TIDMMNG
RNS Number : 4190S
M&G PLC
09 March 2023
9 March 2023
M&G plc full year 2022 results
Positive net client flows in Asset Management and Wealth in a
year of significant market uncertainty
Returned nearly GBP1 billion to shareholders through dividends
and share buy-back
On track to achieve GBP2.5 billion operating capital generation
target by 2024
Launched transformation programme to drive simplification,
unlock growth and deliver GBP200 million cost savings
Net client Adjusted Operating Shareholder Shareholder
flows Operating Capital Generation Solvency returns (1)
excl. Heritage Profit II ratio
GBP821m GBP968m
GBP0.3bn GBP529m 199%
2021: GBP1,117m 2021: GBP466m
2021: GBP0.6bn 2021: GBP721m 2021: 218%
1 Includes ordinary dividends paid in the year and the total
consideration for the share buy-back programme
Andrea Rossi, Group Chief Executive Officer, said:
"I am pleased with how M&G has performed in 2022. Through
exceptional market volatility we have clearly demonstrated the
diversification and resilience of our business model, which has
enabled us to deliver consistently attractive returns for both our
shareholders and for our clients.
"We achieved positive net client flows in Asset Management and
Wealth for the second year in a row driven by the ongoing
turnaround in Wholesale Asset Management and increased client
inflows into PruFund. Adjusted operating profit has been impacted
by market volatility but benefited from Wealth's contribution more
than doubling, as we continue to invest in the propositions offered
by this business. We have also made a solid start to the
achievement of our operating capital generation target of GBP2.5
billion by the end of 2024.
"We now have a clear strategy to build on the inherent strengths
of our differentiated business model. We will maintain our
financial strength, simplify our business and deliver profitable
growth. We are at the start of the next phase for M&G and I am
encouraged by the progress we are already making.
"Looking ahead, despite the uncertainty of the external
environment, our diversified business model and strong financial
position will underpin our ability to invest in the growth of our
business and continue to deliver attractive shareholder
returns."
Strong capital position underpins resilient financial
performance
- Operating capital generation of GBP821 million (2021: GBP1,117
million) with improved underlying capital generation of GBP628
million (2021: GBP484 million) demonstrating the resilience of
our business model offset by a lower benefit from management
actions
- Shareholder Solvency II coverage ratio remained strong at 199%
(2021: 218%) which includes the impact of dividends, the share
buy-back (1) and the dilutive impact from the recognition of
deferred tax assets due to mark to market losses on our assets
- Adjusted operating profit (AOP) before tax of GBP529 million
(2021: GBP721 million), affected by GBP(172) million non-cash
items from duration mismatching losses in the annuity portfolio
and foreign exchange losses on our USD denominated subordinated
debt
- Assets under management and administration decreased by GBP28
billion to GBP342 billion (2021: GBP370 billion), predominantly
driven by adverse market movements
- IFRS loss after tax of GBP1,619 million (2021: GBP92 million
profit), impacted by non-cash losses in the fair value of the
surplus assets in our annuity portfolio and derivatives used
to hedge the Solvency II balance sheet caused by increasing yields
- Second interim dividend of 13.4 pence per share, in line with
our policy of stable or increasing dividends, with a total dividend
per share of 19.6 pence per share, up 7% year-on-year (2021:
18.3 pence per share)
Positive flows and improved investment performance despite
adverse market conditions
- Positive net client flows excl. Heritage of GBP0.3 billion (2021:
GBP0.6 billion) despite significant market volatility
- Wholesale Asset Management returned to net client inflows for
the first time since 2018 of GBP0.5 billion (2021: GBP3.8 billion
outflows) reflecting the measures taken to improve investment
performance - 68% of Wholesale funds now in upper two performance
quartiles over one year (31 December 2021: 45%) (2)
- Net client inflows of GBP0.2 billion (2021: GBP1.4 billion outflows)
into Wealth driven by continued operational improvements and
a strong performance from PruFund
- Roll out of PruFund-type products in Europe progressing with
the launch of Future+ in Italy and Ireland
2 Source M&G plc and Morningstar Inc.
Outlook
- Simplify the operating model and unlock growth through a new transformation
programme, and by end of 2025:
- Generate GBP200 million of cost savings, gross of inflation;
and
- Reduce core Asset Manager cost/income ratio to sustainably
lower than 70%
- Deliver increased adjusted operating profit from Asset Management
and Wealth to more than 50% of the Group total by end of 2025
- On track to achieve GBP2.5 billion operating capital generation
target by 2024
- Aim to reduce our leverage ratio to below 30% by 2025 (3)
3 Leverage ratio is defined as nominal value of debt as a
percentage of M&G plc's shareholder Solvency II own funds
Performance highlights(4) 2022 2021
Adjusted operating profit before tax (GBPm) 529 721
IFRS (loss)/profit after tax (GBPm) (1,619) 92
Assets under management and administration (GBPbn) 342.0 370.0
Net client flows excluding Heritage (GBPbn) 0.3 0.6
Operating capital generation (GBPm) 821 1,117
Total capital generation (GBPm) (397) 1,822
Shareholder Solvency II coverage ratio (%) 199% 218%
=================================================== ======= =====
4 Definitions of key performance measures are provided in the
Supplementary information section of this preliminary
announcement
Enquiries:
Media Investors/Analysts
+44(0)20 8162 +44(0)20 8162
Jonathan Miller 1699 Luca Gagliardi 7307
Irene Chambers +44(0)7825 696815
Notes to Editors
The results in this preliminary announcement are prepared in
1. accordance with UK-adopted international accounting standards,
and are based on the consolidated financial statements of M&G
plc.
The shareholder view and regulatory view of the Solvency II coverage
2. ratio as at 31 December 2022 assumes transitional measures on
technical provisions which have been recalculated using management's
estimate of the impact of operating and market conditions at
the valuation date
Total number of M&G plc shares in issue as at 31 December 2022
3. was 2,374,712,121.
Live webcast of the Full Year 2022 Results presentation and Q&A
4. will be hosted by Andrea Rossi (CEO) and Kathryn McLeland (CFO)
on Thursday 9 March at 11:00 GMT. You can register to view the
webcast live and results presentation here (results presentation
will be available from 07:00 GMT):
https://mngresults.connectid.cloud/register .
Dial in: UK freephone 0800 640 6441/ All other locations +44
203 936 2999 Participant code: 928303
The person responsible for arranging the release of this announcement
5. on behalf of M&G plc is Alan Porter, General Counsel and Company
Secretary
Dividend to be paid in April 2023Ex-dividend date 16 March 2023
6. Record date 17 March 2023
Payment of dividend 27 April 2023
About M&G plc
7. M&G plc is a leading international savings and investments business,
managing money for around 5 million retail clients and more than
800 institutional clients in 26 markets. As at 31 December 2022,
we had GBP342 billion of assets under management and administration.
With a heritage dating back more than 170 years, M&G plc has
a long history of innovation in savings and investments, combining
asset management and insurance expertise to offer a wide range
of solutions. We serve our retail and savings clients under the
M&G Wealth and Prudential brands in the UK and Europe, and under
the M&G Investments brand for asset management clients globally.
Additional Information
8. M&G plc, a company incorporated in the United Kingdom, is the
ultimate parent company of The Prudential Assurance Company Limited.
The Prudential Assurance Company Limited is not affiliated in
any manner with Prudential Financial, Inc., a company whose principal
place of business is in the United States of America or Prudential
plc, an international group incorporated in the United Kingdom.
Forward-Looking Statements
9. This announcement may contain certain 'forward-looking statements'
with respect to M&G plc and its affiliates (the "M&G Group"),
its plans, its current goals and expectations relating to its
future financial condition, performance, results, operating environment,
strategy and objectives. Statements that are not historical facts,
including statements about M&G plc's beliefs and expectations
and including, without limitation, statements containing the
words 'may', 'will', 'should', 'continue', 'aims', 'estimates',
'projects', 'believes', 'intends', 'expects', 'plans', 'seeks',
'outlook' and 'anticipates', and words of similar meaning, are
forward-looking statements. These statements are based on plans,
estimates and projections as at the time they are made, and therefore
persons reading this announcement are cautioned against placing
undue reliance on forward-looking statements. By their nature,
all forward-looking statements involve inherent assumptions,
risk and uncertainty, as they generally relate to future events
and circumstances that may be beyond M&G plc Group's control.
A number of important factors could cause M&G plc's actual future
financial condition or performance or other indicated results
to differ materially from those indicated in any forward-looking
statement. Such factors include, but are not limited to, UK domestic
and global economic and business conditions (including the political,
legal and economic effects of the UK's decision to leave the
European Union); market-related conditions and risk, including
fluctuations in interest rates and exchange rates, the potential
for a sustained low-interest rate environment, corporate liquidity
risk and the future trading value of the shares of M&G plc; investment
portfolio-related risks, such as the performance of financial
markets generally; the policies and actions of regulatory authorities,
including, for example, new government initiatives; the impact
of competition, economic uncertainty, inflation and deflation;
the effect on M&G plc's business and results from, in particular,
mortality and morbidity trends, longevity assumptions, lapse
rates and policy renewal rates; the timing, impact and other
uncertainties of future acquisitions or combinations within relevant
industries; the impact of internal projects and other strategic
actions, such as transformation programmes, failing to meet their
objectives; the impact of operational risks, including risk associated
with third party arrangements, reliance on third party distribution
channels and disruption to the availability, confidentiality
or integrity of M&G plc's IT systems (or those of its suppliers);
the impact of changes in capital, solvency standards, accounting
standards or relevant regulatory frameworks, and tax and other
legislation and regulations in the jurisdictions in which M&G
plc Group operates; and the impact of legal and regulatory actions,
investigations and disputes. These and other important factors
may, for example, result in changes to assumptions used for determining
results of operations or re-estimations of reserves for future
policy benefits. Any forward-looking statements contained in
this document speak only as of the date on which they are made.
M&G plc expressly disclaims any obligation to update any of the
forward-looking statements contained in this document or any
other forward-looking statements it may make, whether as a result
of future events, new information or otherwise except as required
pursuant to the UK Prospectus Rules, the UK Listing Rules, the
UK Disclosure and Transparency Rules, or other applicable laws
and regulations. Nothing in this announcement shall be construed
as a profit forecast, or an offer to sell or the solicitation
of an offer to buy any securities.
LEI: 254900TWUJUQ44TQJY84 Classification: 1.1 Annual Financial
and Audit Reports
Group Chief Executive Officer's statement
Since joining M&G in October I have been getting to know the
business, and meeting colleagues, clients and investors to
understand their perspectives. By engaging with our stakeholders, I
now know where our capabilities are strongest and how we can grow
M&G in line with our values. Our differentiated business model
is one of the main reasons I wanted to join M&G and our
performance in 2022 has demonstrated the underlying strength and
resilience of that business model in challenging markets. The war
in Ukraine and inflationary environment have highlighted global
vulnerability to supply shocks and the impact of these on social,
economic and political resilience.
In difficult times like these, clients value our expertise and
support to navigate financial uncertainty as evidenced by continued
positive net client flows (excluding Heritage) of GBP0.3 billion in
2022, compared to GBP0.6 billion in 2021. Our adjusted operating
profit before tax remained resilient at GBP529 million (2021:
GBP721 million) and we are on track to achieve our GBP2.5 billion
operating capital generation target. Over the course of the year,
we also returned nearly GBP1 billion to shareholders.
This robust performance is testament to the hard work of our
talented and dedicated colleagues, and long-term relationships we
have built over time with our clients.
Our structure is our strategic advantage
Our differentiated business model, with three distinct, yet
balanced and complementary parts, I believe gives us a strategic
advantage and the right foundations to grow profitably and
responsibly. We lead with the Asset Manager at the core of our
business, with Heritage and Wealth supporting its growth and
enabling it to prosper: together, all thrive.
We have a well-capitalised balance sheet and we have shown we
have a resilient earnings profile. We have robust investment
capabilities, a broad geographical reach, and strong relationships
with a wide range of clients: individuals, financial institutions,
wealth managers, financial advisers and other distribution
partners.
Excellent investment capabilities
Our Asset Management business manages more than GBP300 billion
in client assets around the world, including GBP150 billion for our
Retail and Savings clients. Our investment expertise encompasses
one of the largest private assets businesses in Europe and a broad
public fixed income range, as well as sustainability-driven
multi-assets and thematic equities products. We complement our
Asset Management offering with PruFund. At over GBP58 billion in
assets, PruFund is one of the largest multi-assets investment
propositions in the UK and Europe.
I'd like to highlight the strong performance of Wholesale Asset
Management, with net client flows improving by GBP4.3 billion
compared to last year. We are delighted with this achievement,
which is a result of the tremendous work by our colleagues over
several years. The recovery in our UK business was demonstrated by
our Wholesale net sales ranking returning to the top 10 in the
final quarter of 2022. At the same time, Wealth net client flows
increased by GBP1.6 billion compared to last year, due to improved
flows into PruFund.
Over the course of 2022, our Institutional business experienced
marginal net client outflows of GBP0.7 billion (2021: GBP5.8
billion net client inflows), with redemptions triggered by the
mini-budget in the UK in September. The Institutional team
delivered significant advised wins in public debt and real estate
during the year, and retains a healthy pipeline of
opportunities.
Our European franchise performed well, with strong flows in
Italy, in part thanks to our Global Listed Infrastructure Fund.
In Asia, we have seen net client inflows from institutional
clients in Japan, Hong Kong and Singapore, and wholesale clients in
Taiwan across a range of asset classes. We were the third largest
asset manager by net sales in the Asian cross-border wholesale
market in 2022. We have hired a new Asia fixed income team,
establishing a truly international capability in this important
asset class.
Expanding our Retail and Savings products
Our Retail and Savings business is vital to the Group, providing
resilient and predictable capital generation throughout the
economic cycle. It also allows our investment teams to build new
capabilities, which enhance financial returns to our clients, while
providing the scale to take our innovative investment products to
market.
Our Wealth business enhances our reach through strong brands and
intermediary relationships in the UK. With PruFund at its core, it
can address the needs of a broad range of individual clients in a
large and growing market.
In 2022, we added PruFund Planet to our platform. This is the
first time that PruFund has been offered on any investment platform
in the UK. We have also made Future+ available to investors in
Italy and Ireland. This adds a new growth driver to our
international activities. Future+ is a new family of global
multi-asset funds delivering smoothed outcomes, designed to
replicate the success of our flagship PruFund range outside the
UK.
Meeting rising demand from individual clients
We created M&G Wealth, our integrated wealth management
business, to meet rising demand for easily accessible investment
advice and wealth solutions. We now offer access to a broad and
integrated range of savings and advice solutions for UK clients,
through financial advisers, hybrid advice and direct digital
channels, such as our new &me investing app. We are scaling our
capabilities through organic growth and acquisitions and aim to
complement our existing network of advisers with Continuum
(Financial Services), a fast-growing provider of independent
financial advice.
In Heritage, we have maintained our focus on improving the
quality of client service and outcomes, and I am pleased that our
client net promoter score, covering both Wealth and Heritage
clients, has improved to 14 (2021: 9).
We are also exploring ways in which we can support selected
defined benefit pension funds as their needs evolve, providing
innovative insurance solutions by drawing on our investment
expertise, financial scale and annuities experience.
A long-term, responsible investor
Over recent years we have seen a seismic shift in investing as
institutions and individuals become more sustainability focused. We
recognise the scale of change required to transition the global
economy to mitigate the effects of climate change, and we believe
that we can make a real impact from a societal and economic
perspective. This brings both significant responsibility and
opportunity to M&G as conviction-led, responsible investors and
stewards of the long-term savings of millions of clients .
Although we are still at the start of our journey, we are
focused on making progress towards our sustainability commitments
on climate and diversity and inclusion. We continue to identify
investment opportunities in climate solutions and those that
support a just transition. We are embedding our Net Zero Investment
Framework across our investment teams, and engaging with the
companies in which we invest on their ESG policies including
climate change.
We also continue to expand our sustainable investing expertise
with the launch of new thematic funds, the acquisition of
responsAbility and deploying the GBP5 billion With-Profits Fund
Catalyst mandate to invest in innovative businesses working to
create a more sustainable world.
Simplification and profitable growth
Our financial strength underpins attractive and dependable
returns to shareholders, as does our rigorous approach to capital
management. Now we need to build on these strengths, and ensure our
strategy continues to anticipate and meet the needs of our clients.
We are narrowing our focus to three priorities: maintaining
financial strength, simplifying our business, and targeting
profitable growth. We are investing in our digital capabilities to
ensure we make financial advice more accessible in the UK market,
and to deliver strong service to support all of our clients.
The simpler an organisation is, the closer it is to its clients,
the better experience and service they will receive. This is a core
part of our strategy to unlock growth and increase revenue, but we
have to be equally focused on costs and simplify the way we work. I
want us to act faster and more efficiently.
To enable this, we have launched a transformation programme
targeting GBP200 million of cost savings gross of inflation by the
end of 2025. By 2025, we also aim to reduce our Asset Manager
cost/income ratio to below 70%, but this is not the destination:
our longer-term ambition is a cost/income ratio in the range of 66%
to 68%.
In continuing to transform our business, we will empower
colleagues and improve accountability, pushing operational
accountability into the business areas that are close to our
clients. This will make M&G a better place to work and we will
also become easier to do business with, deliver better client
outcomes and drive growth. To meet our GBP200 million cost savings
target we will improve client journeys through digitalisation;
remove management layers and streamline governance, enhancing our
approach to shared services and outsourcing; and optimise our
operating model.
We will focus the business on targeted opportunities where we
believe our differentiated propositions and services give us a good
starting point. By having this focus we expect to deliver increased
adjusted operating profit from Asset Management and Wealth to more
than 50% of the Group total by the end of 2025. Our targets are
ambitious but achievable.
Empowering our teams
We want to create an exceptional place to work - a positive
environment where colleagues can bring their true selves to work
and are inspired to do their best for our clients. I'm committed to
ensuring our colleagues continue to have the right support, advice
and resources so they can continue to grow.
In 2022, we continued to evolve our well-being support,
extending our families policy to include neonatal support. We also
provided a one-off, non-pensionable payment to colleagues earning
less than GBP50,000 to help alleviate the impact of the
cost-of-living crisis. We are committed to creating both a diverse
and inclusive workforce, and playing our part across the wider
financial services industry.
We support industry-wide initiatives to develop diversity, and
were one of the first companies in our sector to publish an
ethnicity target in leadership and to voluntarily publish ethnicity
pay gap data. Our mean gender pay gap for 2022 is stable at 29.2%
(2021: 29.3%) and the mean ethnicity pay gap was 5.5% (2021: 5.7%).
We are committed to having 40% women and 20% ethnic diversity in
our senior leadership by 2025. At the end of 2022 we had made
progress towards these commitments but there are still further
improvements required, with 37% women and 12% ethnic diversity in
our senior leadership.
Executive and leadership changes
We welcomed Kathryn McLeland as Group Chief Financial Officer in
May. We have also added to our Executive team during the year, with
Benoît Macé as Chief Strategy and Transformation Officer and Louise
Shield as Corporate Affairs Director.
Jack Daniels, Chief Investment Officer and Managing Director of
M&G Asset Management, will retire later in the year, after more
than 20 years with M&G I would like to thank him for his
contribution to the business and in particular the significant
impact he made as Managing Director. Jack is being replaced by
Joseph Pinto, who will join us later this month.
Priorities for 2023
Our operational environment remains challenging, but as we look
to the next 12 months we are confident that we have the right
strategy in place and that we are taking the right management
actions to ensure our business continues to perform well,
delivering superior returns through attractive dividends and
earnings growth.
We are aiming to create a leading savings and investment
business, leveraging our strengths to best address our clients'
needs and delivering sustainable growth in markets with recurring,
fee-based revenues: leading with the Asset manager, leveraging the
Heritage balance sheet and Wealth distribution.
This isn't about being the biggest, it's about driving a step
change in profitability.
Business and financial review
In 2022, a year of significant macroeconomic uncertainty, our
financial performance has demonstrated the resilience of our
business.
Wholesale Asset Management returned to net client inflows for
the first time since 2018 of GBP0.5 billion (2021: GBP3.8 billion
net client outflows), demonstrating the ongoing turnaround of the
business. Our Institutional business saw net client outflows of
GBP0.7 billion (2021: GBP5.8 billion net client inflows) with the
domestic Institutional business impacted by the UK mini-budget
crisis in the second half of the year.
We have returned to net client inflows in our Wealth business
with a total of GBP0.2 billion, which compares to net client
outflows of GBP1.4 billion in 2021. This turnaround in net client
flows was driven mainly by strong performance in our PruFund
offerings.
Total AUMA decreased to GBP342.0 billion (2021: GBP370.0
billion), predominantly driven by negative market movements from
the volatility experienced in markets throughout a challenging
year, partly offset by the inclusion of AUMA from the acquisitions
made in the year.
Our IFRS result has been significantly impacted by the
meaningful increase in yields over the year, with the unrealised
fair value losses on the surplus assets in the annuity portfolio
and the fair value losses on the interest rate hedging we have in
place to protect our Solvency II capital position leading to a
significant loss after tax attributable to equity holders for the
year of GBP1,619 million (2021: GBP92 million profit). Importantly,
our dividend payment capacity is linked to the value of available
capital in our subsidiaries which is strong.
Adjusted operating profit before tax of GBP529 million (2021:
GBP721 million) has been affected by the impact of rising yields on
the annuity margin and a foreign exchange loss on our USD
denominated subordinated debt. In M&G Wealth, adjusted
operating profit more than doubled to GBP96 million, due to an
increase in shareholder transfers from PruFund driven by strong
investment returns for our clients.
Despite a reduction in total capital generation, which has
fallen to GBP(397) million compared to GBP1,822 million at 31
December 2021 as a result of adverse market movements, our
shareholder Solvency II coverage ratio remains strong at 199%
(2021: 218%). The coverage ratio is calculated after dividends,
cost of the share buy-back and the dilutive impact from the
recognition of deferred tax assets due to mark to market losses on
our assets.
We are on track to deliver our target of GBP2.5 billion of
cumulative operating capital generation by 2024 with operating
capital generation of GBP821 million in the year. We are also
targeting GBP200 million cost savings across the Group, and a
reduction in the core asset management cost/income ratio to below
70% by 2025. We also plan to take action to reduce our leverage
ratio to below 30% by 2025.
As we focus the business on our strengths we are targeting
adjusted operating profit from Asset Management and Wealth to be
over 50% of the Group total by the end of 2025.
We paid an interim ordinary dividend of GBP154 million equal to
6.2 pence per share, in line with our policy of paying one-third of
the previous year total dividend, on 29 September 2022. A second
interim dividend of GBP310 million equal to 13.4 pence per share
will be paid on 27 April 2023, which means 19.6 pence per share of
total dividends were paid to shareholders in 2022, alongside the
share buy-back.
In 2023 we will be publishing our IFRS 17 compliant results for
the first time, marking the end of what has been significant
implementation programme for our business and the insurance
industry as a whole.
Adjusted operating profit before tax
The following table shows adjusted operating profit before tax
split by segment and source of earnings:
For the year
ended 31 December
--------------------
GBPm 2022 2021
--------- ---------
Core Asset Management 213 277
Performance fees (including carried interest) and investment
return 51 38
============================================================= ========= =========
Asset Management 264 315
============================================================= ========= =========
Wealth 96 41
Heritage 466 620
Other 10 (1)
============================================================= ========= =========
Retail and Savings 572 660
============================================================= ========= =========
Corporate Centre (307) (254)
============================================================= ========= =========
Adjusted operating profit before tax 529 721
============================================================= ========= =========
Adjusted operating profit before tax was GBP529 million for the
year ended 31 December 2022 (2021: GBP721 million).
In Asset Management, the reduction in adjusted operating profit
to GBP264 million (2021: GBP315 million) is mainly driven by an
increase in expenses as we continue building out the capability and
operations of our international investment function. In addition,
there has been an increase in the operational cost base linked to
inflation.
Despite the challenging markets, which resulted in a decrease in
investment return from GBP17 million to GBP(5) million, the income
earned from performance fees and carried interest in the period has
increased by GBP35 million to GBP56 million.
In Retail and Savings, the total with-profits shareholder
transfer net of hedging and other gains/losses has increased by
GBP86 million to GBP354 million, benefiting from the strong
investment performance. However, this has been offset by a GBP142
million fall in the annuity margin driven by the upwards movement
in yields and other one-off benefits from 2021 that did not repeat
in 2022, including a prior year release of the annuity sales
practices review provision of GBP31 million in 2021. This has led
to a reduction in Retail and Savings adjusted operating profit to
GBP572 million (2021: GBP660 million).
Corporate Centre costs have increased which is largely driven by
adverse foreign exchange movements of GBP50 million (2021: GBP4
million) on the USD subordinated debt. Changes in executive
leadership have resulted in additional remuneration and recruitment
costs.
Adjusted operating profit before tax to IFRS (loss)/profit after
tax
The following table shows a reconciliation of adjusted operating
profit before tax to IFRS (loss)/profit after tax:
For the year
ended 31 December
--------------------
GBPm 2022 2021
------------------------------------------------------------- --------- ---------
Fee-based revenues 1,346 1,254
Annuity margin 227 369
With-profit shareholder transfer net of hedging gains/losses 354 268
============================================================= ========= =========
Adjusted operating income 1,927 1,891
============================================================= ========= =========
Adjusted operating expenses (1,165) (1,063)
Other shareholder losses (214) (101)
Share of profit from joint ventures and associates - 6
Adjusted operating profit attributable to non-controlling
interests (19) (12)
============================================================= ========= =========
Adjusted operating profit before tax 529 721
============================================================= ========= =========
Short-term fluctuations in investment returns (2,484) (537)
Profit on disposal of business and corporate transactions - 35
Amortisation and impairment of intangible assets acquired
in business combinations (35) (4)
Restructuring and other costs (147) (146)
IFRS profit attributable to non-controlling interests 19 12
============================================================= ========= =========
IFRS (loss)/profit before tax attributable to equity
holders (2,118) 81
============================================================= ========= =========
Tax credit attributable to equity holders 499 11
============================================================= ========= =========
IFRS (loss)/profit after tax attributable to equity
holders (1,619) 92
============================================================= ========= =========
IFRS (loss)/profit after tax
IFRS result after tax attributable to equity holders is a
GBP1,619 million loss compared with a GBP92 million profit in 2021.
The loss is primarily reflective of a GBP2,484 million loss in the
year (2021: GBP537 million loss) from short-term fluctuations in
investment returns, offset in part by a tax credit of GBP499
million.
In Retail and Savings, market conditions have led to significant
losses from short-term fluctuations in 2022. These losses primarily
comprise a GBP1,301 million loss (2021: GBP99 million loss) from
fair value movements on the surplus assets in the annuity portfolio
and a GBP989 million loss (2021: GBP103 million loss) on interest
rate swaps purchased to protect PAC's Solvency II capital position
against falls in interest rates, both due to significant rising
yields in the year. These are particularly impacted by longer-term
yields which have increased by over 270 basis points, in some
instances, over the course of the year.
These losses were partly offset by a positive movement on the
hedging instruments held to protect the future shareholder
transfers from falling equity markets which moved to a gain of
GBP104 million (2021: GBP248 million loss) as a result of falls in
the US and European equity stock markets.
The interest rate swaps and the equity hedges provide some
protection to the Solvency II balance sheet but there is no
corresponding item to protect on the IFRS balance sheet, and
therefore when the fair value of the derivatives change as interest
rates and equity markets move, there are no offsetting fair value
movements on an IFRS basis leading to an overall loss in the
current year.
Amortisation and impairment of intangible assets includes a
GBP25 million (2021: GBPnil) impairment of goodwill in relation to
the M&G Wealth Platform business related to the uncertainty
around long-term market growth in the current macroeconomic
environment.
Restructuring and other costs of GBP147 million (2021: GBP146
million) relate to GBP56 million (2021: GBP35 million) in relation
to the transformation of the business, GBP17 million (2021: GBP48
million) in respect of our future ways of working and associated
changes to our office spaces and GBP32 million (2021: GBP45
million) in relation to the development of the M&G Wealth
platform business. A significant part of our transformation
programme is the on-going project to migrate our multiple policy
administrative systems to one single system.
We have incurred costs of GBP11 million (2021: GBP6 million) in
relation to this programme in 2022 and expect to complete this
programme over the next two to three years.
The equity holders' effective tax rate for the year ended 31
December 2022 was 23.6% (2021: (13.6%)). Excluding non-recurring
items, the equity holders' effective tax rate was 18.1% (2021:
9.9%). The equity holders' effective tax rate of 23.6% was higher
than the UK statutory rate of 19% (2021: 19%). This reflects a
favourable position (higher tax benefit on the pre-tax loss
position) and is primarily due to the beneficial impact of
recognising deferred tax assets on current period tax losses, for
which the majority have been measured at the new UK corporation tax
rate of 25% that is effective from 1 April 2023. This benefit was
partially offset by the adverse impact of deductions not allowable
for tax purposes.
Further information on tax is provided in Note 6 of the
consolidated financial statements.
Capital generation
The following table shows an analysis of total capital
generation:
For the year
ended 31 December
--------------------
GBPm 2022 2021
------------------------------------------------- ----------- -------
Asset Management underlying capital generation 246 313
Retail and Savings underlying capital generation 641 459
Corporate Centre underlying capital generation (259) (288)
================================================= =========== =======
Underlying capital generation 628 484
================================================= =========== =======
Other operating capital generation 193 633
================================================= =========== =======
Operating capital generation 821 1,117
================================================= =========== =======
Market movements (1,225) 917
Restructuring and other (166) (181)
Tax 173 (31)
Total capital generation (397) 1,822
================================================= =========== =======
Total capital generation for 2022 is negative GBP397 million,
compared to positive GBP1,822 million in 2021. Capital generation
has been adversely affected by significant market volatility and a
lower benefit from management actions. However, underlying capital
generation, which represents the capital generated by the
performance of the business, has increased to GBP628 million from
GBP484 million.
Asset management underlying capital generation has fallen to
GBP246 million (2021: GBP313 million) driven by the fall in
adjusted operating profit and an increase in risk capital held in
respect of credit and market risk, due to increased foreign
exchange stresses and seeding activities.
Corporate Centre underlying capital generation has improved by
GBP29 million to negative GBP259 million due to a fall in capital
requirements of GBP8 million (2021: GBP8 million increase) and
higher investment income received on assets held, which more than
offset an increase in head office costs.
Other operating capital generation has fallen by GBP440 million
to GBP193 million largely as a result of one-off benefits in 2021
not being repeated in 2022. These include the benefit from the
Major Model Change, the release of GBP150 million of counterparty
risk capital in respect of the transfer of annuity business to
Rothesay Life plc and a larger benefit compared to 2022 in respect
of asset trading in the annuity portfolio, particularly in relation
to property sales.
Market movements over 2022 have resulted in a negative impact of
GBP1,225 million (31 December 2021: GBP917 million positive impact)
following a fall in US and Asian equity markets, the widening of
credit spreads, and a substantial increase in interest rates. The
main impact is as a result of losses on the value of surplus
annuity assets of GBP1,602 million (31 December 2021: GBP64 million
loss). On a Solvency II basis there are more surplus assets in the
annuity book than on an IFRS basis, as the measurement basis for
Solvency II liabilities does not include an allowance for prudence
and therefore the total fair value of the assets used to back them
is lower than on an IFRS basis.
Other impacts include losses on interest rate swaps of GBP989
million (31 December 2021: GBP103 million), as the swaps are
designed to protect the fund in a falling interest rate
environment, a reduction in the benefit from the present value of
shareholder transfers less equity hedges to GBP454 million (31
December 2021: GBP653 million), and a reduction in capital
requirements of GBP1,034 million.
Restructuring and other costs of GBP166 million reflects the
impact on the capital position of transformation costs outlined in
the discussion on IFRS results, and additionally includes the
impact of moving to the Investment Firms Prudential Regime, the new
regulatory regime for investment firms.
Capital position
The shareholder Solvency II ratio remains strong at 199% (2021:
218%). However, M&G plc's Solvency II surplus fell to GBP4.6
billion as at 31 December 2022 (2021: GBP6.2 billion),
predominantly impacted by lower own funds but market movements have
also reduced the solvency capital requirement. Own Funds has
reduced by GBP2.1 billion, driven by negative total capital
generation of GBP397 million (2021: positive GBP1,822 million)
combined with a deduction of GBP465 million (2021: GBP466 million)
from dividends paid to shareholders in the year, a reduction of
GBP503 million as a result of the share buy-back, and a reduction
of c.GBP200 million (2021: GBP32 million) from other capital
movements, (primarily the acquisitions of Sandringham, TCF and
responsAbility).
Our With-Profits Fund continues to have a strong Solvency II
coverage ratio of 362%. This is higher than the 302% reported at 31
December 2021; the distribution of excess surplus to policyholders
of GBP1.5 billion, coupled with market movements contributed to a
reduction in surplus over the period, however, both of these items
also reduced the solvency capital requirements.
In particular, the sharp increase in yields and fall in equity
assets reduced exposure to market risks - and thus reduced the
amount of capital that needs to be held against these risks -
resulting in an overall increase in the with-profits solvency ratio
despite the fall in surplus as a result of market movements. The
run-off of capital requirements also contributed to the increase in
this ratio.
The regulatory Solvency II coverage ratio of M&G plc as at
31 December 2022 was 164% (2021: 168%). This view of solvency
combines the shareholder position and the With-Profits Fund but
excludes all surplus within the With-Profits Fund.
The shareholder, With-Profits Fund, and regulatory views of the
Solvency II position presented here assume transitional measures on
technical provisions that have been recalculated using management's
estimate of the impact of operating and market conditions at the
valuation date.
Financing and liquidity
The following table shows key financing and liquidity
information:
As at 31 December
-------------------
GBPm 2022 2021
----------------------------------- -------- ---------
Nominal value of subordinated debt 3,264 3,216
Shareholder Solvency II own funds 9,268 11,409
Leverage ratio 35% 28%
=================================== ======== =========
The main metric we use to manage our debt is the leverage ratio,
defined as nominal value of debt as a percentage of M&G plc's
shareholder Solvency II own funds. Our leverage ratio of 35% at 31
December 2022 has increased from 28% at 31 December 2021, as a
result of the fall in Solvency II Own Funds in the year due to the
impact of market movements as set out earlier under Capital
position.
The following table shows the movement in cash and liquid assets
held by the Parent Company during the period:
For the year
ended 31 December
--------------------
GBPm 2022 2021
------------------------------------------------- --------- ---------
Opening cash and liquid assets at 1 January 1,709 1,040
Cash dividends from subsidiaries 391 1,458
Corporate costs (140) (112)
Interest paid on core structural borrowings (190) (186)
Cash dividends paid to equity holders (465) (466)
Share buy-back (503) -
Capital injection to subsidiaries (11) (25)
Other 26 -
================================================= ========= =========
Closing cash and liquid assets at 31 December(i) 817 1,709
================================================= ========= =========
i Closing cash and liquid assets at 31 December 2022 included a
GBP793 million (2021: GBP1,651 million) inter-company loan asset
with Prudential Capital plc, which acts as the Group's treasury
function.
Movements in cash and liquid assets held by the Parent Company
for the year ended 31 December 2022 represent the dividends and
payments that arise in the normal course of business. Total cash
and liquid assets have decreased with dividend payments to equity
holders of GBP465 million (2021: GBP466 million), interest paid on
structural borrowings of GBP190 million (2021: GBP186 million) and
GBP503 million in respect of the share buy-back scheme completed in
the year.
This has been partly offset by cash dividends of GBP391 million
(2021: GBP1,458 million) received from our subsidiaries. As part of
our cash management processes, GBP185 million of dividends from PAC
and M&G Group Limited in the year have been retained in lower
level holding companies to fund the acquisitions of Sandringham and
TCF, and our partnership with Moneyfarm and therefore cash
dividends from subsidiaries are not comparable year on year. Also,
a large dividend was received from PAC via the intermediate holding
company in 2021, in line with our capital management framework.
Dividends
We paid a dividend of 12.2 pence per share, equal to GBP311
million, on 28 April 2022. In addition, we paid an interim ordinary
dividend of 6.2 pence per share, equal to GBP154 million, in line
with our policy of paying one-third of the previous year total
dividend, on 29 September 2022. A second interim dividend of 13.4
pence per share, equal to roughly GBP310 million, will be paid on
27 April 2023.
Asset Management
The ongoing turnaround in our Wholesale Asset Management
business is demonstrated by net client inflows in the year.
However, the challenging market conditions in the UK led to net
client outflows in Institutional Asset Management.
Assets under management and administration and net client
flows
Net client flows AUMA(i)
For the year
ended
31 December As at 31 December
------------------
GBPbn 2022 2021 2022 2021
------------------------------- -------- -------- --------- --------
Institutional Asset Management (0.7) 5.8 99.2 103.1
Wholesale Asset Management 0.5 (3.8) 53.9 52.7
Other - - 1.1 0.9
=============================== ======== ======== ========= ========
Total Asset Management (0.2) 2.0 154.2 156.7
=============================== ======== ======== ========= ========
i GBP12.7 billion of total asset management AUMA relates to
assets under advice (2021: GBP7.9 billion).
Our Asset Management business saw net client outflows of GBP0.2
billion, against the backdrop of extremely volatile markets,
compared with net client inflows of GBP2.0 billion in 2021.
Following the change in operating segmentation of our business
in 2021, we have renamed Retail Asset Management to Wholesale Asset
Management to better reflect the nature of the business. Wholesale
Asset Management returned to a net client inflow position of GBP0.5
billion (2021: GBP3.8 billion net client outflow) for the first
time since 2018 following actions taken to improve investment
performance and reposition the business. Although a reduction on
the GBP0.8 billion net client inflows reported at 30 June 2022,
this reflects the elevated economic volatility experienced in the
second half of the year. Performance has improved markedly with 68%
(5) of Wholesale funds now in the upper two performance quartiles
over one year (31 December 2021: 45%). Our partnerships with
European distributors have enabled us to deliver strong inflows
into our investment solutions channel, which accounted for GBP1.9
billion of net client inflows in the year.
5 Source M&G plc and Morningstar Inc.
This was partly offset by net client outflows experienced in the
other parts of our wholesale business of GBP1.4 billion, driven by
economic uncertainty and heightened market volatility. Despite this
GBP1.4 billion net client outflow, we have seen the success of our
newer propositions in the year such as the Global Listed
Infrastructure Fund, investing in sustainable infrastructure
companies and investment trusts. This fund delivered GBP1.5 billion
of net client inflows predominantly into our International
Wholesale business in the year.
Wholesale Asset Management AUMA increased GBP1.2 billion to
GBP53.9 billion with negative market movements of GBP1.5 billion in
the year, more than offset by positive other movements of GBP2.2
billion.
Net client outflows of GBP0.7 billion (2021: GBP5.8 billion net
client inflows) in our Institutional Asset Management business
reflect the significant market volatility experienced in the year.
This was particularly evident in our UK Institutional business with
net client outflows of GBP2.3 billion, with a notable spike in
outflows following September's mini-budget. In contrast, our
International Institutional business continued to deliver strong
net client inflows of GBP1.6 billion. The net outflows are a
combination of the gross outflows, particularly in the second half
of the year of GBP8.9 billion (H2 2021: GBP5.3 billion) driven by
the mini-budget, and the reduced gross inflows of GBP3.1 billion to
GBP13.1 billion (2021: GBP16.2 billion) reflecting changing client
behaviour when markets are volatile.
Institutional Asset Management AUMA decreased by GBP3.9 billion
to GBP99.2 billion mainly driven by negative market movements from
the public debt channel, partly offset by GBP2.9 billion additional
AUMA from the acquisition of responsAbility.
Our expertise in private assets, which offers private fixed
income, alternatives, real estate and infrastructure equity
offerings, is a key component of our institutional investment
capability, and represents a resilient, high-margin source of
revenues. Our private assets under management increased 6% to
GBP76.6 billion of AUMA as at 31 December 2022 (2021: GBP72.6
billion).
Adjusted operating profit before tax
The following table shows an analysis of adjusted operating
profit before tax:
For the year
ended 31 December
--------------------
GBPm 2022 2021
---------------------------------------------------------- --------- ---------
Fee-based revenue (i) 1,051 976
========================================================== ========= =========
Adjusted operating income 1,051 976
========================================================== ========= =========
Adjusted operating expenses (763) (672)
Other shareholder (loss)/profit (5) 17
Share of profit from joint ventures and associates - 6
Adjusted operating profit attributable to non-controlling
interests (19) (12)
========================================================== ========= =========
Adjusted operating profit before tax 264 315
========================================================== ========= =========
i GBP306 million of the fee-based revenue is in respect of
assets managed on behalf of Retail and Savings (2021: GBP303
million).
Adjusted operating profit before tax from our Asset Management
business has decreased 16% to GBP264 million in the year ended 31
December 2022 (2021: GBP315 million) primarily driven by increased
expenses.
Following the acquisition of a controlling interest in MandG
Investments Southern Africa Pty (Limited) (MGSA) (formerly PPMSA)
in July 2021, the presentation of revenues and costs in relation to
MGSA are now fully represented within fee-based revenues and
operating expenses respectively. Pre-acquisition the profit on MGSA
was represented by the share of profit on joint ventures and
associates, therefore the impact on the revenue and expenses is not
directly comparable year-on-year.
Revenue earned by Institutional Asset Management has increased
to GBP598 million (2021: GBP539 million) which includes an
additional GBP17 million of revenue recognised from MGSA and GBP23
million of revenue from responsAbility, which was acquired in May
2022. This was marginally offset by lower Wholesale Asset
Management fee-based revenues of GBP397 million (2021: GBP414
million) as we continue to experience the remaining impact from the
lower pricing structure applied to our UK OEICs in February 2021
and the impact of market volatility in the year. In addition,
income earned from performance fees and carried interest in the
year has increased by GBP33 million to GBP56 million.
The Asset Management average fee margin of 32bps was in line
with 31 December 2021. Average fee margins in the Institutional
Asset Management business increased to 29bps (2021: 27bps) driven
by the inclusion of responsAbility, while the Wholesale Asset
Management fee margins decreased to 38bps (2021: 39bps).
Adjusted operating expenses have increased by GBP91 million to
GBP763 million (2021: GBP672 million) with an additional GBP20
million of costs recognised relating to MGSA and GBP22 million in
relation to responsAblity. In addition, we have incurred increased
costs relating to the further development of our capabilities and
operations across our international investment function of GBP20
million and a further GBP21 million increase as a result of the
impact of inflation on our cost base. The cost/income ratio for the
Asset Management business increased to 77% (31 December 2021: 70%)
reflective of the rising operating expenses of the business and the
impact of inflation in the year.
Other shareholder (loss)/profit primarily relates to investment
return on seed investments and units held to hedge management
incentive schemes which has fallen by GBP22 million compared with
the prior year reflecting the falls in equity markets in the
year.
Capital generation
The following table shows an analysis of operating capital
generation:
For the year
ended 31 December
--------------------
GBPm 2022 2021
----------------------------------- --------- ---------
Underlying capital generation 246 313
Other operating capital generation (33) 15
=================================== ========= =========
Operating capital generation 213 328
=================================== ========= =========
Operating capital generated by Asset Management decreased to
GBP213 million (2021: GBP328 million), driven by a decrease in
underlying capital generation due to the fall in adjusted operating
profit, and an increase in risk capital held in respect of credit
and market risk. The fall in other operating capital generation is
attributable to an increased allocation of operational risk capital
(offset elsewhere in the Group), and lower investment return.
On 1 January 2022, M&G Investments adopted the new
Investment Firms Prudential Regime (IFPR). The impact of the change
in capital regime was a decrease in capital of GBP35 million
primarily in relation to deferred tax assets that could no longer
be recognised. This one-off impact is not included in determining
operating capital generation but included in total capital
generation as restructuring and other.
Retail and Savings
We are seeing continued growth of our Wealth business and a
strong performance from our with-profits business. However, the
current economic conditions have resulted in an overall decline in
adjusted operating profit and a significant IFRS loss after
tax.
Assets under management and administration and net client
flows
Net client flows AUMA(i)
For the year
ended
31 December As at 31 December
------------------
GBPbn 2022 2021 2022 2021
------------------------- -------- -------- --------- --------
Wealth 0.2 (1.4) 83.4 84.2
Heritage (6.0) (6.9) 94.1 117.8
Other 0.3 - 8.9 9.1
========================= ======== ======== ========= ========
Total Retail and Savings (5.5) (8.3) 186.4 211.1
========================= ======== ======== ========= ========
i GBP149.9 billion of AUMA is managed internally by the Group's
Asset Management business (2021: GBP168.6 billion).
Wealth net client inflows increased to GBP0.2 billion compared
with net client outflows of GBP1.4 billion in 2021. This turnaround
in net client flows was driven mainly by inflows into PruFund
following strong investment performance and improved service
levels. The trends underscore the importance of broadening the
proposition offered in our Wealth business.
Retail and Savings AUMA decreased to GBP186.4 billion driven by
a fall in Heritage AUMA due to adverse market movements of GBP17.7
billion and net client outflows of GBP6.0 billion (2021: GBP6.9
billion).
Wealth AUMA decreased to GBP83.4 billion primarily due to
adverse market movements of GBP3.4 million, partly offset by a
GBP2.4 billion increase in AUMA from the completion of the
Sandringham acquisition.
The acquisition of Sandringham has provided our clients with
access to whole of market advice, and our partnership with
Moneyfarm has provided direct investment services to our UK
clients. To complete our offering, we have also acquired TCF Fund
Managers LLP, a provider of model portfolio services. TCF has since
been renamed M&G Wealth Investments.
Other Retail and Savings AUMA decreased to GBP8.9 billion, as a
result of market movements despite positive net client inflows of
GBP0.3 billion.
Overall Retail and Savings (excluding Heritage) experienced net
client inflows of GBP0.5 billion. PruFund is an investment solution
offered to clients of both Wealth and Other Retail and Savings.
PruFund experienced net client inflows of GBP0.8 billion in 2022
(2021: GBP1.4 billion net outflows) across both business lines.
This was partly offset by outflows of GBP0.3 billion, from other
Retail and Savings business in the year.
Adjusted operating profit before tax
The following table shows an analysis of adjusted operating
profit before tax:
For the year
ended 31 December
--------------------
GBPm 2022 2021
----------------------------------------------------- --------- ---------
Fee-based revenue 295 278
Annuity margin 227 369
With-profits shareholder transfer net of hedging and
other gains/losses 354 268
===================================================== ========= =========
Adjusted operating income 876 915
===================================================== ========= =========
Adjusted operating expenses (295) (296)
Other shareholder (loss)/profit (9) 41
===================================================== ========= =========
Adjusted operating profit before tax 572 660
===================================================== ========= =========
Adjusted operating profit before tax from our Retail and Savings
business reduced to GBP572 million (2021: GBP660 million) primarily
driven by a decrease of GBP142 million in the annuity margin,
partly offset by an increase in fee-based revenues of GBP17
million, and an increase in the result from the with-profits
business of GBP86 million.
Fee-based revenues increased by GBP17 million to GBP295 million
and includes an additional GBP27 million primarily due to the
recognition of revenue from Sandringham for the first time.
The decrease in annuity margin is primarily driven by rising
yields in the period due to differences in the duration of the
long-term annuity liabilities and the assets held to back them. The
duration mismatch between these assets and liabilities resulted in
a loss of GBP122 million in the period (2021: GBP6 million).
The with-profits shareholder transfer net of hedging and other
gains/losses increased to GBP354 million (2021: GBP268 million).
The gross with-profits shareholder transfer increased to GBP446
million (2021: GBP366 million) primarily as a result of strong
investment performance in 2021 and 2022. The result also benefited
from the release of the provision for expense overruns of GBP15
million which had been established on new business written in the
With-Profits Fund due to lower sales volumes in 2021. This was
partly offset by fair value losses of GBP102 million (2021: GBP60
million) on the derivative instruments used to mitigate equity risk
in respect of shareholder transfers.
Adjusted operating expenses are broadly stable year-on-year.
Other shareholder (loss)/profit is down on 2021 with 2022
impacted by the recognition of a GBP35 million insurance reserve in
relation to initial expenses on the Future+ business and also
includes a number of insurance reserve movements in relation to
legacy remediation programmes and other provisions.
Adjusted operating profit before tax sources of earnings
The following table shows adjusted operating profit before tax
split by source of earnings:
For the year
ended 31 December
--------------------
GBPm 2022 2021
------------------------------------- --------- ---------
Wealth 96 41
Heritage 466 620
of which Annuities 227 369
of which traditional with-profits 226 205
Other Retail and Savings 10 (1)
===================================== ========= =========
Adjusted operating profit before tax 572 660
===================================== ========= =========
Adjusted operating profit before tax from our Wealth business
increased to GBP96 million (2021: GBP41 million) driven by an
improvement in the net result from PruFund business to GBP128
million (2021: GBP63 million). The gross with-profits shareholder
transfer of GBP146 million (2021: GBP115 million) and the release
of GBP15 million (2021: GBP33 million loss) expense overruns
previously recognised, as noted above, are partly offset by fair
value losses on hedges of GBP33 million (2021: GBP19 million).
The loss from Wealth's platform and advice business increased to
GBP24 million (2021: GBP4 million loss) driven by an increase in
expenses as we modernise the business, including the digitalisation
of the platform. This is key to our strategy for delivering
profitable growth.
Heritage adjusted operating profit decreased 25% to GBP466
million (2021: GBP620 million) largely driven by the reduction in
the annuity margin, which is analysed further below.
Traditional with-profits business net result increased in the
year to GBP226 million (2021: GBP205 million) as a result of strong
investment performance in 2021 and 2022.
Other Retail and Savings is up GBP11 million, primarily driven
by an increase in profits from the business written in Poland,
alongside a benefit from extending the term of the agreement to
reimburse the With-Profits Fund for its contribution to the costs
for growing the business in Poland, offset in part by the
recognition of an insurance reserve for initial expenses on the
Future+ business.
The following table provides further analysis of the annuity
margin:
For the year
ended 31 December
--------------------
GBPm 2022 2021
----------------------------------------------- ---------- --------
Return on excess assets and margin release 163 172
Asset trading and portfolio management actions 35 10
Longevity assumption changes 193 125
Other (164) 62
=============================================== ========== ========
Annuity margin 227 369
=============================================== ========== ========
Recurring sources of earnings from the annuity book are
primarily the return on assets held to back capital requirements
and the release of the margins held in respect of credit risk,
mortality and expenses. These recurring sources of earnings
decreased by 5% to GBP163 million (2021: GBP172 million) mainly
driven by a lower benefit in the year from the release of credit
default allowances.
During 2022, we earned GBP35 million from asset trading and
portfolio management actions, compared with GBP10 million in 2021
which was impacted by losses on property disposals due to the
impact on the valuation of annuity liabilities.
The benefit from longevity assumption changes has increased by
GBP68 million to GBP193 million mainly due to lower expected future
improvements in mortality rates (see Note 11.1.3 for more detail on
the Group's longevity assumptions).
The annuity liabilities and the assets that back them are well
matched on an IFRS basis but small differences in durations exist.
With annuity liabilities' durations being overall shorter than the
backing assets, losses occur in a rising rate environment. As a
result there was a GBP116 million increase in duration mismatching
losses within Other. Additionally, the Other annuity margin has
decreased as a result of one-off benefits from 2021 that did not
repeat in 2022 including a GBP31 million benefit from the release
of the Thematic Review of Annuity Sales Practices (TRASP) provision
in the year.
Credit quality of fixed income assets in the annuity portfolio
remained strong in 2022. 98% (2021: 98%) of the debt securities
held by the shareholder annuity portfolio are investment grade and
only 20% (2021: 18%) are BBB. Downgrades experienced in the year
have been relatively moderate, with 5% (2021: 3%) of bonds in the
shareholder annuity portfolio subject to a downgrade.
Adjusted operating profit excludes the impact of GBP2,484
million (2021: GBP542 million) short-term fluctuations in
investment return in the Retail and Savings segment as market
conditions have led to unrealised losses on surplus assets in the
annuities portfolio and derivative contracts held to protect the
Solvency II balance sheet, leading to an overall IFRS loss in the
year.
Capital generation
The following table shows an analysis of operating capital
generation:
For the year
ended 31 December
--------------------
GBPm 2022 2021
Wealth 155 49
of which with-profits 180 60
- In-force 216 112
- New business (36) (52)
of which Platform and advice (25) (11)
Heritage 503 378
of which with-profits 192 142
of which Shareholder annuity and other 311 236
Other Retail and Savings (17) 32
========================================================= ======== ==========
Underlying capital generation 641 459
========================================================= ======== ==========
Model improvements (17) 116
Assumption changes 158 18
Management actions and other (incl. experience variance) 53 487
========================================================= ======== ==========
Other operating capital generation 194 621
========================================================= ======== ==========
Operating capital generation 835 1,080
========================================================= ======== ==========
During the year we have revised our capital generation
methodology to reallocate realised gains and losses on hedges to
protect future shareholder transfers from falling equity markets,
from underlying capital generation to other operating capital
generation (management actions and other). We have not restated
comparatives. The value of realised losses on the equity hedges was
GBP33 million (31 December 2021: GBP94 million). There was no
impact on overall operating capital generation.
In Wealth, the contribution to underlying capital generation
from in-force with-profits business increased to GBP216 million
(2021: GBP112 million), an increase of GBP56m after allowing for
the methodology change to reallocate GBP48 million of realised
losses on equity hedges for 2021 to other operating capital
generation. Underlying capital generation for with-profits business
relates to the expected return on the present value of shareholder
transfers adjusted for movements in the capital held against these
transfers. The increase is primarily as a result of a reduction in
the solvency capital requirement.
Despite higher new business sales, new business strain reduced
to GBP36 million (31 December 2021: GBP52 million), since the
higher sales avoided the repeat of the expense overrun we
experienced in 2021 and allowed us to release a GBP15m
provision.
Underlying capital generation across the remainder of Wealth
fell marginally over the period reflecting losses in respect of the
Platform and Advice business.
Underlying capital generation from Heritage increased GBP125
million to GBP503 million. The traditional with-profits business in
Heritage generated underlying capital of GBP192 million during the
year to 31 December 2022 (2021: GBP142 million). This is comparable
with the previous year after allowing for the change in methodology
to reallocate the equity hedge impact to other operating.
There also continued to be significant underlying capital
generation from the shareholder annuity and other business,
contributing GBP311 million (2021: GBP236 million). The increase in
underlying capital generation for the annuity business is driven by
an increase in the expected return on surplus assets in the annuity
portfolio as a result of substantial rises in yields over 2022.
Underlying capital generation for other Retail and Savings
business reduced due to the requirement to hold capital in respect
of anticipated new business in 2023 which is linked to our
strategic priorities.
Other operating capital generation decreased to GBP194 million
(2021: GBP621 million), largely as a result of one-off benefits in
2021 that have not been repeated. This includes a decrease in model
improvements of GBP113 million to negative GBP17 million largely
attributable to the one-off benefit from the major model change in
2021 that updated the modelling methodology for credit assets. The
benefit from management actions and other also decreased by GBP434
million to GBP53 million with 2021 benefiting by GBP150 million
from the release of counterparty risk in respect of the transfer of
annuity business to Rothesay Life plc and higher operating capital
generation from asset trading in the annuity portfolio of GBP140
million, following sizable property sales. These decreases were
partially offset by an increase in the benefit from longevity
assumption changes.
Consolidated Financial Statements
Consolidated income statement
Restated(i)
2022 2021
For the year ended 31 December Note GBPm GBPm
------------------------------------------------------------------- ---- --------- -------------
Gross premiums earned 6,507 4,784
Outward reinsurance premiums (479) (1,019)
=================================================================== ==== ========= =============
Earned premiums, net of reinsurance 6,028 3,765
=================================================================== ==== ========= =============
Investment return (15,656) 12,909
Fee income 4 1,037 983
Other income 46 115
=================================================================== ==== ========= =============
Total revenue, net of reinsurance (8,545) 17,772
=================================================================== ==== ========= =============
Benefits and claims 11 6,987 (3,551)
Outward reinsurers' share of benefit and claims 11 (241) (8,480)
Movement in unallocated surplus of the With-Profits
Fund 11 1,689 (1,052)
=================================================================== ==== ========= =============
Benefits and claims and movement in unallocated surplus
of the With-Profits Fund, net of reinsurance 8,435 (13,083)
=================================================================== ==== ========= =============
Administrative and other expenses 5 (2,810) (2,803)
Movements in third party interest in consolidated
funds 547 (1,019)
Finance costs 5 (162) (160)
=================================================================== ==== ========= =============
Total charges, net of reinsurance 6,010 (17,065)
=================================================================== ==== ========= =============
Share of profit from joint ventures and associates 38 81
=================================================================== ==== ========= =============
(Loss)/profit before tax(ii) (2,497) 788
=================================================================== ==== ========= =============
Tax credit/(charge) attributable to policyholders'
returns 6 379 (707)
(Loss)/profit before tax attributable to equity holders (2,118) 81
=================================================================== ==== ========= =============
Total tax credit/(charge) 6 878 (696)
Less tax (credit)/charge attributable to policyholders'
returns (379) 707
=================================================================== ==== ========= =============
Tax credit attributable to equity holders 6 499 11
=================================================================== ==== ========= =============
(Loss)/profit for the year (1,619) 92
=================================================================== ==== ========= =============
Attributable to equity holders of M&G plc (1,632) 83
Attributable to non-controlling interests 13 9
=================================================================== ==== ========= =============
(Loss)/profit for the year (1,619) 92
=================================================================== ==== ========= =============
Earnings per share:
Basic (pence per share) 7 (66.0) 3.3
Diluted (pence per share) 7 (66.0) 3.2
=================================================================== ==== ========= =============
i Following a review of the Group's presentation of tax positions
within consolidated investment funds, comparative amounts have
been restated from those previously reported. The restatement
has had no impact on profit for the year or net assets. See
Note 1.1 for further information.
Ii This measure is the profit before tax measure under UK-adopted
IAS but it is not the result attributable to equity holders.
This is principally because the corporate taxes of the Group
include those on the income of consolidated with-profits and
unit-linked funds that, through adjustments to benefits, are
borne by policyholders. These amounts are required to be included
in the tax charge of the company under UK-adopted IAS. Consequently,
profit before tax is not representative of pre-tax profits attributable
to equity holders. Profit before tax is determined after deducting
the cost of policyholder benefits and movements in the liability
for unallocated surplus of the With-Profits Fund after adjusting
for taxes borne by policyholders.
Consolidated statement of comprehensive income
2022 2021
For the year ended 31 December Note GBPm GBPm
--------------------------------------------------------- ---- ------- ----
(Loss)/profit for the year (1,619) 92
========================================================= ==== ======= ====
Items that may be reclassified subsequently to profit
or loss:
Exchange movements arising on foreign operations 20 (13)
========================================================= ==== ======= ====
Other comprehensive income/(loss) on items that may
be reclassified subsequently to profit or loss 20 (13)
========================================================= ==== ======= ====
Items that will not be reclassified to profit or
loss:
Gain on remeasurement of defined benefit pension schemes 9 29 71
Tax on remeasurement of defined benefit pension schemes 6 (7) (19)
========================================================= ==== ======= ====
22 52
========================================================= ==== ======= ====
Add amount transferred to Unallocated surplus of the
With-Profits Fund, net of related tax 2 (2)
========================================================= ==== ======= ====
Other comprehensive income on items that will not
be reclassified to profit or loss 24 50
========================================================= ==== ======= ====
Other comprehensive income for the year, net of related
tax 44 37
========================================================= ==== ======= ====
Total comprehensive (loss)/income for the year (1,575) 129
========================================================= ==== ======= ====
Attributable to equity holders of M&G plc (1,588) 120
Attributable to non-controlling interests 13 9
========================================================= ==== ======= ====
Total comprehensive (loss)/income for the year (1,575) 129
========================================================= ==== ======= ====
Consolidated statement of financial position
Restated(i)
2022 2021
As at 31 December Note GBPm GBPm
------------------------------------------------------ ---- -------- -----------
Assets
Goodwill and intangible assets 1,877 1,615
Deferred acquisition costs 94 94
Defined benefit pension asset 9 155 38
Investment in joint ventures and associates accounted
for using the equity method 413 469
Property, plant and equipment 1,953 2,536
Investment property 16,505 19,698
Deferred tax assets 6 651 119
Reinsurance assets 11 1,186 1,669
Equity securities and pooled investment funds 70,127 74,069
Loans 3,330 5,809
Debt securities 62,821 81,059
Derivative assets 2,850 3,373
Deposits 21,401 17,633
Current tax and other tax assets 289 375
Accrued investment income and other debtors 2,340 2,647
Assets held for sale(ii) 684 1,023
Cash and cash equivalents 4,884 6,908
====================================================== ==== ======== ===========
Total assets 191,560 219,134
====================================================== ==== ======== ===========
Equity
Share capital 10 119 130
Share premium reserve 10 370 370
Shares held by employee benefit trust (70) (93)
Treasury shares (47) (1)
Retained earnings 14,023 16,550
Other reserves (11,613) (11,660)
====================================================== ==== ======== ===========
Equity attributable to equity holders of M&G plc 2,782 5,296
====================================================== ==== ======== ===========
Non-controlling interests 48 49
====================================================== ==== ======== ===========
Total equity 2,830 5,345
====================================================== ==== ======== ===========
Liabilities
Insurance contract liabilities 11 49,805 63,223
Investment contract liabilities with discretionary
participation features 11 78,594 82,743
Investment contract liabilities without discretionary
participation features 11 11,937 14,884
Unallocated surplus of the With-Profits Fund 11 15,130 16,723
Third party interest in consolidated funds 10,389 12,636
Subordinated liabilities and other borrowings 12 7,537 8,930
Defined benefit pension liability 9 - 84
Deferred tax liabilities 780 1,419
Lease liabilities 420 413
Current tax and other tax liabilities 6 113 359
Derivative liabilities 4,185 2,689
Other financial liabilities 2,172 2,882
Provisions 90 138
Accruals, deferred income and other liabilities 13 7,406 6,666
Liabilities held for sale(ii) 172 -
====================================================== ==== ======== ===========
Total liabilities 188,730 213,789
====================================================== ==== ======== ===========
Total equity and liabilities 191,560 219,134
====================================================== ==== ======== ===========
i Following a review of the Group's presentation of tax positions
within consolidated investment funds, comparative amounts have
been restated from those previously reported. The restatement
has had no impact on the profit for the year or net assets.
See Note 1.1 for further information.
ii Assets held for sale on the consolidated statement of financial
position as at 31 December 2022 includes GBP158m (2021: GBP127m)
of seed capital and GBP333m of investment property (2021: GBP896m)
that are expected to be divested within 12 months. GBP398m of
property assets held for sale as at 31 December 2021 were transferred
back to investment property during the year ended 31 December
2022. Additionally, as at 31 December 2022 GBP193m of assets
(year ended 31 December 2021: GBPnil) and GBP172m of liabilities
(year ended 31 December 2021: GBPnil) held for sale are in relation
to the Group's consolidated infrastructure capital private equity
vehicles.
Consolidated statement of changes in equity
Total
Shares equity
held attributable
by to equity
employee holders Non-
Share Share benefit Treasury Retained Other of controlling Total
capital premium trust shares earnings reserves M&G plc interests Equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---- ------- ------- -------- -------- -------- -------- ------------ ----------- -------
As at 1 January 2022 130 370 (93) (1) 16,550 (11,660) 5,296 49 5,345
(Loss)/profit for
the year - - - - (1,632) - (1,632) 13 (1,619)
Other comprehensive
income for the year - - - - 24 20 44 - 44
======================== ==== ======= ======= ======== ======== ======== ======== ============ =========== =======
Total comprehensive
(loss)/income for
the year - - - - (1,608) 20 (1,588) 13 (1,575)
======================== ==== ======= ======= ======== ======== ======== ======== ============ =========== =======
Shares purchased in
buy-back(i) 10 (11) - - (47) (456) 11 (503) - (503)
Dividends paid to
equity holders of
M&G plc 8 - - - - (465) - (465) - (465)
Dividends paid to
non-controlling
interests - - - - - - - (14) (14)
Shares distributed
by trusts - - 23 - (22) - 1 - 1
Vested employee
share-based
payments - - - - 23 (23) - - -
Expense recognised
in respect of
share-based
payments - - - - - 34 34 - 34
Tax effect of items
recognised directly
in equity - - - - 1 5 6 - 6
Other movements - - - 1 - - 1 - 1
======================== ==== ======= ======= ======== ======== ======== ======== ============ =========== =======
Net (decrease)/increase
in equity (11) - 23 (46) (2,527) 47 (2,514) (1) (2,515)
======================== ==== ======= ======= ======== ======== ======== ======== ============ =========== =======
As at 31 December
2022 119 370 (70) (47) 14,023 (11,613) 2,782 48 2,830
======================== ==== ======= ======= ======== ======== ======== ======== ============ =========== =======
i On 24 March 2022, the Group announced that it would commence
a share buy-back programme to purchase ordinary shares of 5
pence each up to a maximum consideration of GBP500m and the
programme completed on 27 October 2022 for a total consideration,
including expenses and stamp duty, of GBP503m. Shares with a
nominal value of GBP11m were cancelled, leading to a capital
redemption reserve for the same amount, disclosed within other
reserves.
Total
Shares equity
held attributable
by to equity
employee holders Non-
Share Share benefit Treasury Retained Other of controlling Total
capital premium trust shares earnings reserves M&G plc interests Equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
As at 1 January 2021 130 370 (117) (1) 16,853 (11,658) 5,577 8 5,585
Profit for the year - - - - 83 - 83 9 92
Other comprehensive
income for the year - - - - 50 (13) 37 - 37
======================== ==== ======= ======= ======== ======== ======== ======== ============ =========== =======
Total comprehensive
income for the year - - - - 133 (13) 120 9 129
======================== ==== ======= ======= ======== ======== ======== ======== ============ =========== =======
Non-controlling interest
arising through
business
combinations - - - - - - - 38 38
Dividends paid to
equity holders of
M&G plc 8 - - - - (466) - (466) - (466)
Dividends paid to
non-controlling
interests - - - - - - - (6) (6)
Shares distributed
by trusts - - 24 - (24) - - - -
Vested employee
share-based
payments - - - - 33 (33) - - -
Expense recognised
in respect of
share-based
payments - - - - - 40 40 - 40
Tax effect of items
recognised directly
in equity - - - - 21 4 25 - 25
======================== ==== ======= ======= ======== ======== ======== ======== ============ =========== =======
Net increase/(decrease)
in equity - - 24 - (303) (2) (281) 41 (240)
======================== ==== ======= ======= ======== ======== ======== ======== ============ =========== =======
As at 31 December
2021 130 370 (93) (1) 16,550 (11,660) 5,296 49 5,345
======================== ==== ======= ======= ======== ======== ======== ======== ============ =========== =======
Consolidated statement of cash flows
Restated(i)
2022 2021
For the year ended 31 December Note GBPm GBPm
Cash flows from operating activities:
(Loss)/profit before tax (2,497) 788
Non-cash and other movements in operating assets
and liabilities included in profit before tax:
Investments 26,477 (804)
Other non-investment and non-cash assets(ii) 1,761 10,524
Policyholder liabilities (including unallocated surplus)(ii) (22,179) (9,846)
Other liabilities (including operational borrowings) (4,210) 1,213
Interest income, interest expense and dividend income (4,491) (4,028)
Other non-cash items(iii) 242 (456)
Operating cash items:
Interest receipts 2,529 2,321
Interest payments(i) (88) (144)
Dividend receipts 2,220 2,066
Tax paid(iv) (268) (332)
=================================================================== ==== ======== ===========
Net cash flows from operating activities(v) (504) 1,302
=================================================================== ==== ======== ===========
Cash flows from investing activities:
Purchases of property, plant and equipment (573) (770)
Proceeds from disposal of property, plant and equipment 1 41
Net cash (paid)/acquired on acquisition of subsidiaries(vi) (210) 13
Divestment in subsidiaries by consolidated private
equity vehicles(vii) 429 250
Investment in subsidiaries by consolidated private
equity vehicles(vii) (15) -
=================================================================== ==== ======== ===========
Net cash flows from investing activities (368) (466)
=================================================================== ==== ======== ===========
Cash flows from financing activities:
Interest paid (190) (186)
Lease capital repayments(i) (30) (23)
Shares purchased in buy-back 10 (503) -
Dividends paid to equity holders of M&G Plc 8 (465) (466)
Dividends paid to non-controlling interests(iii) (14) (6)
=================================================================== ==== ======== ===========
Net cash flows from financing activities (1,202) (681)
=================================================================== ==== ======== ===========
Net (decrease)/increase in cash and cash equivalents (2,074) 155
Cash and cash equivalents at 1 January 6,908 6,776
Effect of exchange rate changes on cash and cash equivalents 50 (23)
=================================================================== ==== ======== ===========
Cash and cash equivalents at 31 December 4,884 6,908
=================================================================== ==== ======== ===========
i Following a review of the Group's presentation of tax positions
within consolidated investment funds, comparative amounts have
been restated from those previously reported. The restatement
has had no impact on profit for the year or net assets. See
Note 1.1 for further information. Additionally, interest payments
on leases have been reallocated to Interest payments, these
were previously reported within Lease capital repayments.
ii Other non-investment and non-cash assets and Policyholder liabilities
(including unallocated surplus) for the year ended 31 December
2021 includes the impact of the GBP9.6bn Part VII transfer
of annuities business to Rothesay Life PLC.
iii Dividends paid to non-controlling interests of GBP6m for the
year ended 31 December 2021 have been reallocated from operating
activities to financing activities.
iv Tax paid for the year ended 31 December 2022 includes GBP68m
(2021: GBP173m) paid on profits taxable at policyholder rather
than shareholder rates.
v Cash flows in respect of other borrowings of the With-Profits
Fund, which principally relate to consolidated investment funds,
are included within cash flows from operating activities.
vi Net cash (paid)/acquired on acquisition of subsidiaries consists
of GBP227m (2021: GBP0.2m) of cash paid, net of GBP17m (2021:
GBP13m) cash acquired. Refer to Note 2.1 for further information
on shareholder acquisitions made in the year.
vii Divestment/investment in subsidiaries by consolidated private
equity vehicles represents the amount paid or received in relation
to the purchase or sale of underlying investee companies held
by the Group's consolidated private equity vehicles.
Basis of preparation and significant accounting policies
1.1 Basis of preparation
The consolidated results in this preliminary announcement have
been taken from the M&G plc Group's 2022 Annual Report and
Accounts which will be made available on the Company's website on
23 March 2023.
The consolidated financial statements for the year ended 31
December 2022 comprise the financial statements of M&G plc
("the Company") and its subsidiaries (together referred to as "the
Group"). The consolidated financial statements have been prepared
in accordance with UK-adopted international accounting standards
(IAS). The consolidated financial statements have been prepared
under the historical cost basis except for investment property
measured at fair value, certain financial assets and financial
liabilities (including derivative instruments) that are measured at
fair value through profit and loss (FVTPL), insurance contract
liabilities that are measured in accordance with the requirements
of IFRS 4: Insurance contracts, and defined benefit assets and
liabilities, measured at the fair value of plan assets less the
present value of the defined benefit obligations. Assets and
disposal groups held for sale are stated at the lower of the
previous carrying amount and fair value less costs to sell.
The basis of preparation and significant accounting policies
applicable to the consolidated financial statements can be found in
the basis of preparation and significant accounting policies
section of the 2022 Annual Report and Accounts.
The preliminary announcement for the year ended 31 December 2022
does not constitute statutory accounts as defined in section 435 of
the Companies Act 2006. The statutory results under UK-adopted
international accounting standards for full-year 2022 have been
audited by PricewaterhouseCoopers LLP (PwC) and for 2021 were
audited by KPMG LLP (KPMG). PwC have reported on the 2022
consolidated financial statements and their audit report is
unqualified and does not contain a statement under section 498 (2)
or (3) of the Companies Act 2006. The Group's 2021 Annual Report
and Accounts have been filed with the Registrar of Companies.
Unless otherwise noted, the consolidated financial statements
are presented in million pounds sterling (GBPm), the Group's
functional and presentation currency.
Restatement of prior period information
The comparative consolidated statement of financial position as
at 31 December 2021 has been restated following a presentational
change in tax-related balances arising in certain consolidated
property funds which were disclosed incorrectly in the prior
period. The tax balances have been reallocated from Accruals,
deferred income and other liabilities to Current tax liabilities
and other taxes and Deferred tax liabilities.
The comparative consolidated income statement for the year ended
31 December 2021 has also been restated to reallocate tax expense
from Administrative and other expenses to Tax charge attributable
to policyholders' returns, to reflect this presentational change.
As a result, Profit before tax for the year ended 31 December 2021
has been restated.
The restatement has had no impact on profit for the year ended
31 December 2021 or total equity attributable to shareholders as at
31 December 2021.
The impact of the restatement on the consolidated statement of
financial position and consolidated income statement is set out in
the tables below:
For the
year For the
ended year
31 December ended
2021 31 December
as previously 2021
reported Adjustments restated
Note GBPm GBPm GBPm
Consolidated income statement:
Administrative and other expenses 5 (2,884) 81 (2,803)
Total charges, net of reinsurance (17,146) 81 (17,065)
Profit before tax 707 81 788
Tax charge attributable to policyholders' returns 6 (626) (81) (707)
Total tax charge 6 (615) (81) (696)
Less tax charge attributable to policyholders'
returns (626) (81) (707)
================================================== ==== ============== =========== ============
As at
31 December As at 1 January
2021 31 December 2021 1 January
as previously 2021 as previously 2021
reported Adjustments restated reported Adjustments restated
Note GBPm GBPm GBPm GBPm GBPm GBPm
Consolidated statement of
financial
position:
Liabilities:
Deferred tax liabilities 6 1,157 262 1,419 916 210 1,126
Current tax liabilities and
other taxes 6 323 36 359 276 21 297
Accruals, deferred income
and
other liabilities 13 6,964 (298) 6,666 6,964 (231) 6,733
Other 205,345 - 205,345 214,985 - 214,985
============================= ==== ============== =========== ============ ============== =========== =========
Total liabilities 213,789 - 213,789 223,141 - 223,141
============================= ==== ============== =========== ============ ============== =========== =========
In the consolidated statement of cash flows, GBP81m has been
reallocated from Profit before tax and split between Other
liabilities of GBP67m, Other non-cash items of GBP3m and Tax paid
of GBP17m, to reflect the change in presentation. The reallocation
from Profit before tax relates to policyholder tax and does not
impact Profit before tax attributable to equity holders.
Comparatives in the impacted notes to the consolidated financial
statements have also been restated.
Going concern
The Directors have reasonable expectation that the Group as a
whole has adequate resources to continue in operational existence
over a period of at least 12 months from the date of approval of
the consolidated financial statements.
To satisfy themselves of the appropriateness of the use of the
going concern assumption in relation to the consolidated financial
statements, the Directors have considered the liquidity projections
of the Group, including the impact of applying specific liquidity
stresses. The Directors also considered the ability of the Group to
access external funding sources, including access to the GBP1.5bn
revolving credit facility and the management actions that could be
used to manage liquidity.
In addition, the Directors also gave particular attention to the
solvency and liquidity projections of the Group under various
stressed scenarios which consider various assumptions around
inflation and actions by central banks resulting from the current
macroeconomic environment and uncertain geo-political situation
which affect supply chains and consumer behaviours.
The impact of the following individual stresses on solvency were
considered as part of the assessment:
- 20% fall in equity prices
- 20% fall in property prices
- (50bps) parallel shift in nominal yields
- 20% of the credit portfolio downgrading by one full letter
- +100bps spread widening (A-rated assets)
We also assessed the resilience of our financial position in a
high inflationary environment scenario and the economic
implications resulting from it.
The results of the assessment demonstrated the ability of the
Group to meet all obligations, including payments to shareholders
and debt holders, and future business requirements for the
foreseeable future, considering relevant management actions are
taken as necessary. In addition, the assessment demonstrated that
the Group was able to remain above its regulatory solvency
requirements in a stressed scenario.
For this reason, the Directors continue to adopt the going
concern basis in preparing the consolidated and Company financial
statements.
1.2 New accounting pronouncements
1.2.1 New accounting pronouncements adopted by the Group
In preparing these consolidated financial statements the Group
has adopted the following standards, interpretations and amendments
that became effective during the year:
- Reference to the Conceptual Framework (Amendments to IFRS 3),
issued in May 2020 and effective from 1 January 2022
- Property, Plant and Equipment: Proceeds before Intended Use (Amendments
to IAS 16), issued in May 2020 and effective from 1 January 2022
- Onerous Contracts - Costs of Fulfilling a Contract (Amendments
to IAS 37), issued in March 2018 and effective from 1 January
2022
None of the above interpretations and amendments to standards
are considered to have a material effect on these consolidated
financial statements
1.2.2 New accounting pronouncements not yet effective
The following standards, interpretations and amendments have
been issued but are not yet effective for the Group. This is not
intended to be a complete list as only those standards,
interpretations and amendments that could have an impact upon the
consolidated financial statements are discussed.
1.2.2.1 IFRS 9: Financial Instruments
In July 2014, the International Accounting Standards Board
(IASB) published IFRS 9: Financial Instruments (IFRS 9) which is
effective for annual periods beginning on or after 1 January 2018,
except as described below, with early application permitted.
IFRS 9 replaces the existing standard, IAS 39: Financial
Instruments-Recognition and Measurement. The standard provides new
principles for determining classification and measurement of
financial instruments, introduces a new forward-looking impairment
model based on expected losses (replacing the existing incurred
loss model) and provides new guidance on application of hedge
accounting.
In September 2016, the IASB published amendments to IFRS 4,
"Applying IFRS 9 Financial Instruments with IFRS 4: Insurance
Contracts" to address the temporary consequences of the different
effective dates of IFRS 9 and IFRS 17: Insurance Contracts. The
amendments include an optional temporary exemption from applying
IFRS 9 and the associated amendments until IFRS 17 comes into
effect. This temporary exemption is available to companies whose
predominant activity is to issue insurance contracts based on
meeting the eligibility criteria as at 31 December 2015 as set out
in the amendments. In June 2020, the IASB amended IFRS 17 so that
the revised effective date of the standard is for periods beginning
on or after 1 January 2023. The IASB also confirmed through this
amendment that IFRS 9 could be delayed for insurers to keep the
effective dates of IFRS 9 and IFRS 17 aligned.
As the Group met the required eligibility criteria for temporary
exemption, the adoption of IFRS 9 has been deferred to coincide
with the adoption of IFRS 17 on 1 January 2023. The comparative
period will be restated for IFRS 9 and the Group will apply the
classification overlay in IFRS 17 to financial assets derecognised
in 2022 and present these assets as if classification and
measurement of IFRS 9 have been applied.
Classification and Measurement
Under IFRS 9 financial assets are classified into three
categories: fair value through profit or loss, fair value through
other comprehensive income or amortised cost. The classification is
based on the business model on which the financial assets are
managed and the contractual cash flows of these assets. IFRS 9
largely retains the requirements of IAS 39 in respect of the
classification and measurement of financial liabilities.
IFRS 9 will affect the classification and measurement of
financial instruments held at 1 January 2023 as follows:
Classification under Classification under
IAS 39 IFRS 9
Financial assets:
=============================== =========================== ====================
Loans Loans and receivables/FVTPL FVTPL mandatory
designated
=============================== =========================== ====================
Derivative assets FVTPL held for trading FVTPL mandatory
=============================== =========================== ====================
Equity securities and pooled FVTPL designated FVTPL mandatory
investment funds
=============================== =========================== ====================
Deposits Loans and receivables Amortised cost
=============================== =========================== ====================
Debt securities FVTPL designated FVTPL mandatory
=============================== =========================== ====================
Accrued investment income Loans and receivables Amortised cost
and other debtors
=============================== =========================== ====================
Cash and cash equivalents Loans and receivables Amortised cost
=============================== =========================== ====================
Classification under Classification under
IAS 39 IFRS 9
Financial liabilities:
=============================== =========================== ====================
Investment contract liabilities FVTPL designated FVTPL designated
without DPF
=============================== =========================== ====================
Third party interests in FVTPL designated FVTPL designated
consolidated funds
=============================== =========================== ====================
Subordinated liabilities Amortised cost Amortised cost
and other borrowings
=============================== =========================== ====================
Derivative liabilities FVTPL held for trading FVTPL mandatory
=============================== =========================== ====================
Other financial liabilities Amortised cost Amortised cost
=============================== =========================== ====================
Accruals, deferred income Amortised cost Amortised cost
and other liabilities(i)
=============================== =========================== ====================
i Except Deferred consideration which is classified as FVTPL
designated under IAS 39 and IFRS 9.
The majority of the Group's financial instruments are measured
at fair value both before and after transition to IFRS 9. The
impact to Group total equity from reclassifying loans from
amortised cost to fair value is a decrease of GBP0.1bn at 1 January
2023 and an increase of GBP0.1bn at 1 January 2022.
Impairment
A new impairment model will apply to the Group's financial
assets measured at amortised cost. The Group estimate that due to
the size and nature of the assets that will be held at amortised
cost following the application of the IFRS 9, there will be no
material change to the impairment recognised.
Hedge accounting
The Group does not currently apply hedge accounting.
The assessment above is preliminary and is subject to change as
the Group continue to refine the new accounting policies,
assumptions, judgements and estimates in respect of IFRS 9.
Presented below are disclosures required by the amendments to
IFRS 4 for entities deferring the adoption of IFRS 9. These are
provided to enable users to compare results with those entities
that have adopted IFRS 9. As required by the amendment, the table
shows the fair value of the Group's directly held financial assets
at 31 December 2022, distinguishing those financial assets which
have contractual terms that give rise on specified dates to cash
flows that are solely payments of principal and interest (SPPI) as
defined by IFRS 9.
All other financial
Financial assets assets,
that net of derivative
pass the SPPI test liabilities
Movement Movement
in fair in fair
31 December value during 31 December value during
2022 the year 2022 the year
Financial assets on the consolidated GBPm GBPm GBPm GBPm
statement of financial position
Equity securities and pooled investment
funds - - 70,127 (2,876)
Loans - - 3,233 (933)
Debt securities - - 62,821 (12,637)
Derivative assets - net of derivative
liabilities - - (1,335) (3,983)
Deposits 21,401 - - -
Accrued investment income and
other debtors 2,340 - - -
Cash and cash equivalents 4,884 - - -
======================================== =========== ============= =========== =============
Total financial assets, net of
derivative liabilities 28,625 - 134,846 (20,429)
======================================== =========== ============= =========== =============
All other financial
Financial assets assets,
that net of derivative
pass the SPPI test liabilities
------------------------ ------------------------
Movement Movement
in fair in fair
value value
31 December during the 31 December during the
2021 year 2021 year
Financial assets on the consolidated GBPm GBPm GBPm GBPm
statement of financial position
Equity securities and pooled investment
funds - - 74,069 9,298
Loans(i) - - 5,876 (172)
Debt securities - - 81,059 (2,732)
Derivative assets - net of derivative
liabilities - - 684 (56)
Deposits 17,633 - - -
Accrued investment income and other
debtors 2,647 - - -
Cash and cash equivalents 6,908 - - -
======================================== =========== =========== =========== ===========
Total financial assets, net of
derivative liabilities 27,188 - 161,688 6,338
======================================== =========== =========== =========== ===========
i Loans have been restated for 31 December 2021 from "Financial
assets that pass the SPPI test" to "All other financial assets net
of derivative liabilities" following business model assessment
carried out in 2022.
1.2.2.2 IFRS 17: Insurance Contracts
IFRS 17: Insurance Contracts (IFRS 17), effective from 1 January
2023, has been published by the IASB, and endorsed without
amendment for application by UK listed groups by the UK Endorsement
Board. IFRS 17 replaces the existing interim standard, IFRS 4:
Insurance Contracts. The Group intends to adopt the new standard on
its mandatory effective date, alongside the adoption of IFRS 9:
Financial Instruments.
A key principle of IFRS 17 is that the profit from insurance
contracts (and investment contracts with discretionary
participation features) is recognised over the period over which
service is provided to policyholders. In addition, while expected
profits are deferred, expected losses are recognised immediately
and, as a consequence, the accounting result depends on the level
of aggregation at which the contracts are measured. Given this,
IFRS 17 specifies how the insurance contracts should be divided
into groups for the purpose of recognition and measurement.
Status of implementation project
The implementation of IFRS 17 continues to be a key priority for
the Group and involves significant change to systems and processes.
Key components of the programme include a large number of
methodology and implementation judgements, delivery of new systems
and controls and the production of comparative results. To deliver
a programme of this size, a large number of resources,
incorporating a wide range of skills and expertise, are
required.
Project progress is tracked against key milestones and reported
through internal governance, including to the Group Audit
Committee, on an ongoing basis. Due to the complexity of the
with-profits business and scale of change involved, delivery
remains challenging but the programme has met key milestones and is
preparing to report in accordance with the new standard in 2023.
The focus over 2023 is the completion of the production of restated
comparatives and ensuring the business is ready to migrate to the
new systems, processes and internal controls in the timescales
available.
Overview of IFRS 17
Contracts within the scope of IFRS 17
An entity must apply IFRS 17 to determine the requirements for
recognition, measurement, presentation and disclosure of:
- Insurance contracts (including reinsurance contracts issued);
- Reinsurance contracts held; and
- Investment contracts with discretionary participation features
(DPF) issued, provided the entity also issues insurance contracts.
The definitions of insurance risk and discretionary
participation features under IFRS 17 are unchanged from IFRS 4.
Therefore the Group's judgements as to what constitutes significant
insurance risk and significant discretionary participation features
when determining whether contracts are within the scope of IFRS 17
are unchanged from the judgements that the Group made for IFRS
4.
Identifying contracts
The requirements for identifying contracts within the scope of
IFRS 17 is not limited to determining only whether a contract falls
into one of the three categories above but also requires the entity
to assess whether contracts within the scope of IFRS 17 contain
embedded derivatives, distinct investment components or obligations
to provide distinct goods or services other than insurance contract
services that must be separated out and accounted for under a
different standard (with the remaining components accounted for
under IFRS 17).
Level of aggregation
IFRS 17 requires contracts to be aggregated together into groups
for measurement purposes. Contracts are grouped together:
- If they are subject to similar risks and managed together;
- If they were issued in the same calendar year; and
- According to whether at initial recognition they are expected
to be loss making, profitable with no significant possibility
of becoming loss making subsequently, or neither of these.
There are similar grouping requirements applied to reinsurance
contracts held although, rather than being assessed by
profitability, reinsurance contracts held are assessed according to
whether at initial recognition their value to the Group is a net
gain, a net loss with no significant possibility that the value
becomes a net gain subsequently, or neither of these.
Upon transition the Group expects to aggregate the in-force
contracts into about 70 groups.
Measurement - Overview
The carrying amount of a group of insurance contracts is the sum
of the liability for incurred claims and the liability for
remaining coverage. The liability for incurred claims contains
fulfilment cash flows for incurred claims that have not yet been
paid to policyholders and other relevant cash flows.
The liability for remaining coverage is the sum of:
- The present value of the probability-weighted expected future
cash flows that are expected to arise from fulfilling the contracts.
Cash flows are discounted using risk-free yield curves adjusted
to reflect the liquidity characteristics of the contracts;
- An explicit risk adjustment that reflects the entity's own view
of the additional amount it requires for bearing the uncertainty
about the timing and amount of the cash flows that arises from
non-financial risk; and
- A contractual service margin (CSM), which represents the unearned
profit that will be recognised as the entity provides services
under the contracts.
Measurement - future cash flows
Underlying items
IFRS 17 includes the concept of "underlying items", which are
assets that determine some of the amounts payable to policyholders.
Underlying items form part of the assessment of "direct
participation features", which determines which CSM measurement
model must be used and how the CSM is re-measured under the
Variable Fee Approach (see section on CSM measurement below).
Underlying items are also included in the assessment of whether
there is mutualisation (see below) between groups of contracts.
Underlying items of the with-profits groups of insurance
contracts
The underlying items are the assets backing the asset shares
(which are the accumulated value of all items of income and outgo
for with-profits policies) plus, where applicable, the assets
backing enhancements that are expected to be added to asset shares
in the future, such as profit from some of the non-profit business
written in the With-Profits Fund.
Other underlying items in the With-Profits Fund
The With-Profits Fund includes assets that are expected to be
utilised to pay amounts to current or future policyholders in
addition to the provisions held in the groups of insurance
contracts. The underlying items for these additional amounts are
defined as:
- The entirety of the assets in the With-Profits Fund;
- Less: the underlying items of the with-profits groups of insurance
contracts; and
- Less: the assets held to meet other liabilities of the With-Profits
Fund, for example for non-profit contracts.
Mutualisation
In general, IFRS 17 only requires a liability to be held for the
current policyholders at each valuation. However, in addition, IFRS
17 acknowledges the "mutualisation" feature of with-profits funds
whereby the cash flows of some contracts may affect or be affected
by the cash flows of other contracts. In recognition of this
feature, IFRS 17 also permits a liability to be held that
represents the share of the surplus assets in the With-Profits Fund
attributable to current or future policyholders.
Future cash flows of the with-profits groups of insurance
contracts - impact of mutualisation
Surpluses may arise from some with-profits contracts, for
example if the amounts charged to policies exceed the costs they
are intended to cover. These surpluses accrue to the With-Profits
Fund and may be utilised to meet deficits arising on other
with-profits contracts or to enhance the benefits payable to
current or future policyholders. In order to recognise this feature
of the With-Profits Fund, the liabilities for each with-profits
group of insurance contracts includes the policyholders' share of
the expected future surpluses/deficits, where the expected future
surpluses/deficits are given by:
- The discounted value of the amounts that will be charged to policies;
- Less: the discounted value of future shareholder transfers, gross
of tax;
- Less: the discounted value of other costs directly attributable
to the group of insurance contracts.
Future cash flows - additional amounts payable to current or
future policyholders
The liability for the additional amounts payable to current or
future policyholders will be a key judgement and is expected to be
equal to around 90% of the fair value of the other underlying items
in the With-Profits Fund. The fair value of these underlying items
includes the fair value of the non-profit contracts in the
With-Profits Fund.
Discount rates
The Group will determine the adjustment for illiquidity using
either a top-down or a bottom-up approach. Under the top-down
approach a yield curve that reflects the current market rates of
return implicit in a fair value measurement of a reference
portfolio of assets is adjusted to eliminate any factors that are
not relevant to the insurance contracts, such as cash flow
mismatching and credit risk. However, it is not required to adjust
the yield curve for differences in the liquidity characteristics of
the insurance contracts and the reference portfolio.
Judgement is required to choose an appropriate reference
portfolio and to determine the element of the yield on the
portfolio that is attributable to factors not relevant to the
insurance contracts.
Under the bottom-up approach a liquid risk-free yield curve is
increased to reflect the differences between the liquidity
characteristics of the financial instruments that underlie the
risk-free rates observed in the market and the liquidity
characteristics of the insurance contracts. Judgement is required
to determine the illiquidity premium.
The Group intends to apply the top-down approach for annuities
contracts and the bottom-up approach for all other contracts,
including with-profits.
Measurement - risk adjustment for non-financial risk
Different approaches are expected to be used within the industry
to estimate the risk adjustment for non-financial risk, including a
confidence level technique or a cost of capital technique.
For all lines of business, the Group will use a confidence level
technique under which a probability distribution of the expected
present value of future cash flows from the contracts is estimated
and the risk adjustment for non-financial risk is calculated as the
excess of the value at risk at the target confidence level over the
expected present value of the future cash flows.
The Group has set the compensation it requires for uncertainty
arising from non-financial risk over the period of coverage
equivalent to the 75th percentile over a 1-year time horizon. This
is a key judgement.
The risk adjustment will reflect the impact of diversification
of non-financial risks within each entity in the Group but not
diversification of risks between entities.
Measurement - CSM
The CSM is subject to different measurement requirements
depending on whether it relates to groups of contracts that are
classified as being with or without direct participation features.
Insurance and investment contracts with direct participation
features are contracts for which the entity expects to pay the
policyholder a substantial share of the returns on the underlying
items.
For the Group's business all contracts that are in the scope of
IFRS 17 and that are without direct participation features will
apply the General Measurement Model (GMM). These primarily consist
of the non-profit annuity and non-profit protection lines of
business.
The contracts with direct participation features will use the
Variable Fee Approach (VFA). These are expected to comprise the
with-profits business, including PruFund, and unit-linked
business.
A key difference between the GMM and VFA measurement models is
that adjustments to the VFA CSM reflect prevailing market
conditions, giving some alignment between the movements in asset
and liability values. In contrast, adjustments to the GMM CSM are
determined using prospective financial assumptions and discount
rates that are fixed ("locked-in") at initial recognition.
Under the General Measurement Model the carrying amount of CSM
is adjusted to reflect the following changes:
- Effect of new contracts added to the group of contracts;
- Interest accreted on the carrying amount of CSM, measured at the
locked-in rate;
- Changes in cash flows arising from non-financial risk that relate
to future service;
- Effect of any currency exchange differences on the CSM; and
- Recognition of insurance revenue for services provided in the
year.
Under the Variable Fee Approach the CSM is adjusted to reflect
the following changes:
- Effect of new contracts added to the group of contracts;
- Change in the entity's share of the fair value of underlying items;
- Changes in cash flows that relate to future service, including
the effect of the time value of money and financial risk not arising
from the underlying items;
- Effect of any currency exchange differences on the CSM; and
- Recognition of insurance revenue for services provided in the
year.
Some of the adjustments to the CSM for the Variable Fee Approach
listed above are determined by reference to changes in the
"variable fee", which represents the value of the entity's interest
in the contracts. For with-profits business, the variable fee is
determined as the discounted value of future shareholder transfers,
gross of tax, plus the shareholders' share of the expected future
surpluses/deficits, where the expected future surpluses/deficits
are given by:
- The discounted value of the amounts that will be charged to policies;
- Less: the discounted value of future shareholder transfers, gross
of tax; and
- Less: the discounted value of other costs directly attributable
to the group of insurance contracts.
The shareholders' share is expected to be around 10%, mirroring
the key judgement that the policyholders' share is expected to be
around 90%.
Insurance revenue for services provided in the year is
recognised by reference to "coverage units", which represent the
quantity of services provided. For non-profit annuities that are
already in payment the coverage units are determined as the annual
annuity benefit payable. This is consistent with the conclusion
published on this topic by the IASB's Interpretation Committee
(IFRIC) in 2022. For the majority of the with-profits contracts the
coverage units are defined as the maximum of the benefit payable on
death and the asset share, as this best represents the insurance
and investment service being provided. The exception is
with-profits annuity contracts in payment, for which the coverage
units are defined as the annual annuity benefit payable.
For a profitable group of contracts the value of the CSM at
inception equals the present value of the expected net inflow. This
results in no income or expenses being recognised for the group of
contracts at their initial recognition. Conversely, for a group of
contracts that is loss making (or "onerous") at inception, the CSM
is set to zero and the expected net outflow is immediately
recognised as a loss. A loss component is established with value
equal to the net outflow.
Transition to IFRS 17
IFRS 17 requires that the changes in accounting policies arising
from adopting the new standard, at 1 January 2022, must be applied
using a fully retrospective approach unless it is not practicable
to do so. Under the fully retrospective approach the Group
will:
- Identify, recognise and measure each group of insurance contracts,
investment with DPF contracts and reinsurance contracts held as
if IFRS 17 had always applied;
- Derecognise previously reported balances that would not have existed
if IFRS 17 had always applied (including IFRS 4-related deferred
acquisition costs, and the unallocated surplus of the With-Profits
Fund); and
- Recognise any resulting net difference in equity, after allowing
for any deferred tax adjustment.
Where it is impracticable to apply a fully retrospective
approach to a group of contracts, then the Group will, as permitted
under IFRS 17, use either the modified retrospective approach or
the fair value approach.
The Group expects to apply the following approaches to valuing
the CSM on transition to IFRS 17(i) :
Transition approach Applied for
Fully Retrospective Approach With-profits business written 2020-2021
Non-Profit protection in Poland written
2020-2021
Rothesay annuity reinsurance treaty(ii)
=============================== =============================================
Modified Retrospective Approach 90:10 with-profits business written 2004-2019
=============================== =============================================
Fair Value Approach With-profits business written before 2004
All other contracts written up to 2021
All other reinsurance treaties incepted
up to 2021
=============================== =============================================
i The approach to be used for PruProtect business is still to be
confirmed. As this business is fully reinsured, the impact of
PruProtect contracts on shareholder equity at transition to IFRS 17
is not significant.
ii The Rothesay Part VII transfer in December 2021 and
consequential update to the reinsurance treaty for the retained
annuity business is deemed to constitute a derecognition event.
Therefore, for IFRS 17 purposes, the inception date of the
reinsurance contract is 15 December 2021 and so is transitioned
under the Fully Retrospective Approach.
The reasons why the Group considers the fully retrospective
approach to be impracticable for some contracts include:
- The effects of retrospective application are not determinable
because the information required has not been collected, or has
not been collected with sufficient granularity, or is unavailable
because of system migrations or other reasons.
- The fully retrospective approach requires assumptions about what
the Group management's intentions would have been in previous
periods that cannot be made without the use of hindsight. These
include judgements about the compensation the Group requires for
bearing non-financial risk in order to determine the risk adjustment.
As the Group was established as a separate entity in 2019, the
Group's current business management and assumptions are not appropriate
prior to 2020 and choosing to use these or other assumptions would
require the application of hindsight.
- Where the fully retrospective approach is impracticable for the
valuation of a portfolio of insurance contracts written then it
will also be impracticable for the valuation of associated reinsurance
portfolio as measurement requires similar considerations.
Modified retrospective approach
The objective of the modified retrospective approach is to
achieve the closest outcome to retrospective application possible
using reasonable and supportable information available without
undue cost or effort. The Group will apply each of the following
modifications only to the extent that it does not have reasonable
and supportable information to apply IFRS 17 retrospectively.
Assessments at inception or on initial recognition
The Group will determine the identification of groups of
contracts and classification of contracts using information
available at contract inception where reasonable and supportable
information is available. Where the Group does not have reasonable
and supportable information this will be assessed based on
information at 1 January 2022.
Groups of contracts valued under the modified retrospective
approach will contain contracts issued more than one year
apart.
90:10 with-profits business written 2004-2019
For groups of with-profits contracts issued between 2004 and
2019 transitioning under the modified retrospective approach, the
Group will determine the CSM at 1 January 2022 by calculating a
proxy (as permitted in IFRS 17) for the total CSM for all services
to be provided from inception as the fair value of the underlying
items at 1 January 2022 minus the fulfilment cash flows at 1
January 2022, adjusted for:
- Amounts charged to policyholders (including charges deducted from
the underlying items) before 1 January 2022.
- Amounts paid before 1 January 2022 that did not vary based on
the underlying items.
- The change in the risk adjustment for non-financial risk caused
by the release from risk before 1 January 2022, which will be
estimated by reference to the release of risk for similar contracts
that the Group issues at 1 January 2022.
If the calculation results in a CSM, the Group will measure the
CSM at 1 January 2022 by deducting the CSM related to services
provided before 1 January 2022. The CSM related to services
provided before 1 January 2022 will be determined by comparing the
remaining coverage units at 1 January 2022 with coverage units
prior to 1 January 2022.
If the calculation results in a loss component then the Group
will adjust the loss component to nil and increase the liability
for remaining coverage excluding the loss component by the same
amount.
Fair value approach
Under the fair value approach, the CSM (or the loss component)
at 1 January 2022 will be determined as the difference between the
fair value of a group of contracts at that date and the fulfilment
cash flows at that date. The Group will measure the fair value of
the contracts as the sum of:
- The best estimate of the liability, determined using a discounted
cash flow technique; and
- The compensation a market participant would require for taking
on the obligation, over and above the best estimate liability,
determined using a cost of capital approach, and an amount to
reflect the risk around the quantum of future shareholder transfers.
The key judgements are in the assumptions used to set the best
estimate of the liability, such as longevity assumptions, assumed
asset mix for annuities, and discount rates, and the compensation a
market participant would require for taking on the obligation, in
particular the level of capital assumed to be held, the assumed
cost of holding the capital, and the level of compensation required
to reflect the risk in relation to future shareholder
transfers.
The fair value will be calibrated based on analysis of the
Group's own data and market data including public information on
recent transactions (to the extent relevant and available).
The Group will determine the identification of groups of
contracts and classification of contracts using information
available at 1 January 2022. Groups of policies valued under the
fair value approach will contain contracts issued more than one
year apart. For GMM under the fair value approach, locked-in
discount rates and financial assumptions, as applied after
transition, will be determined at 1 January 2022.
Comparison with IFRS 4
The timing of profit recognition will change significantly under
IFRS 17. Under IFRS 4 profits are recognised as follows:
- For with-profits contracts that share in the profit arising in
the main With-Profits fund, profits are recognised when bonuses
are added to policies. As a substantial proportion of the total
bonus is determined when claims are paid to policyholders, a considerable
part of the profit is recognised when policies terminate.
- For non-profit contracts (notably annuities) a substantial proportion
of the lifetime expected profit is recognised at policy inception
reflecting the difference between the premiums received less costs
incurred and the prudent liability established for the expected
future cash flows.
In contrast, IFRS 17 does not allow upfront profit recognition
for profitable contracts but rather requires that profit is
recognised as services are provided to the policyholders.
Other differences in the measurement of the liabilities
include:
- IFRS 17 requires that the discount rates include an illiquidity
premium. The IFRS 4 discount rates for with-profits contracts
in particular do not include an illiquidity premium. For annuity
contracts, the IFRS 4 discount rates are similar to IFRS 17.
- IFRS 4 liabilities for non-profit contracts are determined using
implicit prudence margins in the demographic and expense assumptions.
In contrast IFRS 17 requires a separate risk adjustment for non-financial
risks which may differ from the value of the IFRS 4 margins.
- Under IFRS 4, the unallocated surplus of the With-Profits Fund
represents the excess of the fund's assets over policyholder liabilities
that are yet to be appropriated between policyholders and shareholders
with no allocation to equity. There is no unallocated surplus
under IFRS 17 although IFRS 17 does allow a liability to be held
for the policyholders' share of the surplus assets in the With-Profits
Fund. Under IFRS 17 there will be equity for the first time relating
to the With-Profits Fund.
Overall quantitative impact on the Group
The Group will apply IFRS 17 for the first time at 1 January
2023. As a result of the requirement to restate comparative
information presented, the date of transition to IFRS 17 for the
Group is 1 January 2022. The standard will, as detailed above,
bring significant changes to the accounting for insurance and
reinsurance contracts and is expected to have a material impact on
the Group's consolidated financial statements in the period of
initial application.
The Group has estimated the impact that the initial application
of IFRS 17 will have on the consolidated financial statements at 31
December 2021/1 January 2022. The quantitative assessment is
preliminary as not all of the IFRS 17 transition work is finalised,
and the application of some elements of IFRS 17 to the Group's open
with-profits business is complex. The final impact of adopting IFRS
17 may change as:
- the Group is continuing to refine the new accounting processes,
methodology and internal controls in applying IFRS 17; and
- the new accounting policies, assumptions, judgements and estimation
techniques employed are subject to change until the Group finalises
its adoption of IFRS 17.
Although the quantitative assessment is preliminary, it may be
reasonably estimated that on transition to IFRS 17 equity will
increase by at least GBP1.5bn at 1 January 2022, from GBP5.3bn to
GBP6.8bn.
Shareholder equity is expected to increase as the reduction in
equity driven by the CSM established to defer previously recognised
profits on the annuity portfolio is more than offset by the
recognition as equity of part of the surplus assets in the
With-Profits Fund. The equity in the With-Profits Fund represents
the shareholders' assumed share of the surplus assets in the fund
in accordance with the requirements of IFRS 17 and is not
immediately available for distribution to shareholders. Transfers
from the With-Profits Fund to shareholders will continue to be
derived from the cost of bonuses (or equivalent) added to
with-profits contracts.
The Group is currently unable to set an upper limit for the
impact on equity at 1 January 2022 as there is insufficient
certainty in the outcome of the judgements that remain, for
with-profits business in particular.
Adjusted operating profit will continue to be the Group's
non-GAAP alternative performance measure. The definition of
adjusted operating profit is currently being refined for IFRS 17,
to ensure that it continues to provide an accurate reflection of
the Group's underlying business performance.
The Group will publish restated comparative information on
adoption of IFRS 17 in the 2023 interim financial statements.
1.2.2.3 Other
In addition to the above, the following new accounting
pronouncements have also been issued but are not yet effective or
have not yet been adopted for use in the UK:
- Classification of Liabilities as Current or Non-current (Amendments
to IFRS 1), issued in January 2020 and effective from 1 January
2023, although it is anticipated that the effective date will
be pushed back to no earlier than 1 January 2024
- Sale or Contribution of Assets between an Investor and its Associate
or Joint Venture - (Amendments to IFRS 10 and IAS 28), issued
in December 2015 and effective date pending completion of the
research project on equity method accounting
- The Disclosure Initiative: Accounting Policy Requirements (Amendments
to IAS 1), issued in February 2021 and effective from 1 January
2023
- Definition of Accounting Estimates (Amendments to IAS 8), issued
in February 2021 and effective from 1 January 2023
- Deferred tax related to assets and liabilities arising from a
single transaction (Amendments to IAS 12), issued in May 2021
and effective from 1 January 2023
- Lease Liability in a sale and leaseback (Amendments to IFRS 16),
issued in September 2022 and effective from 1 January 2024.
The Group has assessed the impact of these pronouncements on the
consolidated financial statements, none of which are expected to
have material impact on the Group.
2 Group structure and products
2.1 Corporate transactions
2.1.1 Sandringham Financial Partners acquisition
On 6 January 2022, the Group, via M&G Group Regulated Entity
Holding Company Limited (M&G REH), acquired a 100% holding in
Clear View Assured Limited, the holding company for Sandringham
Financial Partners Limited (Sandringham) for a purchase
consideration of GBP73m.
Sandringham is part of M&G Wealth within our Retail and
Savings segment and at acquisition brought to M&G a
well-established national financial services advisory business with
around 180 advisory partners working on behalf of over 10,000
clients and more than GBP2.4bn of assets under advice to complement
our existing advisory business, The Advice Partnership.
There is a further deferred amount payable to former
shareholders who are in the employment of Sandringham of GBP8.6m
over 2 years from the date of acquisition provided the shareholders
remain in service. This does not form part of the purchase
consideration and will be accounted for as employment costs over
the service period.
As at the acquisition date the consideration, net assets and
intangible assets acquired and resulting goodwill were as
follows:
GBPm
Total cash consideration 73
================================================ ====
Fair value of net assets acquired:
Accrued investment income and other debtors 1
Cash and cash equivalents 4
================================================ ====
Total assets 5
================================================ ====
Accruals, deferred income and other liabilities (3)
================================================ ====
Total liabilities (3)
================================================ ====
Acquired intangible assets:
Trade name 7
Customer-related 15
Deferred tax on assets not on balance sheet (6)
================================================ ====
Goodwill 55
================================================ ====
The goodwill of GBP55m represents the synergies to be achieved
through the creation of a fully integrated M&G Wealth business
to complement the Group's well established asset management
offering.
The Sandringham trade name was recognised on acquisition at fair
value of GBP6.7m. The valuation was based on the relief from
royalty rates method and the key assumptions used in measuring the
fair value were discount rate and royalty rate.
A customer-related intangible was also recognised at fair value
of GBP14.6m. The valuation was based on the multi-period excess
earning method and the key assumptions used in measuring the fair
value were discount rate and net attrition.
Sandringham was acquired at the start of the reporting period.
The revenue and loss before tax included in the consolidated income
statement in respect of Sandringham was GBP26.7m and GBP9.9m
respectively. The loss before tax includes the impact of deferred
consideration accounted for as employment costs.
2.1.2 responsAbility acquisition
On 3 May 2022, the Group, via M&G FA Limited, acquired a
94.8% holding in responsAbility Investments AG
(responsAbility).
responsAbility is a Swiss private asset manager which is a
leader in impact investing focused on private debt and private
equity across emerging markets, with GBP2.9bn of assets under
management. Following completion of the acquisition
responsAbility's 200 employees joined M&G, the business will
remain headquartered in Zurich creating a new investment hub for
M&G Investments. responsAbility will sit within the Asset
Management segment of the business.
The purchase consideration was subject to an adjustment for net
assets between the date of the Share Purchase Agreement and the
acquisition date. The Group retained call options and the seller
retained put options over the remaining holding where the exercise
price was fixed at inception. For accounting purposes, at the
balance sheet date, the Group has accounted for the transaction on
the basis it controls 100% of responsAbility. A liability has been
recognised in respect of the Group's obligation under the call
option arrangement. The Group acquired the remaining shares in
February 2023.
As at the acquisition date the consideration, net assets and
intangible assets acquired and resulting goodwill were as
follows:
GBPm
================================================ ====
Total cash consideration 148
================================================ ====
Fair value of net assets acquired:
Accrued investment income and other debtors 41
Cash and cash equivalents 13
================================================ ====
Total assets 54
================================================ ====
Accruals, deferred income and other liabilities (22)
================================================ ====
Total liabilities (22)
================================================ ====
Acquired intangible assets:
Trade name 9
Customer-related 36
Deferred tax on assets not on balance sheet (8)
================================================ ====
Goodwill 79
================================================ ====
The goodwill of GBP79m represents the benefits of the
acquisition which introduces various revenue synergies including
leveraging from the Group's capabilities to grow responsAbility's
UK institutional presence and the EU bank distribution
relationships outside Switzerland. Additionally, the acquisition
includes revenue benefits from launching new thematic products from
an ESG perspective.
The responsAbility trade name was recognised on acquisition at
fair value of GBP9.3m. The valuation was based on the relief from
royalty rates method and the key assumptions used in measuring the
fair value were discount rate and royalty rate.
A customer-related intangible was also recognised at fair value
of GBP36.3m. The valuation was based on the multi-period excess
earning method and the key assumptions used in measuring the fair
value were discount rate and net attrition.
The revenue and profit before tax included in the consolidated
statement of comprehensive income since the date of acquisition was
GBP22.7m and GBP0.4m respectively. The revenue and profit before
tax for the year ended 31 December 2022 for responsAbility was
GBP35.6m and GBP2.3m respectively.
2.1.3 TCF Fund Managers LLP acquisition
On 17 February 2022, the Group acquired the total membership
interest of TCF Fund Managers LLP (TCF), a provider of model
portfolio services for a purchase consideration of GBP17m. The
acquisition of TCF, has enabled us to launch an M&G Wealth
branded range of model portfolios in April 2022. From 5 September
2022 TCF has been renamed M&G Wealth Investments LLP.
The acquisition was structured as follows:
- 99.9999% of the membership interest was acquired by M&G Wealth
Solutions Limited (M&G WSL), formerly called M&G Wealth Investments
Limited, which is a wholly owned subsidiary of M&G REH;
- 0.0001% of the membership interest was acquired by Pru Limited,
a wholly owned subsidiary of M&G Corporate Holding Limited (M&G
CHL).
The purchase consideration comprised of GBP15m of cash
consideration paid at completion and a deferred consideration of
GBP2m paid on 7 November 2022 on the satisfactory completion of
various activities linked to transition by the previous owners. The
purpose of the deferred consideration was to ensure a smooth
transition to M&G operations and not to retain services of the
existing members over a longer duration.
The acquisition has been accounted for using the acquisition
method. On acquisition goodwill of GBP16m and a customer-related
intangible asset of GBP1m was recognised.
2.2 Insurance and investment products written by the Group's
insurance entities
A description of the main insurance and investment contracts
written by the Group's insurance entities is provided below.
The Group's with-profits contracts are written in the
With-Profits Fund in which policyholders share in the profit of the
fund. Up until 1 April 2021 there were three with-profits
sub-funds: the With-Profits Sub-Fund (WPSF), the Defined Charge
Participating Sub-Fund (DCPSF) and the Scottish Amicable Insurance
Fund (SAIF). On 1 April 2021 SAIF merged with WPSF and the assets
and liabilities of SAIF were combined with those of the WPSF.
Shareholder-backed business represents all insurance and
investment contracts in the Group other than contracts written in
the With-Profits Fund. The profit on these contracts accrues
directly to the Group's shareholders.
2.2.1 With-profits contracts
With-profits contracts provide returns to policyholders through
bonuses that are smoothed to reduce the impact of volatility of the
investment performance of the assets in the fund.
2.2.1.1 Conventional and accumulating with-profits contracts
written in WPSF and DCPSF
Conventional and accumulating with-profits policyholders receive
their share of profit by way of regular and final bonuses.
Regular bonus rates are determined for each type of policy
primarily by targeting the bonus level at a prudent proportion of
the long-term expected future investment return on underlying
assets, reduced as appropriate for each type of policy to allow for
items such as expenses, charges, tax and shareholder transfers.
In normal investment conditions, the Group expects changes in
regular bonus rates to be gradual over time. However, the Group
retains the discretion whether or not to declare a regular bonus
each year, and there is no limit on the amount by which regular
bonus rates can change.
A final bonus which is normally declared annually, may be added
when a claim is paid. The rates of final bonus usually vary by type
of policy and by reference to the period, usually a year, in which
the policy commences or each premium is paid. These rates are
determined by reference to the asset shares of representative
sample policies and are subject to smoothing.
Regular bonuses are typically declared once a year, and once
credited are guaranteed in accordance with the terms of the
particular product. Final bonus rates are guaranteed only until the
next bonus declaration.
Contracts are predominantly written in the WPSF, where the
shareholders are entitled to an amount up to one-ninth of the bonus
declared, which is payable as a cash transfer from the With-Profits
Fund.
For the business written in the DCPSF, the charges accrue to
shareholders who also meet the corresponding expenses. Profits
arising in the DCPSF are attributed wholly to DCPSF policyholders.
The shareholders' profit arises as the difference between charges
and expenses.
2.2.1.2 With-profits contracts with a PruFund investment option ("PruFund contracts")
These are a range of with-profits contracts offering
policyholders a choice of investment profiles ("PruFund funds").
Unlike the with-profits contracts described above, no regular or
final bonuses are declared. Instead, policyholders participate in
profits by means of an increase in their investment, which grows in
line with an Expected Growth Rate (EGR). The EGR is adjusted for
significant market movements.
The EGR may be applied for each of the different PruFund funds
within the range, varying depending on the individual asset mix of
that fund. The applicable EGR, net of the relevant charges, is
applied to calculate the 'smoothed unit value' of policyholder
funds. The EGRs are reviewed and updated quarterly, with the
smoothed unit value calculated daily. In normal investment
conditions, the EGR is expected to reflect PAC's view of how the
funds will perform over the longer term.
Policyholders are protected from some of the short-term ups and
downs of direct investments by using an established smoothing
process. Prescribed adjustments are made to the smoothed unit value
if it moves outside a specified range relative to the value of the
underlying assets.
PruFund contracts are predominantly written in the WPSF, where
the shareholder is entitled to an amount up to one-ninth of the
difference between the smoothed unit value on withdrawal and the
initial investment. The DCPSF also contains PruFund contracts, and
for these contracts the shareholders receive profits or losses
arising from the difference between the charges and expenses on
this business.
2.2.1.3 SAIF with-profits contracts
SAIF was a ring-fenced with-profits sub-fund which merged with
WPSF on 1 April 2021. As SAIF was a closed sub-fund, no new
business was written in SAIF, although regular premiums and top-ups
were still being collected on in-force policies. The fund was
solely for the benefit of policyholders of SAIF, and at the date of
the merger, surplus assets of the SAIF fund were allocated to the
SAIF policyholders, with the enhancement due to be paid through a
terminal bonus at the point of claim. Shareholders have no
entitlement to the profits of this fund.
The Group's main exposure to guaranteed annuity options arises
through with-profits contacts originally written in SAIF. More
detail on the provisions held in respect of guaranteed annuity
options is provided in Note 11.1.1.
2.2.2 Unit-linked contracts
Unit-linked contracts are contracts where the value of the
policy is linked to the value of underlying investments (such as
collective investment schemes, internal investment pools or other
property) or fluctuations in the value of underlying investments or
indices. Investment risk associated with the product is primarily
borne by the policyholder. Some unit-linked contracts provide an
element of insurance coverage, such as a benefit payable on death
in excess of the value of the units, and these contracts are
classified as insurance contracts and accounted for under IFRS 4
(see Note 11).
Charges are deducted from the unit-linked funds for investment
and administration services, and for certain contracts, insurance
coverage. Benefits payable will depend on the price of the units
prevailing at the time of surrender, death or the maturity of the
product.
2.2.3 Annuities
Annuities are contracts which offer policyholders a regular
income over the policyholder's life, in exchange for an upfront
premium, and may be immediate or deferred. For immediate annuities,
the regular income starts immediately after the premium payment,
but for deferred annuities, the regular income is delayed until a
specified date in the future. There are various types of annuity
contracts written across the Group: level, fixed increase,
inflation-linked (referred to as "non-profit annuities") and
with-profits annuities. Some non-profit annuities have been written
in the With-Profits Fund, and profits relating to this business
accrue to the With-Profits Fund.
- Level annuities: provide a regular (for example, monthly) fixed
annuity payment over the policyholder's life.
- Fixed increase annuities: provide for a regular annuity payment
which incorporates automatic increases in annuity payments by
fixed amounts over the policyholder's life.
- Inflation-linked annuities: provide for a regular annuity payment
to which an additional amount is added periodically based on
the increase in an inflation index.
- With-profits annuities: are written in the With-Profits Fund.
These combine the income features of annuity contracts with the
investment smoothing features of with-profits products and enable
policyholders to obtain exposure to investment return on the
With-Profits Fund.
2.3 Changes in consolidation of collective investment and other
vehicles
As part of the normal course of business the Group, primarily
via the With-Profits Fund, invests and disinvests in a number of
collective investment and other investment vehicles. The Group
continually assess whether these investments meet the requirements
of IFRS10 - Consolidated Financial Statements and apply the
accounting policy explained in 1.5.1 in those assessments. In any
given year the investment vehicles moving in and out of the scope
of consolidation have a limited impact on the Group's financial
statements. However, during the year ended 31 December 2022 a
number of investment vehicles have been deconsolidated which have
had more significant impacts.
There were four vehicles which were deconsolidated - M&G
European Property Fund (MEP), Sky Fund I LP, Sky Fund V Onshore LP
and Harben 2017-1 plc. Sky Fund I LP was disposed of by PAC and the
other three entities were re-assessed for control following a
dilution of their holdings and deconsolidated. In the case of MEP
and Sky Fund V LP, the Group holdings are now treated as
investments in associates at FVTPL. The main impacts of the
deconsolidation of these entities is in Property, plant and
equipment, Investment property, Loans and Subordinated liabilities
and other borrowings .
3 Segmental analysis
The Group's operating segments are defined and presented in
accordance with IFRS 8: Operating Segments on the basis of the
Group's management reporting structure and its financial management
information. The Group's primary reporting format is by client
type, with supplementary information being given by product type.
The Chief Operating Decision Maker for the Group is the Group
Executive Committee.
3.1 Operating segments
The Group's operating segments are:
Asset Management
The Group's investment management capability is offered to both
wholesale and institutional clients. The Group's wholesale clients
invest through either UK domiciled Open Ended Investment Companies
(OEICs) or Luxembourg domiciled Sociétés d'Investissement à Capital
Variable (SICAVs) and have access to a broad range of actively
managed investment products, including Equities, Fixed Income,
Multi-Asset and Real Estate. The Group serves these clients through
its many business-to-business relationships both in the UK and
overseas, which include independent financial advisers, high-street
banks and wealth managers. The Group's institutional investors,
include pension funds, insurance companies and banks from around
the world, who invest through segregated mandates and pooled funds
into a diverse range of Fixed Income and Real Estate investment
products and services.
The Asset Management segment generates revenues by charging fees
which are typically based on the level of assets under management.
The Asset Management segment also earns investment management
revenues from the significant proportion of Retail and Savings
assets it manages.
Retail and Savings
Our Retail and Savings operating segment includes M&G
Wealth, our Heritage business and Other Retail and Savings business
which primarily relates to our international savings business.
Wealth
M&G Wealth provides a range of retirement, savings and
investment management solutions to its clients. These products are
distributed to clients through the wrap platform, intermediaries
and advisers, and include the Retirement Account (a combined
individual pension and income drawdown product), individual
pensions, ISAs, collective investments and a range of on-shore and
off-shore bonds.
All of the Group's products that give access to the UK PruFund
investment proposition are included in M&G Wealth. The UK
PruFund investment proposition gives clients access to savings
contracts with smoothed investment returns and a wide choice of
investment profiles. Unlike the conventional and accumulating
with-profits contracts in the Heritage business, no regular or
final bonuses are declared. Instead, policyholders participate in
profits by means of an increase in their investment, which grows in
line with an EGR.
Heritage
The Heritage business includes individual and corporate
pensions, annuities, life, savings and investment products. The
majority of the products in the Heritage business are closed to new
clients but may accept further contributions from existing
policyholders. The annuity contracts include: level annuities,
which provide a fixed annuity payment; fixed increase annuities,
which incorporate a periodic automatic fixed increase in annuity
payments; and inflation-linked annuities, which incorporate a
periodic increase based on a defined inflation index. Some
inflation-linked annuities have minimum and/or maximum increases
relative to the corresponding inflation index.
The life products in Heritage are primarily whole of life
assurance, endowment assurances, term assurance contracts, lifetime
mortgages, income protection, and critical illness products.
Investment products include unit-linked contracts and the
Prudential bond offering, which mainly consists of
single-premium-invested whole of life policies, where the client
has the option of taking ad-hoc withdrawals, regular income or the
option of fully surrendering their bond.
Some of the Group's Heritage products written through
conventional and accumulating with-profits contracts, in the
with-profits sub-fund, provide returns to policyholders through
"regular" and "final" bonuses that reflect a smoothed investment
return.
The Heritage business includes the closed SAIF business which
participates in profits on a 100:0 basis with no shareholder profit
transfers. Shareholders are entitled to asset management fees. This
business is now included in PAC's main with-profits sub fund
following the merger with the SAIF with-profits sub fund on 1 April
2021 as discussed in Note 2.2.1.3.
Other Retail and Savings
Our savings businesses based in Ireland (Prudential
International Assurance plc) and Poland are included within Other
Retail and Savings.
The Group's other reportable segment is:
Corporate Centre
Corporate Centre includes central corporate costs and debt
costs.
3.2 Adjusted operating profit before tax methodology
Adjusted operating profit before tax is the Group's non-GAAP
alternative performance measure, which complements IFRS GAAP
measures and is key to decision-making and the internal performance
management of operating segments.
For the Group's fee-based business, adjusted operating profit
before tax includes fees received from clients and operating costs
for the business including overheads, expenses required to meet
regulatory requirements and regular business
development/restructuring and other costs. Costs associated with
fundamental Group-wide restructuring and transformation are not
included in adjusted operating profit before tax.
For the Group's business written in the With-Profits Fund,
adjusted operating profit before tax includes the statutory
transfer to shareholders gross of attributable shareholder tax.
Derivative instruments are held to mitigate the risk to the
shareholder of lower future shareholder transfers, and can be
separated into two types:
i. Cash flow hedges (6) : those instruments that are held to mitigate
volatility in the Group's IFRS results by being explicitly matched
to the expected future shareholder transfers.
ii. Capital hedges: instruments that hedge the economic present value
of shareholder transfers on a Solvency II basis, to optimise the
capital position.
6 These cash flow hedges do not constitute hedge accounting
arrangements under IAS 39.
The realised gains or losses on the cash flow hedges are
allocated to adjusted operating profit before tax in line with
emergence of the corresponding shareholder transfer within IFRS
profit. Any short-term temporary movements in the fair value of
these instruments, not relating to the current year's shareholder
transfer are excluded from adjusted operating profit before tax. As
the capital hedges do not explicitly hedge future IFRS profits, all
movements in the fair value of these instruments are excluded from
adjusted operating profit before tax.
For the Group's shareholder annuity products written by the
Retail and Savings segment, adjusted operating profit before tax
excludes the impact of short-term components of credit risk
provisioning, the impact of credit risk experience variances over
the period, and total fair value movement on surplus assets backing
the shareholder annuity capital, that are not reflective of the
longer-term performance of the business.
Certain adjustments that are considered to be non-recurring or
strategic, or due to short-term movements not reflective of
longer-term performance are made to IFRS profit before tax.
Adjustments are in respect of short-term fluctuations in investment
returns, costs associated with fundamental one-off Group-wide
restructuring and transformation, profits or losses arising on
corporate transactions and profit/(loss) before tax from any
discontinued operations, and impairment and amortisation in respect
of acquired intangibles.
The key adjusting items between IFRS profit before tax and
adjusted operating profit before tax are:
Short-term fluctuations in investment returns
The adjustment for short-term fluctuations in investment returns
represents:
i. Short-term temporary movements in the fair value of instruments
held to mitigate equity risk in the with-profits shareholder
transfer, including both cash flow and capital hedges.
ii. Total fair value movements on other capital hedges, which are
held solely to optimise the Solvency II capital position.
iii. Total fair value movements on surplus assets backing the shareholder
annuity capital, and the impact of short-term credit risk provisioning
and experience variances over the period which are not reflective
of the longer-term performance of the business, specifically:
- The impact of credit risk provisioning for short-term adverse credit
risk experience;
- The impact of credit risk provisioning for actual upgrades and
downgrades relative to best estimate assumptions. This is calculated
by reference to current interest rates;
- Credit experience reflecting the impact of defaults and other similar
experience, such as asset exchanges arising from debt restructuring;
- The impact of market movements on bond portfolio weightings and
the subsequent impact on credit provisions.
Items relating to investment returns which are included in
adjusted operating profit before tax are:
- The net impact of movements in the value of policyholder liabilities
and fair value of the assets backing these liabilities, excluding
the items included in short-term fluctuations above. The fair
value movements of the assets backing the liabilities are closely
correlated with the related change in liabilities;
- The unwind of the credit risk premium, which is the opening value
of the assets multiplied by the credit risk premium assumption,
with an adjustment for claims paid over the year. The credit
risk premium assumption is the difference between the total long-term
credit allowance and a best estimate credit allowance (both of
which allow for the combination of defaults and downgrades);
- Actual income received in the year, such as coupon payments,
redemption payments and rental income, on surplus assets backing
the shareholder annuity capital, less an allowance for expenses;
- The net effect of changes to the valuation rate of interest due
to asset trading and portfolio rebalancing;
- The impact of changes in the long-term component of credit provisioning.
Profit/(loss) on disposal of businesses and corporate
transactions
Certain additional items are excluded from adjusted operating
profit before tax where those items are considered to be
non-recurring or strategic, or considered to be one-off, due to
their size or nature, and therefore not indicative of the long term
operating performance of the Group, including profits or losses
arising on corporate transactions and profits or losses on
discontinued operations.
Restructuring and other costs
Restructuring and other costs primarily reflect the shareholder
allocation of costs associated with the transformation of our
business. These costs represent fundamental Group-wide
restructuring and transformation and are therefore excluded from
adjusted operating profit before tax.
Amortisation and impairment of intangible assets acquired in
business combinations
Amortisation and impairment of intangible assets (including
Goodwill) acquired in business combinations are excluded from
adjusted operating profit before tax.
3.3 Analysis of Group adjusted operating profit before tax by
segment
2022
---------------------------------------------
Asset Retail Corporate
Management and Savings Centre Total
For the year ended 31 December GBPm GBPm GBPm GBPm
Fee based revenues(i) 1,051 295 - 1,346
Annuity margin - 227 - 227
With-profits shareholder transfer net of
hedging and other gains/(losses)(ii) - 354 - 354
======================================================== =========== ============ ========= =======
Adjusted operating income 1,051 876 - 1,927
======================================================== =========== ============ ========= =======
Adjusted operating expenses (763) (295) (107) (1,165)
Other shareholder loss (5) (9) (200) (214)
Share of profit from joint ventures and associates(iii) - - - -
Adjusted operating profit attributable to
non-controlling interests (19) - - (19)
======================================================== =========== ============ ========= =======
Adjusted operating profit/(loss) before
tax 264 572 (307) 529
======================================================== =========== ============ ========= =======
Short-term fluctuations in investment returns(iv) - (2,484) - (2,484)
Amortisation and impairment of intangible
assets acquired in business combinations (8) (27) - (35)
Restructuring and other costs(v) (74) (77) 4 (147)
======================================================== =========== ============ ========= =======
IFRS profit/(loss) before tax and non-controlling
interests attributable to equity holders
before tax 182 (2,016) (303) (2,137)
======================================================== =========== ============ ========= =======
IFRS profit before tax attributable to non-controlling
interests(vi) 19 - - 19
======================================================== =========== ============ ========= =======
Profit/(loss) before tax attributable to
equity holders 201 (2,016) (303) (2,118)
======================================================== =========== ============ ========= =======
i Of the fee-based revenues, GBP306m (2021: GBP303m) relates to
revenues that Asset Management earned from the Retail and Savings
segment. Other presentational differences when compared to the fee
income in Note 4 include the netting of certain items that have a
nil profit impact in adjusted operating profit, and the inclusion
of certain revenue presented elsewhere within the IFRS income
statement.
ii The with-profits shareholder transfer is paid to the
shareholder net of tax. The shareholder transfer amount is grossed
up for tax purposes with regard to adjusted operating profit.
iii Excludes adjusted operating profit from joint ventures in
the With-Profits Fund.
iv Market conditions have led to significant losses from
short-term fluctuations in investment returns for the year ended 31
December 2022. These losses primarily comprise a GBP1,301m loss
(2021: GBP99m loss) from fair value movements on surplus assets in
the annuity portfolio and a GBP989m loss (2021: GBP103m loss) on
interest rate swaps purchased to protect PAC's Solvency II capital
position against falls in interest rates, both due to significant
rising yields in the period. Additionally losses of GBP223m (2021:
GBP39m) arose on gilts pledged as collateral. These losses were
partly offset by a positive movement on the hedging instruments
held to protect the future shareholder transfers from falling
equity markets which moved to a GBP104m gain (2021: GBP248m loss)
as a result of falls in the US and European equity markets.
v Restructuring and other costs excluded from adjusted operating
profit includes costs that relate to the transformation of our
business which are allocated to the shareholder. These differ to
Restructuring costs included in the analysis of administrative and
other expenses in Note 5 which include costs allocated to the
Policyholder. In the year to 31 December 2022, restructuring and
other costs includes GBP17m (2021: GBP48m) in respect of our future
ways of working and associated changes to our office space, and
GBP32m (2021: GBP45m) of costs in relation to the integration of
M&G Wealth platform business. Included in the Corporate Centre
is a reversal of impairment recognised in respect of our future
ways of working of GBP6m (2021: GBP29m recognition of impairment)
which is presented in impairment of property, plant and equipment
in the analysis of administrative and other expenses in Note 5.
vi Excludes non-controlling interests in relation to
amortisation of intangible assets acquired in business combinations
which is presented net within the non-operating line item.
2021
---------------------------------------------
Asset Retail Corporate
Management and Savings Centre Total
For the year ended 31 December GBPm GBPm GBPm GBPm
Fee based revenues(i) 976 278 - 1,254
Annuity margin - 369 - 369
With-profits shareholder transfer net of
hedging and other gains/(losses)(ii) - 268 - 268
======================================================== =========== ============ ========= =======
Adjusted operating income 976 915 - 1,891
======================================================== =========== ============ ========= =======
Adjusted operating expenses (672) (296) (95) (1,063)
Other shareholder profit/(loss) 17 41 (159) (101)
Share of profit from joint ventures and associates(iii) 6 - - 6
Adjusted operating profit attributable to
non-controlling interests (12) - - (12)
======================================================== =========== ============ ========= =======
Adjusted operating profit/(loss) before
tax 315 660 (254) 721
======================================================== =========== ============ ========= =======
Short-term fluctuations in investment returns(iv) 5 (542) - (537)
Profit on disposal of businesses and corporate
transactions 51 (16) - 35
Amortisation and impairment of intangible
assets acquired in business combinations (4) - - (4)
Restructuring and other costs(v) (51) (67) (28) (146)
======================================================== =========== ============ ========= =======
IFRS profit/(loss) before tax and non-controlling
interests attributable to equity holders
before tax 316 35 (282) 69
======================================================== =========== ============ ========= =======
IFRS profit attributable to non-controlling
interests(vi) 12 - - 12
======================================================== =========== ============ ========= =======
Profit/(loss) before tax attributable to
equity holders 328 35 (282) 81
======================================================== =========== ============ ========= =======
The Group has a widely diversified client base. There are no
clients whose revenue represents greater than 10% of fee-based
revenue.
Each reportable segment reports adjusted operating income as its
measure of revenue. Fee-based revenue represents asset management
charges, transactional charges and annual management charges on
unit-linked business. The annuity margin reflects the margin earned
on annuity business and includes net earned premiums, claims and
benefits paid, net investment return for assets backing the
liabilities, net investment income for surplus assets backing the
annuity capital, actuarial reserving changes, investment management
expenses and administrative expenses. The with-profits shareholder
transfer reflects the statutory transfer gross of attributable tax
net of hedging gains or losses on cash flow hedges held to match
those transfers.
Adjusted operating expenses includes shareholders operating
expenses incurred outside of the annuity and with-profits
portfolios. Other shareholder profit/(loss) includes non-recurring
costs, movements in provisions that are an expense to the
shareholder and shareholder investment return earned outside of the
annuity portfolio.
4 Fee income
The following table disaggregates fee revenue by segment:
2022 2021
For the year ended 31 December GBPm GBPm
Management fees 870 860
Rebates (24) (28)
Performance fees and carried interest 41 18
========================================================= ===== ====
Total Asset Management fee income 887 850
========================================================= ===== ====
Investment contracts without discretionary participation
features 42 50
Platform fees 31 34
Advice fees 77 49
========================================================= ===== ====
Total Retail and Savings fee income 150 133
========================================================= ===== ====
Total fee income 1,037 983
========================================================= ===== ====
5 Administrative and other expenses
2022 Restated(i)
2021
For the year ended 31 December GBPm GBPm
Staff and employment costs 791 731
Acquisition costs incurred:
Insurance contracts and investment contracts with DPF 132 119
Other contracts 15 23
Acquisition costs deferred:
Insurance contracts and investment contracts with DPF (10) (8)
Other contracts (6) (6)
Amortisation of deferred acquisition costs:
Insurance contracts and investment contracts with DPF 6 6
Other contracts 10 7
Impairment of deferred acquisition costs 1 4
Depreciation of property, plant and equipment 142 123
Impairment of property, plant and equipment(ii) 3 102
Amortisation of intangible assets 34 25
Impairment of goodwill and intangible assets 25 -
Restructuring costs 228 193
Interest expense 136 161
Commission expense 190 200
Investment management fees 134 165
Property-related costs 165 192
Other expenses 814 766
========================================================== ===== ===========
Total administrative and other expenses 2,810 2,803
========================================================== ===== ===========
i Following a review of the Group's presentation of tax
positions within consolidated investment funds, comparative amounts
have been restated from those previously reported. The restatement
has had no impact on profit for the year or net assets. See Note
1.1 for further information.
ii Includes impairment of certain property, plant and equipment
held by the Group's infrastructure capital private equity vehicles
of GBP11m (2021: GBP73m). Includes reversal of impairment
recognised in respect of our future way of workings of GBP6m (2021:
GBP29m recognition of impairment) included in 'restructuring and
other costs' within the Segmental Analysis in Note 3.
In addition to the interest expense shown above of GBP136m
(2021: GBP161m), the interest expense incurred in respect of
subordinated liabilities for the year ended 31 December 2022 was
GBP162m (2021: GBP160m). This is shown as finance costs in the
consolidated income statement.
6 Tax
6.1 Tax (credited)/charged to the consolidated income
statement
Following a review of the Group's presentation of tax positions
within consolidated investment funds, comparative amounts have been
restated from those previously reported throughout this tax note.
The restatement has had no impact on the profit for the year or net
assets. See Note 1.1 for further information.
2022 Restated
2021
For the year ended 31 December GBPm GBPm
The total tax (credit)/charge comprises:
Current tax:
Current year 158 427
Adjustments in respect of prior years (19) 4
===================================================== ======= ========
Total current tax 139 431
===================================================== ======= ========
Deferred tax:
Origination and reversal of temporary differences in
the year (1,017) 288
Adjustments in respect of prior years - (23)
===================================================== ======= ========
Total deferred tax (1,017) 265
===================================================== ======= ========
Total tax (credit)/charge (878) 696
===================================================== ======= ========
The tax (credit)/charge above, comprising current and deferred
tax, can be analysed as follows:
Restated
2022 2021
For the year ended 31 December GBPm GBPm
UK tax (1,062) 528
Overseas tax 184 168
=============================== ======= ========
Total tax (credit)/charge (878) 696
=============================== ======= ========
6.1.1 Allocation of profit before tax and tax charge between
equity holders and policyholders
The loss before tax reflected in the consolidated income
statement for the year ended 31 December 2022 of GBP(2,497)m (2021:
profit before tax of GBP788m restated) comprises profit
attributable to equity holders and pre-tax profit attributable to
policyholders of unit-linked and with-profits funds and unallocated
surplus of the With-Profits Fund. This is the formal measure of
profit before tax under UK-adopted IAS but it is not the result
attributable to equity holders.
This is principally because the corporate taxes of the Group
include those on the income of consolidated with-profits and
unit-linked funds that, through adjustments to benefits, are borne
by policyholders. These amounts are required to be included in the
tax charge of the Company under IAS 12. Consequently, this measure
of profit before all taxes is not representative of pre-tax profits
of the Group attributable to equity holders.
The tax charge attributable to policyholder returns is removed
from the Group's total profit before tax in arriving at the Group's
profit before tax attributable to equity holders'. As the net of
tax profits attributable to policyholders is zero, the Group's
pre-tax profit attributable to policyholders is an amount equal and
opposite to the tax charge attributable to policyholders included
in the total tax (credit)/charge.
2022 Restated
2021
-------------------------------- ------------------------------
Equity Equity
holders Policyholders Total holders Policyholders Total
For the year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- -------- ------------- ------- -------- ------------- -----
(Loss)/profit before tax (2,118) (379) (2,497) 81 707 788
Tax credit/(charge) 499 379 878 11 (707) (696)
=============================== ======== ============= ======= ======== ============= =====
(Loss)/profit after tax for
the year (1,619) - (1,619) 92 - 92
=============================== ======== ============= ======= ======== ============= =====
6.1.2 Tax reconciliation
Restated
2022 2021
-------------------------------- ------------------------------
Equity Equity
holders Policyholders Total holders Policyholders Total
For the year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- -------- ------------- ------- -------- ------------- -----
(Loss)/profit before tax (2,118) (379) (2,497) 81 707 788
Tax (credit)/charge based on
the standard UK corporation
tax rate of 19% (2021: 19%) (403) (72) (475) 15 134 149
Impact of profits earned in
jurisdictions with different
statutory rates to the UK 3 - 3 2 - 2
(weighted average rate for equity
holders is 19% (2021: 19%))
Recurring items
Different basis of taxation
- policyholders - (283) (283) - 586 586
Deductions not allowable for
tax purposes(i) 30 - 30 15 - 15
Income and gains not taxable
or taxable at concessionary
rates(ii) (8) - (8) (10) - (10)
Effects of results of joint
ventures and associates(iii) - - - (1) - (1)
Changes in recognition of deferred
tax and effect of unrecognised
tax losses(iv) (7) - (7) (16) - (16)
Other 1 - 1 3 - 3
Non recurring items
Adjustments in relation to prior
periods(v) 5 (24) (19) (6) (13) (19)
Changes in local statutory tax
rates or laws(vi) - - - (3) - (3)
Impairment of goodwill 5 - 5 - - -
Impact of deferred tax recognised
at 25% on current year movements(vii) (125) - (125) - - -
Non-taxable income - MGSA acquisition(viii) - - - (10) - (10)
============================================ ======== ============= ======= ======== ============= =====
Tax (credit)/charge (499) (379) (878) (11) 707 696
============================================ ======== ============= ======= ======== ============= =====
i Of the GBP30m, GBP22m (2021: GBP3m) relates to the non-taxable
adjustment in relation to a historic joint venture agreement in
respect of long term assurance business. The remaining amount
relates to expenses that are not deductible for tax purposes,
primarily in the UK.
ii Of the 2022 amount of (GBP8m), (GBP7m) relates to non-taxable
dividend income in the UK (2021: GBPnil). For 2021, the balance
primarily relates to a non-taxable income arising on the reversal
of provision that was not tax deductible in previous periods.
iii Profit before tax includes the Group's share of profits
after tax from the joint ventures and associates. Therefore, the
actual tax charge does not include tax arising from profit or loss
of joint ventures and associates and is reflected as a reconciling
item.
iv The total amount of GBP(7)m related to the remeasurement of
DTA on capital losses carried forward (2021: GBP(3)m). The
remaining tax benefit in 2021 of (GBP13m) related to the
utilisation of capital losses on which no deferred tax asset was
recognised.
v The equity holders impact of GBP5m (2021: (GBP6m)) relates to
changes in estimates of prior year positions. The policyholder
benefit of (GBP24m) primarily relates to an agreement reached with
HMRC to amend the application of income allocation methodology
within the life insurance business (2021: (GBP13m) primarily due to
changes in estimates to deferred tax assets).
vi In June 2021, the standard rate of Corporation Tax in the UK
was changed from 19% to 25% with effect from 1 April 2023.
Accordingly, the UK deferred tax balances were revalued to reflect
the change in rate.
vii Benefit arising on deferred tax movements in the period
booked at the future rate of corporation tax in the UK of 25%
compared to the current period rate of 19%.
viii Non-taxable income relates to the GBP51m income recognised
on the acquisition of the additional 0.13% shareholding in
MGSA.
The Group's profits are taxed at different rates depending on
the country or territory in which the profits arise. The key
applicable tax rate for 2022 is the UK Corporation tax rate of 19%
as the majority of the Group's profits are earned and taxed in the
UK.
6.1.3 Factors that may impact the future tax rate
Changes in tax laws and rates may affect recorded deferred tax
assets and liabilities and our effective tax rate in the future. On
10 June 2021, the UK Government's proposal to increase the rate of
UK corporation tax from 19% to 25% with effect from 1 April 2023
was enacted into UK law. In line with the rate increase, there will
be an increase to our effective tax rate for periods from 2023
onwards. The majority of the Group's profits are generated in the
UK. Taking into account recurring tax adjusting items, the
underlying effective tax rate for equity holders' portion of
profits is expected to be marginally higher than the statutory rate
in the UK.
The Group has unused tax losses carried forward of GBP481m,
primarily UK capital losses, on which no deferred tax is
recognised. Should appropriate capital gains arise in future
periods it will result in tax benefits thereby reducing the future
effective tax rate in the relevant periods.
During late 2021, the Organisation for Economic Co-operation and
Development (OECD) announced agreement had been reached on a
sweeping overhaul of the international tax system and the G-20
leaders endorsed the plan during the Leaders' Summit. The plan
follows a Two-Pillar framework which sets out the principles of a
solution to tackle the tax challenges arising from an increasingly
globalised and digital global economy. Pillar One addresses taxing
rights and distribution of profits, and Pillar Two the imposition
of a global minimum tax rate of 15% on large companies. For Pillar
One purposes, the Group is not expected to be within the scope of
the rules due to the exclusion for regulated financial services
and/or beneath the scoping thresholds. For Pillar Two, there is no
financial services exemption and the Group is above the size
threshold (EUR750m of revenue) and will be in scope. It was
originally announced the Pillar Two rules to be effective for 2023,
however, this has been deferred until 2024. The Group generates its
profits predominantly in the UK and the remainder mainly in
jurisdictions with a tax rate higher than 15%. Whilst the
Two-pillar framework is not expected to have a significant impact
on the future effective tax rate, much will depend upon the
framework to be finalised by the OECD, the enacted legislation, and
the impact on the insurance and asset management industries, in
particular, treatment of investment in fund structures and
policyholder attributes. During the period, the Group were heavily
engaged in the consultations with the UK Government through
Industry bodies and this work is expected to continue in 2023. The
Group is reviewing the current set of OECD rules, draft UK
legislation, updates to the framework and awaiting the OECD's
anticipated release of the final framework, as well as new
legislation expected to be released by governments implementing
this new tax regime and will assess the potential impact of new
legislation during 2023.
6.1.4 Use of accounting estimates and judgements
The calculation of the Group's tax charge involves a degree of
estimation and judgement. The recognition of a deferred tax asset
is a key judgement in applying the Group's accounting policies and
relies on an assessment of the probability of future taxable
profits, future reversals of existing taxable temporary differences
and ongoing tax planning strategies.
Deferred tax assets are reviewed at each reporting date. In
considering their recoverability, the Group assesses the likelihood
of their being recovered within the expiry of losses and/or while
operating as a going concern. This takes into account the future
expected profit profile and business model of each relevant company
or country, and any potential legislative restrictions on use.
Short-term timing differences are generally recognised ahead of
losses and other tax attributes as being likely to reverse more
quickly.
There is also judgement involved in the level of provisioning
for uncertain tax positions. These provisions cover a wide range of
issues, only a fraction of which are expected to be subject to
challenge by a tax authority at any point in time. The Group
engages constructively and transparently with tax authorities with
a view to early resolution of uncertain tax matters. Estimated
positions are based on the probability of potential challenge
within certain jurisdictions and the possible outcome based on
relevant facts and circumstances. The judgements and estimates made
to recognise and measure the effect of uncertain tax positions are
reassessed whenever circumstances change or when there is new
information that affects those judgements.
Not withstanding any origination and reversal of temporary
differences in the year, the Group does not consider there to be a
significant risk of a material adjustment in the next financial
year to the deferred and current tax balances from either
recognition and measurement of deferred tax assets or the level of
provisioning for uncertain tax positions
6.2 Deferred tax
Deferred tax assets and liabilities
Under IAS12, deferred tax is measured at the tax rates that are
expected to apply to the period when the asset is realised or the
liability settled, based on tax rates (and laws) that have been
enacted or are substantively enacted at the end of the reporting
period. Deferred tax assets are recognised as recoverable only to
the extent it is considered probable, based on all available
evidence, that there will be suitable taxable profits from which
the future reversal of the underlying temporary differences can be
deducted or tax losses utilised. Deferred tax assets and
liabilities are only offset when there is both a legal right to
set-off and an intention to settle on a net basis.
Deferred tax in the statement of financial position
The deferred tax balances, after netting, arise in the following
parts of the Group:
Deferred tax Deferred tax
assets liabilities
-------------- ---------------
2022 2021 2022 Restated
2021
GBPm GBPm GBPm GBPm
------------------ ------ ------ ----- --------
UK 594 68 (465) (960)
Overseas 57 51 (315) (459)
================== ====== ====== ===== ========
As at 31 December 651 119 (780) (1,419)
================== ====== ====== ===== ========
6.2.1 Unrecognised deferred tax
Tax losses and temporary differences
At the end of the reporting period, the Group have unused tax
losses of GBP481m (2021: GBP512m) and temporary differences of
GBPnil (2021: GBP2m) for which no deferred tax asset is being
recognised. The Group's unused tax losses primarily relate to
capital losses in the UK of GBP472m (2021: GBP502m). No deferred
tax asset is recognised on the unused tax losses of GBP481m as it
is considered not probable that future taxable UK capital gains or
other appropriate profits will be available against which they can
be utilised. Under UK law, capital losses can be carried forward
indefinitely.
Group investments in subsidiaries, branches and investments
Retained earnings of overseas subsidiaries are expected to be
reinvested indefinitely or remitted to the UK free from further
taxation by virtue of parent company exemptions on dividends from
subsidiaries and on capital gains on disposal. Consequentially, the
Group does not consider there to be any significant taxable
temporary differences associated with investments in subsidiaries,
branches, associates and joint arrangements.
6.3 Change in corporation tax rate
On 10 June 2021, the UK Government's proposal to increase the
rate of UK corporation tax from 19% to 25% with effect from 1 April
2023 was enacted into UK law. Changes in tax laws and rates may
affect recorded deferred tax assets and liabilities and our
effective tax rate in the future. We expect that, in line with the
rate increase, proposed, there will be an increase to our effective
tax rate for periods from 2023 onwards.
7 Earnings per share
Basic earnings per share for the year ended 31 December 2022 was
(66.0)p (2021: 3.3p) and diluted earnings per share was (66.0)p
(2021: 3.2p). Basic earnings per share is based on the weighted
average ordinary shares in issue after deducting treasury shares
and shares held by the employee benefit trust. Diluted EPS is based
on the potential future shares in issue resulting from exercise of
options under the various share-based payment schemes in addition
to the weighted average ordinary shares in issue. The weighted
average ordinary shares in issue reflects the impact of the share
buy-back during the year.
The following table shows details of basic and diluted earnings
per share:
2022 2021
For the year ended 31 December GBPm GBPm
---------------------------------------------------- ------- ----
(Loss)/profit attributable to equity holders of the
Company (1,632) 83
==================================================== ======= ====
2022 2021
Millions Millions
--------------------------------------------------------------- -------- --------
Weighted average number of ordinary shares outstanding 2,474 2,542
--------
Dilutive effect of share options and awards - 33
=============================================================== ======== ========
Weighted average number of diluted ordinary shares outstanding 2,474 2,575
=============================================================== ======== ========
2022 2021
Pence Pence
per share per share
---------------------------------- ---------- ----------
Basic (loss)/earnings per share (66.0) 3.3
================================== ========== ==========
Diluted (loss)/earnings per share (66.0) 3.2
================================== ========== ==========
As the Group has made a loss attributable to equity holders of
the Company for the year ended 31 December 2022, the diluted
earnings per share is the same as the basic earnings per share as
it is not permissible for the diluted earnings per share to be
greater than the basic earnings per share.
8 Dividends
2022 2021
---------------- ----------------
Pence Pence
For the year ended 31 December per share GBPm per share GBPm
------------------------------------------------ ---------- ---- ---------- ----
Dividends relating to reporting period:
First interim dividend - Ordinary 6.2 154 6.1 156
Second interim dividend - Ordinary 13.4 310 12.2 311
================================================ ========== ==== ========== ====
Total 19.6 464 18.3 467
================================================ ========== ==== ========== ====
Dividends paid in reporting period:
Prior year's second interim dividend - Ordinary 12.2 311 12.2 310
First interim dividend - Ordinary 6.2 154 6.1 156
================================================ ========== ==== ========== ====
Total 465 466
================================================ ========== ==== ========== ====
Subsequent to 31 December 2022, the Board has declared a second
interim dividend for 2022 of 13.4 pence per ordinary share and, an
estimated GBP310m in total. The dividend is expected to be paid on
27 April 2023 and will be recorded as an appropriation of retained
earnings in the financial statements at the time that it is paid.
The final dividend amount per ordinary share for the year ended 31
December 2022 is impacted by the share buy-back programme, see Note
10 for further details.
9 Defined benefit pension schemes
The Group operates three defined benefit pension schemes. The
largest defined benefit scheme as at 31 December 2022 is the
Prudential Staff Pension Scheme (PSPS), which accounts for 82%
(2021: 80%) of the present value of the defined benefit pension
obligation.
The Group also operates two smaller defined benefit pension
schemes that were originally established by the M&G Group
Limited (M&GGPS) and Scottish Amicable (SASPS) businesses.
Under IAS 19: Employee Benefits and IFRIC 14: IAS 19 - The Limit
on a Defined Benefit Asset, Minimum Funding Requirements and their
Interaction, the Group can only recognise a surplus to the extent
that it is able to access the surplus either through an
unconditional right of refund or through reduced future
contributions relating to ongoing service of active members. The
Group has no unconditional right of refund to any surplus in PSPS.
Accordingly, PSPS's net economic pension surplus is restricted up
to the present value of the Group's economic benefit, which is
calculated as the difference between the estimated future cost of
service for active members and the estimated future ongoing
contributions. The level of the restriction is set out in the table
below. The net economic pension surplus is attributed 70% to the
With-Profits Fund and 30% to the Group's shareholders.
In contrast, the Group is able to access the surplus of SASPS
and M&GGPS through an unconditional right of refund. Therefore,
the surplus resulting from these schemes is recognised in full. As
at 31 December 2022 the SASPS and M&GGPS schemes are in surplus
based on the IAS 19 valuation. Under IAS 19, non-transferable
insurance policies issued by a related party do not qualify as plan
assets.
Therefore, as at 31 December 2021, investments in insurance
policies issued by Prudential Pensions Limited, (a subsidiary of
the Group, through which it invested in certain pooled funds), were
deducted from the M&GGPS surplus, on an IAS 19 basis. However
all holdings were divested during 2022 and this deduction is no
longer required.
The SASPS net economic pension surplus is attributed 40% to the
With-Profits Fund and 60% to the Group's shareholders.
The pension assets and liabilities for the defined benefit
pension schemes are as follows:
2022
---------------------------------
PSPS SASPS M&GGPS Total
As at 31 December GBPm GBPm GBPm GBPm
-------------------------------------------- ------- ------ ------- -------
Fair value of plan assets 4,641 582 442 5,665
Present value of defined benefit obligation (4,050) (566) (313) (4,929)
Effect of restriction on surplus (581) - - (581)
============================================ ======= ====== ======= =======
Net economic pension surplus(i) 10 16 129 155
============================================ ======= ====== ======= =======
Eliminate group issued insurance policies - - - -
============================================ ======= ====== ======= =======
Net pension surplus 10 16 129 155
============================================ ======= ====== ======= =======
2022
------------------------------
PSPS SASPS M&GGPS Total
As at 31 December GBPm GBPm GBPm GBPm
----------------------------- ----- ------ ------- ------
Attributable to:
Shareholder--backed business 3 10 129 142
With-Profits Fund 7 6 - 13
============================= ===== ====== ======= ======
Net pension surplus 10 16 129 155
============================= ===== ====== ======= ======
i The economic basis reflects the position of the defined
benefit schemes from the perspective of the pension schemes,
adjusted for the effect of IFRIC 14 for the derecognition of PSPS's
unrecognisable surplus and before adjusting for any non-qualifying
assets.
2021
---------------------------------
PSPS SASPS M&GGPS Total
As at 31 December GBPm GBPm GBPm GBPm
-------------------------------------------- ------- ------- ------ -------
Fair value of plan assets 7,394 993 754 9,141
Present value of defined benefit obligation (6,460) (1,043) (581) (8,084)
Effect of restriction on surplus (896) - - (896)
============================================ ======= ======= ====== =======
Net economic pension surplus/(deficit)(i) 38 (50) 173 161
============================================ ======= ======= ====== =======
Eliminate group issued insurance policies - - (207) (207)
============================================ ======= ======= ====== =======
Net pension surplus/(deficit) attributable
to the Group 38 (50) (34) (46)
============================================ ======= ======= ====== =======
2021
--------------------------
PSPS SASPS M&GGPS Total
As at 31 December GBPm GBPm GBPm GBPm
------------------------------ ---- ----- ------ -----
Attributable to:
Shareholder--backed business 11 (30) (34) (53)
With--Profits Fund 27 (20) - 7
============================== ==== ===== ====== =====
Net pension surplus/(deficit) 38 (50) (34) (46)
============================== ==== ===== ====== =====
10 Issued share capital and share premium
2022 2021
---------------------------- ----------------------------
Number of Number of
ordinary ordinary
shares Share capital shares Share capital
As at 31 December GBPm GBPm
At 1 January 2,599,906,866 130 2,599,906,866 130
Shares cancelled following
buy-back (225,194,745) (11) - -
=========================== ============= ============= ============= =============
At 31 December 2,374,712,121 119 2,599,906,866 130
=========================== ============= ============= ============= =============
Amounts recorded in share capital represent the nominal value of
shares issued with any difference between proceeds received on
issue of shares, net of issue costs, and the nominal value of
shares issued being credited to the share premium account. The
share premium reserve at 31 December 2022 was GBP370m (2021:
GBP370m).
In March 2022, the Group commenced a share buy-back programme to
purchase ordinary shares of 5 pence each up to a maximum
consideration of GBP500m, and the programme concluded on 27 October
2022 for a total consideration, including expenses and stamp duty,
of GBP503m. Shares with a nominal value of GBP11m were cancelled,
with recognition of an GBP11m capital redemption reserve. As at 31
December 2022, ordinary shares with a nominal value of GBP47m were
bought back but not cancelled with these shares being accounted for
as a deduction to Shareholders equity within the Treasury shares
reserve.
11 Policyholder liabilities, unallocated surplus and
reinsurance
11.1 Determination of insurance and investment contract
liabilities for different components of business
Note 2.2 describes the different types of insurance and
investment contracts across the business. A description relating to
the determination of the policyholder liabilities and the key
assumptions for each component of business is set out below:
11.1.1 With-profits business
The With-Profits Fund mainly contains with-profits contracts but
also contains some non-profit business (annuities, unit-linked, and
term assurances). The liabilities of the With-Profits Fund are
accounted for on a realistic basis in accordance with the
requirements of FRS 27 Life Assurance. The basis is consistent with
the rules for the determination of reserves on the realistic basis
under the Solvency I capital regime. Though no longer in force for
regulatory purposes, these rules continue to be applied to
determine with-profits contract liabilities in accordance with IFRS
4 Insurance Contracts. In aggregate, the regime has the effect of
placing a market-consistent value on the liabilities of
with-profits contracts, which reflects the amounts expected to be
paid based on the current value of investments held by the
With-Profits Fund and current circumstances. In line with FRS 27
requirements, the non-profit annuities business within the
With-Profits Fund is valued on the statutory basis, i.e. including
margins for adverse deviations (as set out in 'Valuation of annuity
contracts'). The with-profits liabilities are valued on a realistic
basis and therefore allow for the future enhancements to the
policyholders. Following this approach unadjusted would lead to an
inconsistency in the net assets, as such, the present value of
future profits from the relevant non-profit annuities is applied as
an adjustment to the with-profit liabilities. Annually when the
enhancements to asset shares are committed to, the value of the
enhancements is transferred from the Unallocated surplus of the
With-Profits Fund to with-profit liabilities.
The with-profits contracts are a combination of insurance and
investment contracts with DPF, as defined by IFRS 4. The realistic
basis requires the value of with-profits policyholder liabilities
to be calculated as the sum of:
i. A with-profits benefits reserve (WPBR)
ii. Future policy-related liabilities (FPRL)
The WPBR is primarily based on the retrospective calculation of
accumulated asset shares with adjustments to reflect future
policyholder benefits and other charges and expenses. Asset shares
broadly reflect the policyholders' share of the With-Profits Fund
assets attributable to their policies. For certain classes of
business, the WPBR is instead calculated using a prospective bonus
reserve valuation, valuing future claims and expenses using the
expected future bonus rates.
The FPRL is comprised of other components of the liability
including a market-consistent valuation of costs of guarantees,
options and smoothing, less any related charges, and this amount is
determined using stochastic modelling techniques.
Assumptions used for the realistic, market-consistent valuation
of with-profits business typically do not contain margins, whereas
those used for the valuation of other classes of business, for
example, annuities, contain margins of prudence within the
assumptions. The main assumptions used in the prospective elements
of the with-profits policyholder liabilities are listed below:
- Assumptions relating to persistency and the take-up of options
offered under certain with-profits contracts are set based on
the results of the most recent experience analysis looking at
the experience over recent years of the relevant business, and
supplemented by expert judgement of the appropriate SMEs across
the business;
- Management actions under which the fund is managed in different
scenarios;
- Maintenance and, for some classes of business, termination expense
assumptions are expressed as per policy amounts. They are set
based on forecast expense levels, including an allowance for
ongoing investment management expenses, and are allocated between
entities and product groups in accordance with the Group's internal
cost allocation model;
- Expense inflation assumptions are set consistent with the economic
basis and based on the inflation swap spot curve;
- The contract liabilities for with-profits business also require
assumptions for mortality. These are set based on the results
of recent experience analysis. However, mortality experience
over 2020 and 2021 was significantly higher than previous years'
as a result of the COVID-19 pandemic. Therefore, no weight has
been given to 2020 or 2021 experience in calibrating mortality
assumptions;
- Future investment return assumptions are set at a risk-free rate
equal to the spot yield on UK swaps. The volatility of investment
returns are set with reference to implied volatility data on
traded market instruments, where available, or on a best estimate
basis where not.
Unallocated surplus
The unallocated surplus of the With-Profits Fund represents the
excess of the fund's assets over policyholder liabilities on an
IFRS basis that have yet to be appropriated between policyholders
and shareholders. The unallocated surplus is recorded wholly as a
liability with no allocation to equity. The annual
excess/(shortfall) of income over expenditure of the With-Profits
Fund, after declaration and attribution of the cost of bonuses to
policyholders and shareholders, is transferred to/(from) the
unallocated surplus each year through a charge/(credit) to the
consolidated income statement. The balance retained in the
unallocated surplus represents cumulative income arising on the
with-profits business that has not been allocated to policyholders
or shareholders.
With-profits options and guarantees
Certain policies written in the Group's With-Profits Fund give
potentially valuable guarantees to policyholders, or options to
change policy benefits which can be exercised at the policyholders'
discretion. Most with-profits contracts give a guaranteed minimum
payment on a specified date or range of dates or on death if before
that date or dates. For pensions products, the specified date is
the policyholder's chosen retirement date or a range of dates
around that date. For endowment contracts, guarantees apply at the
maturity date of the contract. For with-profits bonds it is often a
specified anniversary of commencement, in some cases with further
dates thereafter.
The main types of options and guarantees offered for
with-profits contracts are as follows:
- For conventional with-profits contracts, including endowment
assurance contracts and whole of-life assurance contracts, payouts
are guaranteed at the sum assured together with any declared
regular bonus;
- Conventional with-profits deferred annuity contracts have a basic
annuity per annum to which bonuses are added. At maturity, the
cash claim value will reflect the current cost of providing the
deferred annuity. Regular bonuses when added to with-profits
contracts usually increase the guaranteed amount;
- For unitised with-profits contracts and cash accumulation contracts
the guaranteed payout is the initial investment (adjusted for
any withdrawals, where appropriate), less charges, plus any regular
bonuses declared. If benefits are taken at a date other than
when the guarantee applies, a market value reduction may be applied
to reflect the difference between the accumulated value of the
units and the market value of the underlying assets;
- For certain unitised with-profits contracts and cash accumulation
contracts, policyholders have the option to defer their retirement
date when they reach maturity, and the terminal bonus granted
at that point is guaranteed;
- For with-profits annuity contracts, there is a guaranteed minimum
annuity payment below which benefit payments cannot fall over
the lifetime of the policies;
- Certain pensions products have guaranteed annuity options at
retirement, where the policyholder has the option to take the
benefit in the form of an annuity at a guaranteed conversion
rate.
Determination of bonuses
Profit recognition for traditional with-profits business written
in the WPSF is in line with the declaration of bonuses. Determining
discretionary bonuses for traditional types of with-profits
business requires the PAC Board to apply significant judgement,
including in particular the following:
- Determining what constitutes fair treatment of clients;
- Determining the process for the smoothing of investment returns;
- Determining at what level to set bonuses to ensure that they are
competitive.
The overall rate of return on investments and the expectation of
future investment returns are the most important influences in
bonus rates, subject to the smoothing described below. The Group
determines the assumptions to apply in respect of these factors,
including the effects of reasonably likely changes in key
assumptions, in the context of the overarching discretionary and
smoothing framework that applies to its with-profits business.
The Group's approach, in applying significant judgement and
discretion in relation to determining bonus rates, is consistent
with the Principles and Practices of Financial Management (PPFM)
that explains how the With-Profits Fund is managed. In accordance
with industry-wide regulatory requirements, the PAC Board has
appointed:
- A Chief Actuary who provides the PAC Board with all actuarial
advice.
- A With-Profits Actuary whose specific duty is to advise the PAC
Board on the reasonableness and proportionality of the manner
in which its discretion has been exercised in applying the PPFM
and the manner in which any conflicting interests have been addressed.
- A With-Profits Committee of independent individuals, which assesses
the degree of compliance with the PPFM and the manner in which
conflicting interests and rights have been addressed.
In determining bonus rates for the with-profits policies,
smoothing is applied to the allocation of the overall earnings of
the With-Profits Fund, of which the investment return is a
significant element. The degree of smoothing is illustrated
numerically in the following table, which allows comparison of the
relatively "smoothed" level of policyholder bonuses declared as
part of the surplus for distribution with the more volatile
movement in investment return and other items of income and
expenditure of the WPSF.
2022 2021
For the year ended 31 December GBPm GBPm
------------------------------------------------------------ -------- --------
Net income of the WPSF:
Investment return (7,239) 11,875
======== ========
Claims incurred (10,225) (10,728)
Movement in policyholder liabilities 10,758 (1,321)
Add back policyholder bonus for the year (as shown below) 3,494 2,906
============================================================ ======== ========
Claims incurred and movement in policyholder liabilities
(including change for provision for asset shares and
excluding policyholder bonuses) 4,027 (9,143)
============================================================ ======== ========
Earned premiums, net of reinsurance 6,270 4,503
Other income 2 26
Acquisition costs and other expenditure (1,164) (2,436)
Share of profits from investment joint ventures 38 76
Tax credit/(charge) 232 (645)
============================================================ ======== ========
Net income of the fund before movement in unallocated
surplus of the With-Profits Fund 2,166 4,256
============================================================ ======== ========
Movement in unallocated surplus of the With-Profits Fund 1,689 (1,052)
============================================================ ======== ========
Surplus for distribution for the year 3,855 3,204
============================================================ ======== ========
Surplus for distribution for the year allocated as follows:
Policyholders' bonus (as shown above) 3,494 2,906
Shareholders' transfers(i) 361 298
============================================================ ======== ========
Surplus for distribution for the year 3,855 3,204
============================================================ ======== ========
i Shareholder transfers for most business in the WPSF are one
ninth of the cost of bonus declared to policyholders. In 2021, the
SAIF with-profits sub-fund was merged with the WPSF. Shareholders
have no entitlement to profits from the bonus relating to ex-SAIF
policyholders of GBP220m for the year ended 31 December 2022 (2021:
GBP226m), the value of which is included in the total
Policyholders' bonus shown in the table above. Refer to Note 2.2
for further details.
11.1.2 Unit-linked business
For unit-linked contracts, the attaching liability reflects the
unit value obligation (using actuarial funding where relevant) and,
in the case of contracts with significant insurance risk which are
therefore classified as insurance contracts, allowance for expense,
persistency, and mortality risk. The latter component, calculated
using a discounted cashflow approach (non-unit reserves), is
determined by applying mortality assumptions on a basis that is
appropriate for the policyholder profile and including a margin for
prudence in the mortality, persistency, and expense assumptions. To
calculate the non-unit reserves for unit-linked insurance
contracts, assumptions are also set for the unit growth rate and
the valuation interest rate. The valuation interest rate is derived
from the yields of assets representative of the returns that will
be earned on the assets backing these liabilities.
For those contracts where the level of insurance risk is
insignificant, the assets and liabilities arising under the
contracts are distinguished between those that relate to the
financial instrument liability, and the deferred acquisition costs
and deferred income that relate to the component of the contract
that relates to investment management. The fair value of the
liability is equal to the unit value obligation.
Deferred acquisition costs and deferred income are recognised in
line with the level of service provision.
Certain parts of the unit-linked business are reinsured
externally by way of fund reinsurance. Where this is the case, the
reinsurance liabilities in respect of these reinsurance
arrangements is valued in a manner consistent with the valuation of
the underlying assets. Certain parts of the unit-linked business
are reinsured externally by reinsuring specific risk benefits.
Where this is the case, the reinsurance asset in respect of these
reinsurance arrangements is valued in a manner consistent with the
valuation of the underlying liabilities.
11.1.3 Annuities and other long-term business
The majority of the policyholder liabilities in the "annuities
and other long-term business" component relate to annuity
contracts. The annuity liabilities are calculated as the expected
value of future annuity payments and expenses, discounted by a
valuation interest rate, having prudent regard to the assumptions
used. The valuation methodology for the reinsurance is based on a
deterministic cashflow model, in line with the underlying
portfolio.
The key assumptions used to calculate the policyholder liability
in respect of annuity business are as follows:
Mortality
Mortality assumptions for annuity business are set in light of
recent population and internal experience, with an allowance for
expected future mortality improvements. Given the long-term nature
of annuity business, annuitant mortality remains a significant
assumption in determining policyholder liabilities.
The assumptions used reference recent England & Wales
population mortality data consistent with the CMI mortality
improvements model, with specific risk factors applied on a per
policy basis to reflect the features of the Group's portfolio.
An increase in mortality rates was observed over 2020 and 2021
due to the COVID-19 pandemic. Higher mortality experience may be
expected to continue to some extent over the short-term, with
significant excess deaths observed in the population over 2022.
However, there is significant uncertainty and the longer-term
implications for mortality rates amongst the annuitant population
are unknown at this stage. In line with broader industry approach,
zero weight has been given to pandemic experience. This is an area
that will continue to be monitored by the Group.
For current mortality, while no weight has been given to the
most recent years of experience, the Group's longevity assumptions
have been updated to reflect enhancements made to aspects of the
underlying data and the corresponding modelling approach. This has
resulted in a small weakening.
The mortality improvements observed in recent population data
have been considered as part of the judgement exercised in setting
the mortality basis for 2022. New mortality projection models are
released annually by the Continuous Mortality Investigation (CMI).
The CMI tables used are adjusted as appropriate each year to
reflect anticipated mortality improvements, including an
appropriate margin on an IFRS basis relative to the best estimate
assumption used for Solvency II.
An external panel process with a range of experts from different
disciplines (such as Public Health & Social Policy, General
Practice and Oncology) was undertaken in 2022 which formed part of
a review of the drivers of future mortality improvements.
Enhancements were also made to the approach to determining how the
Group's own portfolio experience could differ from the population
as whole. Combining these resulted in more pessimism (i.e. lower
levels of future improvements) than the previous year and resulted
in a release of reserves. The 2022 basis is expressed in terms of
CMI 2020 in comparison to the 2021 basis, which was expressed
relative to CMI 2019. The mortality improvement assumptions used
are summarised in the table below, with other assumptions
reflecting the core CMI projection.
Model version(i) Long-term improvement Smoothing parameter
Period ended , (iv) rate(ii) (Sk)(iii)
---------------- ---------------- --------------------- -------------------
31 December 2022 CMI 2020 For males: 2.10% pa For males: 7.25
For females: 2.10% For females: 7.75
pa
================ ================ ===================== ===================
31 December 2021 CMI 2019 For males: 2.25% pa
For females: 2.00% For males: 7.50
pa For females: 8.00
================ ================ ===================== ===================
i An 'A' parameter in the model to reflect socio-economic
differences between the portfolio and population experience is also
used. This adjusts initial mortality improvement rates and was
0.45% at 31 December 2021. Under the revised methodology, this
parameter varies by age and gender and is reduced at all ages
relative to 31 December 2021.
ii As at 31 December 2022 and 31 December 2021, the long-term
improvement rates shown reflected a 0.5% increase to all future
improvement rates relative to the best estimate used under Solvency
II as a margin for prudence.
iii The smoothing parameter controls the amount of smoothing by
calendar year when determining the level of initial mortality
improvements.
iv The tapering of improvements to zero is set to occur between
ages 90-110 at 31 December 2022, which is a change from 85 - 110 at
31 December 2021.
The mortality assumptions for in-force vested annuities also
cover annuities in deferment.
Valuation interest rates
Valuation interest rates used to discount the liabilities are
based on the yields as at the valuation date on the assets backing
the policyholder liabilities. For fixed interest securities, the
internal rate of return of the assets backing the liabilities is
used. Investment properties are valued using the redemption yield.
An adjustment is made to the yield on non risk-free fixed interest
securities and property to reflect credit risk. The credit risk
allowance comprises an amount for long-term best estimate defaults
and downgrades, a provision for credit risk premium, and where
appropriate an additional short-term overlay to reflect prospective
outlook in respect of experience over the coming period, including
any uncertainty in outlook. Following adverse downgrade experience
over the latter half of 2022, and deteriorating future outlook for
the UK economy, the short-term allowance has been increased for
reporting as at 31 December 2022. The table below shows the credit
allowance relative to the overall spread over swaps.
Annuities in
Shareholder-backed With-Profits
Period ended 31 December 2022 annuities Fund
Credit default allowance 47 bps 46 bps
============================================= ================== =============
Overall valuation interest rate 5.48% 5.32%
============================================= ================== =============
Credit allowance as proportion of spreadover
swaps 20.3% 21.5%
============================================= ================== =============
Net of reinsurance credit reserve (GBPm) 434 198
============================================= ================== =============
Annuities in
Shareholder-backed With-Profits
Period ended 31 December 2021 annuities Fund
Credit default allowance 44 bps 40 bps
========================================= ================== =============
Overall valuation interest rate 2.23% 2.03%
========================================= ================== =============
Credit allowance as proportion of spread
over swaps 25.0% 27.7%
========================================= ================== =============
Net of reinsurance credit reserve (GBPm) 727 312
========================================= ================== =============
The decrease in net of reinsurance reserve is primarily due to
the increase in yields since 31 December 2021. The allowance for
credit risk within the valuation interest rate is of particular
importance when determining policyholder liabilities.
Expenses
Maintenance expense assumptions are expressed as per policy
amounts. They are set based on forecast expense levels, including
an allowance for ongoing investment management expenses and are
allocated between entities and product groups in accordance with
the Group's internal cost allocation model. A margin for prudence
is added to this amount. Expense inflation assumptions are set
consistent with the economic basis and based on the inflation swap
spot curve. These assumptions therefore take recent increases in
inflation into account, and allow for the market-driven long-term
view of future inflation.
11.2 Analysis of movements in policyholder liabilities and
unallocated surplus of the With-Profits Fund
The following tables show the movement in policyholder
liabilities and unallocated surplus of the With-Profits Fund by
business component. The analysis includes the impact of premiums,
claims and investment movements on policyholder liabilities. The
impact does not represent premiums, claims, and investment
movements as reported in the consolidated income statement. For
example, the premiums shown below exclude any deductions for
fees/charges, as the table only shows the impact on the insurance
and investment contract liabilities and unallocated surplus of the
With-Profits Fund. Claims (surrenders, maturities and deaths)
represent the liability released rather than the claim amount paid
to the policyholder.
Shareholder-backed
funds and
subsidiaries
------------------------
Annuity
and other
With-profits Unit-linked long-term
sub-funds(i) liabilities business Total Reinsurance(ii,vi) Net total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------------- ------------ ---------- -------- ------------------ ---------
As at 1 January 2021 136,387 20,455 30,599 187,441 (11,761) 175,680
Comprising:
==================================== ============= ============ ========== ========
Insurance contract liabilities 41,172 4,987 30,491 76,650
Investment contract liabilities
with DPF 79,592 - 31 79,623
Investment contract liabilities
without DPF 2 15,468 77 15,547
Unallocated surplus of the
With-Profits
Fund 15,621 - - 15,621
==================================== ============= ============ ========== ========
Net Flows:
Premiums 4,505 1,471 157 6,133
Surrenders (6,480) (3,231) (91) (9,802)
Maturities/deaths (4,334) (628) (1,979) (6,941)
==================================== ============= ============ ========== ========
Net flows (6,309) (2,388) (1,913) (10,610)
==================================== ============= ============ ========== ========
Corporate transactions(iii) - 598 (9,558) (8,960)
Shareholders' transfers post-tax (298) - - (298)
Switches (31) 31 - -
Assumption changes(iv) - - (347) (347)
Investment-related items and other
movements 8,960 1,173 350 10,483
Foreign exchange differences (80) (56) - (136)
==================================== ============= ============ ========== ======== ================== =========
As at 31 December 2021/As at
1 January 2022 138,629 19,813 19,131 177,573 (1,669) 175,904
==================================== ============= ============ ========== ======== ================== =========
Comprising:
==================================== ============= ============ ========== ========
Insurance contract liabilities 39,203 4,978 19,042 63,223
Investment contract liabilities
with DPF 82,700 - 43 82,743
Investment contract liabilities
without DPF 3 14,835 46 14,884
Unallocated surplus of the
With-Profits
Fund 16,723 - - 16,723
==================================== ============= ============ ========== ========
Net Flows:
Premiums 6,270 877 148 7,295
Surrenders (6,256) (2,273) (91) (8,620)
Maturities/deaths (4,237) (517) (1,221) (5,975)
==================================== ============= ============ ========== ========
Net flows (4,223) (1,913) (1,164) (7,300)
==================================== ============= ============ ========== ========
Corporate transactions(iii) - - - -
Shareholders' transfers post-tax (361) - - (361)
Switches (44) 44 - -
Assumption changes(iv) - - (275) (275)
Investment-related items and other
movements(v) (8,116) (1,856) (4,312) (14,284)
Foreign exchange differences 86 26 1 113
==================================== ============= ============ ========== ======== ================== =========
As at 31 December 2022 125,971 16,114 13,381 155,466 (944) 154,522
==================================== ============= ============ ========== ======== ================== =========
Comprising:
==================================== ============= ============ ========== ========
Insurance contract liabilities 32,299 4,214 13,292 49,805
Investment contract liabilities
with DPF 78,539 - 55 78,594
Investment contract liabilities
without DPF 3 11,900 34 11,937
Unallocated surplus of the
With-Profits
Fund 15,130 - - 15,130
==================================== ============= ============ ========== ========
i Includes the WPSF, the DCPSF and the SAIF, including the
non-profit business written within these funds. On 1 April 2021 the
closed SAIF fund merged with PAC's main WPSF and the assets and
liabilities of SAIF combined with those of the WPSF.
ii Reinsurance at 31 December 2022 includes Reinsurance assets
of GBP1,186m net of longevity swap liabilities of GBP242m (31
December 2021: GBP174m) included in Accruals, deferred income and
other liabilities on the consolidated statement of financial
position and in Note 13, but previously presented in Reinsurance
assets. For the comparative periods all reinsurance is presented in
Reinsurance assets.
iii Corporate transactions in 2021 relates to the impact of the
Part VII transfer of annuity business to Rothesay Life PLC which
decreased annuity and other long-term business by GBP9,558m and
reduced the reinsurance asset by GBP9,558m, and the acquisition of
MGSA which increased unit-linked liabilities by GBP598m.
iv Refer to breakdown of assumption changes below.
v Reduction over 2022 primarily reflects the impact of adverse
market movements over the year, in particular the significant rise
in interest rates.
vi The reduction over 2022 is driven by the same factors as the
underlying liabilities, namely the rise in interest rates and
weakening of the annuitant mortality basis.
The tables below set out the impact of assumption changes on
gross policyholder liabilities over the current and previous
reporting period. The impact on the With-Profits Fund liabilities
is offset by a corresponding reduction in the unallocated surplus
of the With-Profits Fund and is therefore reported as GBPnil in the
table above.
2022 2021
Assumption changes impact on shareholder-backed business GBPm GBPm
Longevity(i) (292) (320)
Expenses (including investment management expenses) 17 (8)
Other(ii) - (19)
========================================================= ===== =====
Total (275) (347)
========================================================= ===== =====
2022 2021
Assumption changes impact on With-profits Fund (offset
by opposite movement in unallocated surplus) GBPm GBPm
Longevity(i) (278) (92)
Persistency 99 116
Expenses (including investment management expenses) 210 (66)
Other(ii) 17 (8)
======================================================= ===== ====
Total 48 (50)
======================================================= ===== ====
i The net of reinsurance impacts of longevity assumption
changes, as set out in the Business and Financial review, are
GBP(193)m in 2022 and GBP(125)m in 2021.
ii 'Other' category includes non-annuitant mortality, morbidity,
and judgemental assumption changes in respect of the long-term view
of credit risk. Any impact relating to changes in those components
of the credit default allowance that are not subjective but are
purely market-driven are allocated to 'investment-related items and
other movements'.
The impact of longevity assumption updates over the reporting
period reflects the weakening of the basis for shareholder and
policyholder backed annuity business, including in respect of lower
future improvements in mortality. Persistency assumptions were also
updated for the year ended 31 December 2022 for a number of
with-profits product lines in order to reflect emerging experience.
The impact in respect of expense assumption changes predominately
reflects the impact of higher salary and cost inflation. The
'other' category includes the impact of the increase in the
long-term subjective (non-market driven) components of the credit
default allowance.
Further analysis of the movement in the Group's insurance
contract liabilities, reinsurance asset, investment contract
liabilities and unallocated surplus of the With-Profits Fund is
provided below. The movement in these items is predominantly
allocated to the "benefits and claims and movement in unallocated
surplus of the With-Profits Fund, net of reinsurance" line in the
consolidated income statement, although certain movements such as
premiums received and claims paid on investment contracts without
DPF, are not charged to the consolidated income statement.
Unallocated
surplus
of the
Insurance Investment With-Profits Reinsurers'
contracts Contracts(i) Fund Share(ii)
GBPm GBPm GBPm GBPm
-------------------------------------------- ---------- ------------- ------------- -----------
As at 1 January 2021 76,650 95,170 15,621 (11,761)
Additions arising on acquisitions(iii) - 598 - -
Income and expense included in the income
statement(iv) (13,356) 3,556 1,052 10,088
Other movements including amounts included
in other comprehensive income(v) 5 (1,640) 2 6
Foreign exchange translation differences (76) (57) 48 (2)
============================================ ========== ============= ============= ===========
As at 31 December 2021/As at 1 January 2022 63,223 97,627 16,723 (1,669)
Income and expense included in the income
statement (13,537) (5,633) (1,689) 735
Other movements including amounts included
in other comprehensive income(v) 116 (1,493) (2) (15)
Foreign exchange translation differences 3 30 98 5
============================================ ========== ============= ============= ===========
As at 31 December 2022 49,805 90,531 15,130 (944)
============================================ ========== ============= ============= ===========
i This comprises investment contracts with discretionary
participation features of GBP78,594m as at 31 December 2022 (2021:
GBP82,743m) and investment contracts without discretionary
participation features of GBP11,937m as at 31 December 2022 (2021:
GBP14,884m).
ii Includes reinsurers' share of claims outstanding of GBP137m
as at 31 December 2022 (2021: GBP143m). Reinsurance at 31 December
2022 includes Reinsurance Assets of GBP1,186m net of longevity swap
liabilities of GBP242m included in Accruals, deferred income and
other liabilities on the consolidated statement of financial
position and in Note 13. For the comparative periods all
reinsurance is presented in Reinsurance Assets.
iii Additions arising on acquisitions for the year to 31
December 2021 relate to the acquisition of MGSA which increased
unit-linked liabilities by GBP598m.
iv Income and expense included in the income statement in 2021
includes the impact of the Part VII transfer of annuity business to
Rothesay Life PLC.
v Other movements including amounts included in other
comprehensive income include premiums received and claims paid on
investment contracts without discretionary participating features,
which are taken directly to the consolidated statement of financial
position in accordance with IAS 39; changes in the unallocated
surplus of the With-Profits Fund resulting from actuarial gains and
losses on the Group's defined benefit pension schemes, which are
recognised directly in other comprehensive income and balance sheet
reallocations. In 2022, this also reflects the divestment of
insurance policies in PPL previously held by the M&G Group
Pension scheme. Refer to Note 9 for further details.
The below tables show the "Benefits and claims and movement in
unallocated surplus of the With-Profits Fund, net of reinsurance"
as shown in the consolidated income statement. "Benefits and claims
and movement in unallocated surplus of the With-Profits Fund, net
of reinsurance" comprises of the movement charged to the
consolidated income statement presented in the table above, and the
benefits and claims paid over the period, net of amounts
attributable to reinsurers.
2022
-------------------------------------------
Unallocated
surplus
of the
Policyholder With-Profits Reinsurance
liabilities(i) Fund asset
For the year ended 31 December GBPm GBPm GBPm
------------------------------------------------------- --------------- ------------- -----------
Movement in policyholder liabilities and unallocated
surplus of the With-Profits Fund included in
consolidated income statement 19,170 1,689 -
Movement in reinsurance asset included in consolidated
income statement - - (735)
Benefits and claims paid (12,183) -
Benefits and claims attributable to external
reinsurers - - 494
======================================================= =============== ============= ===========
Benefits and claims and movement in unallocated
surplus of the With-Profits Fund, net of reinsurance,
as shown in consolidated income statement 6,987 1,689 (241)
======================================================= =============== ============= ===========
i Policyholder liabilities includes insurance contract
liabilities and investment contract liabilities.
2021
-------------------------------------------
Unallocated
surplus
of the
Policyholder With-Profits Reinsurance
liabilities(i) Fund asset
For the year ended 31 December GBPm GBPm GBPm
------------------------------------------------------- --------------- ------------- -----------
Movement in policyholder liabilities and unallocated
surplus of the With-Profits Fund included in
consolidated income statement 9,807 (1,052) -
Movement in reinsurance asset included in consolidated
income statement - - (10,088)
Benefits and claims paid (13,358) -
Benefits and claims attributable to external
reinsurers - - 1,608
======================================================= =============== ============= ===========
Benefits and claims and movement in unallocated
surplus of the With-Profits Fund, net of reinsurance
as shown in consolidated income statement (3,551) (1,052) (8,480)
======================================================= =============== ============= ===========
12 Subordinated liabilities and other borrowings
2022 2021
As at 31 December GBPm GBPm
---------------------------------------------------- ----- -----
Subordinated liabilities 3,729 3,706
Operational borrowings 50 107
Borrowings attributable to With-Profits Fund 3,758 5,117
==================================================== ===== =====
Total subordinated liabilities and other borrowings 7,537 8,930
==================================================== ===== =====
12.1 Subordinated liabilities
The Group's subordinated liabilities consist of subordinated
notes which were transferred from Prudential plc on 18 October 2019
and were recorded at fair value on initial recognition. The
transfer of the subordinated liabilities was achieved by
substituting the Company in place of Prudential plc as issuer of
the debt, as permitted under the terms and conditions of each
applicable instrument. All costs related to the transaction were
borne by Prudential plc.
2022 2021
------------------- -------------------
Principal Carrying Principal Carrying
amount value amount value
As at 31 December GBPm GBPm
---------------------------------------------- --------- -------- --------- --------
5.625% sterling fixed rate due 20 October
2051 GBP750m 839 GBP750m 848
6.25% sterling fixed rate due 20 October 2068 GBP500m 604 GBP500m 606
6.50% US dollar fixed rate due 20 October
2048 $500m 466 $500m 423
6.34% sterling fixed rate due 19 December
2063 GBP700m 845 GBP700m 849
5.56% sterling fixed rate due 20 July 2055 GBP600m 672 GBP600m 676
3.875% sterling fixed rate due 20 July 2049 GBP300m 303 GBP300m 304
============================================== ========= ======== ========= ========
Total subordinated liabilities 3,729 3,706
============================================== ========= ======== ========= ========
Subordinated notes issued by the Company rank below its senior
obligations and ahead of its ordinary share capital.
A description of the key features of each of the Group's
subordinated notes as at 31 December 2022 is as follows:
5.625% sterling 6.25% sterling 6.50% US 6.34% sterling 5.56% sterling 3.875% sterling
fixed rate fixed rate dollar fixed rate fixed rate fixed rate
fixed rate
Principal amount GBP750m GBP500m $500m GBP700m GBP600m GBP300m
================ =============== =============== =============== =============== =============== ===============
Issue date(i) 3 October 3 October 3 October 16 December 9 June 2015 10 July
2018 2018 2018 2013 (amended (amended 2019
10 June 10 June
2019) 2019)
================ =============== =============== =============== =============== =============== ===============
Maturity date 20 October 20 October 20 October 19 December 20 July 20 July
2051 2068 2048 2063 2055 2049
================ =============== =============== =============== =============== =============== ===============
Callable at par 20 October 20 October 20 October 19 December 20 July 20 July
at the option 2031 (and 2048 (and 2028 (and 2043 (and 2035 (and 2024, 20
of the Company each each each each each July 2029
from semi-annual semi-annual semi-annual semi-annual semi-annual (and each
interest interest interest interest interest semi-annual
payment payment payment payment payment interest
date date date date date payment
thereafter) thereafter) thereafter) thereafter) thereafter) date
thereafter)
================ =============== =============== =============== =============== =============== ===============
Solvency II own Tier 2 Tier 2 Tier 2 Tier 2 Tier 2 Tier 2
funds treatment
================ =============== =============== =============== =============== =============== ===============
i The subordinated notes were issued by Prudential plc rather
than by the Company.
As at 31 December 2022, the principal amount of all subordinated
liabilities is expected to be settled after more than 12 months and
accrued interest of GBP43m (2021: GBP42m) is expected to be settled
within 12 months.
12.1.1 Movement in subordinated liabilities
The following table reconciles the movement in subordinated
liabilities in the year:
2022 2021
GBPm GBPm
At 1 January 3,706 3,729
Amortisation (28) (27)
Foreign exchange movements 51 4
=========================== ===== =====
At 31 December 3,729 3,706
=========================== ===== =====
There were no repayments of principal on these loans during the
year. The amortisation of premium on the loans based on an
effective interest rate and the foreign exchange movement on the
translation of the subordinated liabilities denominated in US
dollar are both non-cash items.
13 Accruals, deferred income and other liabilities
Restated(i)
2022 2021
As at 31 December GBPm GBPm
Outstanding purchases of investment securities 4,607 3,836
Accruals and deferred income 1,338 1,469
Deferred consideration 246 403
Deposits received from reinsurers 146 299
Creditors arising from insurance operations 189 156
Interest payable 80 60
Creation of units awaiting settlement 32 52
Property related creditors 17 15
Reinsurance liabilities(ii) 242 -
Other 509 376
====================================================== ===== ===========
Total accruals, deferred income and other liabilities 7,406 6,666
====================================================== ===== ===========
Analysed as:
Expected to be settled within one year 6,920 6,116
Expected to be settled after one year 486 550
====================================================== ===== ===========
Total accruals, deferred income and other liabilities 7,406 6,666
====================================================== ===== ===========
i Following a review of the Group's presentation of tax
positions within consolidated investment funds, comparative amounts
have been restated from those previously reported. The restatement
has had no impact on profit for the year or net assets. See Note
1.1 for further information.
ii Reinsurance liabilities at 31 December 2022 relate to
longevity swap liabilities of GBP242m (31 December 2021: GBP174m)
previously held in Reinsurance assets on the consolidated statement
of financial position and in Note 11. For the comparative periods
all reinsurance is presented in Reinsurance assets.
14 Fair value methodology
14.1 Determination of fair value hierarchy
The fair values of assets and liabilities for which fair
valuation is required under IFRS are determined by the use of
current market bid prices for exchange-quoted investments, by using
quotations from independent third parties such as brokers and
pricing services, or by using appropriate valuation techniques.
Fair value is the amount for which an asset could be exchanged or a
liability settled in an arm's length transaction.
To provide further information on the approach used to determine
and measure the fair value of certain assets and liabilities, the
following fair value hierarchy categorisation has been used. This
hierarchy is based on the inputs to the fair value measurement and
reflects the lowest level input that is significant to that
measurement.
Level 1 - quoted prices (unadjusted) in active markets for
identical assets and liabilities
Level 1 principally includes exchange-listed equities, mutual
funds with quoted prices, exchange-traded derivatives such as
futures and options, and national government bonds, unless there is
evidence that trading in a given instrument is so infrequent that
the market could not be considered active. It also includes other
financial instruments where there is clear evidence that the
valuation is based on a traded price in an active market.
Level 2 - inputs other than quoted prices included within level
1 that are observable either directly (i.e. as prices) or
indirectly (i.e. derived from prices)
Level 2 principally includes corporate bonds and other national
and non-national government debt securities which are valued using
observable inputs, together with over-the-counter derivatives such
as forward exchange contracts and non-quoted investment funds
valued with observable inputs. It also includes investment contract
liabilities without DPF that are valued using observable
inputs.
Level 3 - significant inputs for the asset or liability are not
based on observable market data (unobservable inputs)
Level 3 principally includes investments in private equity
funds, directly held investment properties and investments in
property funds which are exposed to bespoke properties or risks and
investments which are internally valued or subject to a significant
number of unobservable assumptions. It also includes debt
securities which are rarely traded or traded only in privately
negotiated transactions and hence where it is difficult to assert
that their valuations have been based on observable market
data.
14.2 Fair value hierarchy for assets measured at fair value in
the consolidated statement of financial position
The tables below present the Group's assets measured at fair
value by level of the fair value hierarchy for each component of
business.
2022
-------------------------------
Level Level Level Total
1 2 3
As at 31 December GBPm GBPm GBPm GBPm
------ ------ ------ -------
With-profits:
Investment property - - 15,132 15,132
Equity securities and pooled investment funds 40,155 5,322 13,087 58,564
Loans - 137 145 282
Debt securities 13,685 26,380 4,725 44,790
Derivative assets 52 2,350 1 2,403
============================================== ====== ====== ====== =======
Total with-profits 53,892 34,189 33,090 121,171
============================================== ====== ====== ====== =======
Unit-linked:
Investment property - - 497 497
Equity securities and pooled investment funds 10,788 515 33 11,336
Debt securities 1,378 3,069 19 4,466
Derivative assets 5 2 - 7
============================================== ====== ====== ====== =======
Total unit-linked 12,171 3,586 549 16,306
============================================== ====== ====== ====== =======
Annuity and other long-term business:
Investment property - - 876 876
Equity securities and pooled investment funds 5 - 2 7
Loans - - 934 934
Debt securities 1,617 6,616 4,166 12,399
Derivative assets - 265 25 290
============================================== ====== ====== ====== =======
Total annuity and other long-term business 1,622 6,881 6,003 14,506
============================================== ====== ====== ====== =======
Other:
Equity securities and pooled investment funds 162 - 58 220
Debt securities 686 440 40 1,166
Derivative assets - 150 - 150
============================================== ====== ====== ====== =======
Total other 848 590 98 1,536
============================================== ====== ====== ====== =======
Group:
Investment property - - 16,505 16,505
Equity securities and pooled investment funds 51,110 5,837 13,180 70,127
Loans - 137 1,079 1,216
Debt securities 17,366 36,505 8,950 62,821
Derivative assets 57 2,767 26 2,850
============================================== ====== ====== ====== =======
Total assets at fair value 68,533 45,246 39,740 153,519
============================================== ====== ====== ====== =======
2021
-------------------------------
Level Level Level Total
1 2 3
As at 31 December GBPm GBPm GBPm GBPm
---------------------------------------------- ------ ------ ------ -------
With-profits:
Investment property - - 17,707 17,707
Equity securities and pooled investment funds 45,599 4,162 10,884 60,645
Loans - 141 1,411 1,552
Debt securities 28,014 21,275 5,675 54,964
Derivative assets 65 2,553 - 2,618
============================================== ====== ====== ====== =======
Total with-profits 73,678 28,131 35,677 137,486
============================================== ====== ====== ====== =======
Unit-linked:
Investment property - - 931 931
Equity securities and pooled investment funds 12,733 425 74 13,232
Debt securities 3,949 2,528 22 6,499
Derivative assets 3 2 - 5
============================================== ====== ====== ====== =======
Total unit-linked 16,685 2,955 1,027 20,667
============================================== ====== ====== ====== =======
Annuity and other long-term business:
Investment property - - 1,060 1,060
Equity securities and pooled investment funds 3 - 2 5
Loans - - 1,723 1,723
Debt securities 5,036 6,557 6,673 18,266
Derivative assets - 561 58 619
============================================== ====== ====== ====== =======
Total annuity and other long-term business 5,039 7,118 9,516 21,673
============================================== ====== ====== ====== =======
Other:
Equity securities and pooled investment funds 179 - 8 187
Debt securities 731 599 - 1,330
Derivative assets - 131 - 131
============================================== ====== ====== ====== =======
Total other 910 730 8 1,648
============================================== ====== ====== ====== =======
Group:
Investment property - - 19,698 19,698
Equity securities and pooled investment funds 58,514 4,587 10,968 74,069
Loans - 141 3,134 3,275
Debt securities 37,730 30,959 12,370 81,059
Derivative assets 68 3,247 58 3,373
============================================== ====== ====== ====== =======
Total assets at fair value 96,312 38,934 46,228 181,474
============================================== ====== ====== ====== =======
14.3 Fair value hierarchy for liabilities measured at fair value
in the consolidated statement of financial position
The tables below present the Group's liabilities measured at
fair value by level of the fair value hierarchy:
2022
----------------------------
Level Level Level Total
1 2 3
As at 31 December GBPm GBPm GBPm GBPm
Investment contract liabilities without discretionary
participation features - 11,937 - 11,937
Third party interest in consolidated funds 7,372 1,329 1,688 10,389
Subordinated liabilities and other borrowings - - - -
Derivative liabilities 95 4,081 9 4,185
Accruals, deferred income and other liabilities - - 246 246
====================================================== ===== ====== ===== ======
Total liabilities at fair value 7,467 17,347 1,943 26,757
====================================================== ===== ====== ===== ======
2021
----------------------------
Level Level Level Total
1 2 3
As at 31 December GBPm GBPm GBPm GBPm
Investment contract liabilities without discretionary
participation features - 14,884 - 14,884
Third party interest in consolidated funds 7,170 4,225 1,241 12,636
Subordinated liabilities and other borrowings - - 1,159 1,159
Derivative liabilities 37 2,648 4 2,689
Accruals, deferred income and other liabilities - - 403 403
====================================================== ===== ====== ===== ======
Total liabilities at fair value 7,207 21,757 2,807 31,771
====================================================== ===== ====== ===== ======
15 Contingencies and related obligations
15.1 Litigation, tax and regulatory matters
In addition to the regulatory provisions held in relation to
annuity past sales practices and the litigation in respect of
portfolio dividend tax, the Group is involved in various litigation
and regulatory issues. While the outcome of such litigation and
regulatory issues cannot be predicted with certainty, the Directors
believe that their ultimate outcome will not have a material
adverse effect on the Group's financial condition, results of
operations, or cash flows.
15.2 Guarantees
Guarantee funds provide for payments to be made to policyholders
on behalf of insolvent life insurance companies and are financed by
payments assessed on solvent insurance companies based on location,
volume and types of business. The estimated reserve for future
guarantee fund assessments is not significant, and adequate
reserves are available for all anticipated payments for known
insolvencies.
M&G plc acts as guarantor for certain property leases where
a group company is a lessee. The most material of these is the
guarantee provided in respect of the 10 Fenchurch Avenue lease
between Saxon Land B.V. and M&G Corporate Services Limited.
On acquisition of a controlling interest in MGSA, M&G Group
Limited provided a guarantee in respect of an existing loan
facility between Thesele, the seller of MGSA, and Nedbank, a third
party bank amounting to ZAR 220m. The guarantee is secured on 7% of
the shares that Thesele retains in MGSA.
M&G Group Regulated Entity Holding Company Limited is a
guarantor for the obligations of M&G Corporate Services Limited
to make payments under the Scottish Amicable Staff Pension
Scheme.
The Group has also provided other guarantees and commitments to
third parties entered into in the normal course of business, but
the Group does not consider that these would result in a
significant unprovisioned loss.
15.3 Support for the With-Profits Fund by shareholders
PAC is liable to meet its obligations to with-profits
policyholders even if the assets of the with-profits sub-funds are
insufficient to do so. The assets, represented by the unallocated
surplus of the With-Profits Fund, in excess of amounts expected to
be paid for future terminal bonuses and related shareholder
transfers ('the excess assets') in the with-profits sub-funds could
be materially depleted over time by, for example, a significant or
sustained equity market downturn. In the unlikely circumstance that
the depletion of the excess assets within the with-profits
sub-funds was such that the Group's ability to satisfy
policyholders' reasonable expectations was adversely affected, it
might become necessary to restrict the annual distribution to
shareholders or to contribute shareholders' funds to the
with-profits sub-funds to provide financial support.
There are a number of additional arrangements between the
shareholder and the With-Profits Fund as follows:
- The With-Profits Fund contributed to the costs of establishing
the Polish branch of PAC, and receives repayment through income
from charges levied on the business. There is an obligation on
the shareholders to ensure that the With-Profits Fund will be
repaid in full with interest, and an amount is recognised for
the estimated cost to the shareholder of any shortfall at the
end of the term of the agreement. The impact is included in the
Unallocated surplus of the With-Profits Fund with changes in
value recognised in Movement in unallocated surplus of the With-Profits
Fund in the consolidated income statement.
- Part of the acquisition costs incurred in the early years of
M&G Wealth Advice Limited (formerly Prudential Financial Planning
Ltd) were funded by the With-Profits Fund. In return, M&G Wealth
Advice Limited is required to deliver cost savings to the With-Profits
Fund. In the event of closure of M&G Wealth Advice or, the cost
savings not being delivered and M&G Wealth Advice stops writing
new business, the shareholder will reimburse the With-Profits
Fund for any remaining shortfall. The time period for repayment
is not defined.
- Transformation costs associated with with-profits new business
will be recovered in the pricing of future new business (subject
to a shareholder underpin whereby the shareholder will compensate
the With-Profits Fund if any of these costs are not fully recovered
at the end of the term of the agreement).
- PAC has undertaken a project to rationalise fund structures (The
Target Investment Model programme) achieved by combining existing,
smaller funds with the main With-Profits asset share fund in
a fund umbrella structure, and is expected to yield various benefits
for the business over time. If expected benefits do not materialise
to the With-Profits Fund, the shareholder is committed to compensate
the fund for any implementation costs borne which were not fully
recouped. The assessment period for the underpin arrangement
is 5 years, running to the end of 2025.
- PAC has priced new with-profits business on a basis that is expected
to be financially self-supporting or, where this has not been
the case, the shareholder is required to cover the cost (known
as the New Business Supportability Test, 'NBST'). The impact
is included in the unallocated surplus of the with-profits fund
with changes in value recognised in movement in unallocated surplus
of the with-profits fund in the consolidated income statement.
The following matters are of relevance with respect to the
With-Profits Fund:
15.3.1 Pension mis-selling review
The Pensions mis-selling review covers clients who were sold
personal pensions between 29 April 1988 and 30 June 1994, and who
were advised to transfer out, not join, or opt out of their
employer's Defined Benefit Pension Scheme. Currently a provision
amounting to GBP226m (2021: GBP296m) as at 31 December 2022 is
being held in relation to this within insurance contract
liabilities. During the initial review, some clients were issued
with guarantees that redress will be calculated on retirement or
transfer of their policies. The provision continues to cover these
clients.
Whilst PAC believed it met the requirements of the FSA (the UK
insurance regulator at that time) to issue offers of redress to all
impacted clients by 30 June 2002, there is a population of clients
who, whilst an attempt was made at the time to invite them to
participate in the review, may not have received their invitation.
These clients have been re-engaged, to ensure they have the
opportunity to take part in the review. The provision also covers
this population.
The key assumptions underlying the provisions are:
- average cost of redress per client.
- proportion of provision (reserve rate) held for soft close cases
(where all reasonable steps have been taken to contact the client
but the client has not engaged with the review).
Sensitivities of the value of the provision to change in
assumptions are as follows:
As at 31 December
-------------------
2022 2021
Assumption Change in assumption GBPm GBPm
increase/decrease
Average cost of redress by 10% +/-10 +/-10
=================================== ===================== ======== =========
increase/decrease +/-
Reserve rate for soft closed cases by 10% 30 +/- 30
=================================== ===================== ======== =========
Costs arising from this review are met by the excess assets of
the with-profits sub-fund and hence have not been charged to the
asset shares used in the determination of policyholder bonus rates.
An assurance was given that these deductions from excess assets
would not impact PAC's bonus or investment policy for policies
within the with-profits sub-funds that were in force at 31 December
2003. This assurance does not apply to new business since 1 January
2004. In the unlikely event that such deductions would affect the
bonus or investment policy for the relevant policies, the assurance
provides that support would be made available to the sub-fund from
PAC's shareholder resources for as long as the situation continued,
so as to ensure that PAC's policyholders were not disadvantaged.
PAC's comfort in its ability to make such support available was
supported by related intra-group arrangements between Prudential
plc and PAC, which formalised the circumstances in which capital
support would be made available to PAC by Prudential plc. These
intra-group arrangements terminated on 21 October 2019, following
the demerger of M&G plc from Prudential plc, at which time
intra-group arrangements formalising the circumstances in which
M&G plc would make capital support available to PAC became
effective.
15.3.2 With-profits options and guarantees
Certain policies within the With-Profits Fund give potentially
valuable guarantees to policyholders, or options to change policy
benefits which can be exercised at the policyholders' discretion.
These options and guarantees are valued as part of the policyholder
liabilities. Please refer to Note 11.1 for further details on these
options and guarantees.
16 Post balance sheet events
On 3 August 2022, M&G Wealth Advice Limited, a wholly owned
subsidiary of the Group, agreed to acquire a 49.9% holding in My
Continuum Financial Limited (MCFL). MCFL is the holding company of
Continuum (Financial Services) LLP (CFSL) and My Continuum Wealth
(MCW). CFSL is a regulated entity engaged in providing wealth
management services to retail clients through a network of
independent financial advisors whereas MCW provides in-house
portfolio management services through provision of model
portfolios.
The transaction required regulatory approval, which was granted
on 3 February 2023, and acquisition of the initial stake completed
on 8 March 2023 and from this date the investment was recognised as
an investment in associate accounted for under the equity method on
the consolidated statement of financial position.
The agreement provides the Group the call option and the sellers
the put option to allow acquisition of the remaining holding in
MCFL over 2 years from the completion date.
As referenced in Note 2.1.2, the Group retained call options and
the seller retained put options over the remaining shareholding in
responsAbility that the Group did not purchase at the acquisition
date. The Group has subsequently acquired the remaining shares on
21 February 2023.
Supplementary information
1.1 Overview of the Group's key and alternate performance
measures
The Group measures its financial performance using a number of
key performance measures (KPM). The Group also uses a number of
alternative performance measures (APM), which are most commonly
derived from the financial statements prepared in accordance with
the IFRS financial reporting framework or the Solvency II
requirements, but are not defined under IFRS or Solvency II. The
APMs are used to complement and not to substitute the disclosures
prepared in accordance with IFRS and Solvency II, and provide
additional information on the long-term performance of the
Group.
A list of the APMs used by the Group along with their
definitions and how they can be reconciled to the nearest IFRS or
Solvency II measure, where applicable, is provided in the table
below.
Key performance
measure Type Definition
IFRS profit KPM IFRS profit or loss after tax demonstrates to our shareholders
or loss after the financial performance of the Group during the year
tax on an IFRS basis.
=================== ==== ===============================================================
Adjusted APM, Adjusted operating profit before tax is the Group's
operating KPM non-GAAP alternative performance measure, which complements
profit before IFRS GAAP measures and is useful as it allows deeper
tax understanding of operating performance over time. It
is therefore key to decision-making and the internal
performance management of our operating segments.
Certain adjustments that are considered to be non-recurring
or strategic, or due to short-term movements not reflective
of longer-term performance are made to IFRS profit
before tax to determine Adjusted operating profit before
tax. Adjustments are in respect of short-term fluctuations
in investment returns, costs associated with fundamental
Group-wide restructuring and transformation, profit/(loss)
arising on corporate transactions, impairment and amortisation
in respect of acquired intangible assets and where
relevant, profit/(loss) before tax from discontinued
operations.
The adjusted operating profit methodology is described
in Section 3.2, along with a reconciliation of adjusted
operating profit before tax to IFRS profit after tax.
=================== ==== ===============================================================
Adjusted APM Adjusted operating income is a component part of the
operating Group's key APM of adjusted operating profit before
income tax.
For the Group's fee based business adjusted operating
income represents asset management charges, transactional
charges and annual management charges on unit-linked
business.
For the Group's business written in the With-Profits
Fund, adjusted operating income includes the statutory
transfer to shareholders gross of attributable shareholder
tax. Derivative instruments are held to mitigate the
risk to the shareholder of lower future shareholder
transfers.
For the Group's shareholder annuity products written
by the Retail and Savings segment, adjusted operating
income includes the net impact of movements in the
value of policyholder liabilities and fair value of
the assets backing these liabilities, the unwind of
the credit risk premium, the actual income received
in the year, such as coupon payments, redemption payments
and rental income on surplus assets backing the shareholder
annuity capital, less an allowance for expenses, the
net effect of changes to the valuation rate of interest
due to asset trading and portfolio rebalancing and
the impact of changes in the long-term component of
credit provisioning. Specifically excluded are the
impact of short-term components of credit risk provisioning,
the impact of credit risk experience variances over
the period, and total fair value movement on surplus
assets backing the shareholder annuity capital, that
are not reflective of the longer-term performance of
the business.
=================== ==== ===============================================================
Adjusted APM Adjusted operating expenses is a component part of
operating the Group's key APM of adjusted operating profit before
expenses tax.
Included are operating costs for the business consisting
of overheads, expenses required to meet regulatory
requirements and regular business development/restructuring
and other costs. Non-recurring or strategic costs associated
with fundamental Group-wide merger, transformation,
rebranding and other change in control costs are not
included.
=================== ==== ===============================================================
Assets under APM, Closing AUMA represents the total market value of all
management KPM assets managed, administered or advised on behalf of
and administration clients at the end of each financial period and is
(AUMA) a key indicator of the scale of the business. Assets
managed by the Group include those managed on behalf
of our institutional and wholesale clients.
Assets administered by the Group includes assets which
we provide investment management services for, in addition
to assets we administer where the client has elected
to invest in a third-party investment manager.
Assets under advice are advisory portfolios where clients
receive investment recommendations such as Strategic
Asset Allocation & model portfolios but retain discretion
over executing the advice.
AUMA includes assets recognised in the Group's consolidated
statement of financial position together with certain
assets administered by the Group belonging to external
clients outside of the Group which are therefore not
included within the Group's statement of financial
position and, as a result, this measure is not directly
reconcilable to the financial statements.
Please see section 1.3 of the supplementary financial
information for further details on the Group's AUMA.
=================== ==== ===============================================================
Net client APM, Net client flows represent gross inflows less gross
flows (excluding KPM outflows and provides useful insight into the growth
Heritage) of the business. Gross inflows are new funds from clients.
Gross outflows are money withdrawn by clients during
the period. This measure does not include the expected
net outflows in our Heritage business, which is closed
to new clients, as it runs-off.
Net client flows includes flows on assets held on the
Group's consolidated statement of financial position
for our retail clients, and external client flows on
assets belonging to wholesale and institutional clients
outside of the Group which are not included in the
Group's consolidated statement of financial position
and as a result, this measure is not directly reconcilable
to the financial statements.
Please see section 1.3 of the supplementary financial
information section for further analysis on net client
flows, excluding heritage.
=================== ==== ===============================================================
Shareholder APM, Management focuses on a shareholder view of Solvency
Solvency KPM II coverage ratio, which is considered to provide a
II coverage more useful reflection of the capital strength of the
ratio Group. The shareholder view includes future with-profits
shareholder transfers, but excludes the shareholders'
share of ring-fenced with-profits estate.
The regulatory Solvency II capital position considers
the Group's overall own funds and SCR. The shareholder
Solvency II coverage ratio is the ratio of own funds
to SCR, excluding the contribution to own funds and
SCR from the Group's ring-fenced With-Profits Fund.
Own Funds assume transitional measures on technical
provisions which have been recalculated using management's
estimate of the impact of operating and market conditions
at the valuation date.
The shareholder Solvency II coverage ratio is described
in the "Solvency II capital position" in section 1.4.
=================== ==== ===============================================================
Underlying APM For insurance entities and their underlying subsidiaries,
capital generation underlying capital generation includes the expected
Solvency II surplus capital generated from in-force
business and the impact of writing new life insurance
business. For non-insurance entities, underlying capital
generation is equal to adjusted operating profit before
tax, with certain adjustments made in respect of items
that do not reflect the underlying result. It also
includes other items such as head office expenses and
debt interest costs that contribute to the underlying
capital position of the business.
Please see section 1.5 of the supplementary financial
information for further details on underlying capital
generation, including any applicable reconciliation.
=================== ==== ===============================================================
Operating APM, Operating capital generation is the total capital generation
capital generation KPM before tax, adjusted to exclude market movements relative
to those expected under long-term assumptions and to
remove other non-operating items, including shareholder
restructuring and other costs. Management use this
as an indicator on the longer-term components of the
movement in the Group's surplus capital as it is less
affected by short-term market volatility and non-recurring
items as total capital generation.
Please see section 1.5 of the supplementary financial
information for further details on operating capital
generation.
=================== ==== ===============================================================
Total capital APM, Total capital generation measures the change in surplus
generation KPM capital during the period, before dividends and capital
movements. Management consider it to be integral to
the running and monitoring of the business, our decisions
on capital allocation and investment, and ultimately
our dividend policy.
Surplus capital is the amount by which own funds exceed
SCR under Solvency II. Total capital generation is
the total change in Solvency II surplus capital before
dividends and capital movements.
Please see section 1.5 of the supplementary financial
information for further details on total capital generation
including the reconciliation to change in Solvency
II surplus.
=================== ==== ===============================================================
1.2 Adjusted operating profit before tax
1.2 (i) Adjusted operating profit/(loss) before tax by
segment
Retail and Corporate
Asset Management Savings Centre Total
------------------ ------------ ------------ ----------------
2022 2021 2022 2021 2022 2021 2022 2021
For the year ended 31
December GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Fee-based revenue 1,051 976 295 278 - - 1,346 1,254
Annuity margin - - 227 369 - - 227 369
With-profits shareholder
transfer net of hedging
and other gains/losses - - 354 268 - - 354 268
================================== ======== ======== ===== ===== ===== ===== ======= =======
Adjusted operating
income 1,051 976 876 915 - - 1,927 1,891
================================== ======== ======== ===== ===== ===== ===== ======= =======
Adjusted operating expenses (763) (672) (295) (296) (107) (95) (1,165) (1,063)
Other shareholder (loss)/profit (5) 17 (9) 41 (200) (159) (214) (101)
Share of profit from
joint ventures and associates(i) - 6 - - - - - 6
Adjusted operating profit
attributable to non-controlling
interests (19) (12) - - - - (19) (12)
================================== ======== ======== ===== ===== ===== ===== ======= =======
Adjusted operating
profit/(loss) before
tax 264 315 572 660 (307) (254) 529 721
================================== ======== ======== ===== ===== ===== ===== ======= =======
i Excludes adjusted operating profit before tax from joint
ventures in the With-Profits Fund.
1.2 (ii) Adjusted operating profit/(loss) before tax by segment
and source
Asset Management Retail and Savings Corporate
Centre
---------------------------- ----------------------- ---------
Performance
fees(i)
Core Asset and investment
Management income Wealth Heritage Other Other
For the year ended 31 December
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Fee-based revenue 995 56 140 92 63 -
Annuity margin - - - 227 - -
With-profits shareholder
transfer net of hedging
and other gains/losses - - 128 226 - -
================================= =========== =============== ====== ======== ===== =========
Adjusted operating income 995 56 268 545 63 -
Asset Management operating
expenses (763) - - - - -
Other operating expenses - - (173) (80) (42) (107)
================================= =========== =============== ====== ======== ===== =========
Adjusted operating expenses (763) - (173) (80) (42) (107)
Other shareholder (loss)/profit - (5) 1 1 (11) (200)
Share of profit from joint
ventures and associates - - - - - -
Adjusted operating profit
attributable to non-controlling
interests (14) (5) - - - -
================================= =========== =============== ====== ======== ===== =========
Adjusted operating profit/(loss)
before tax 218 46 96 466 10 (307)
================================= =========== =============== ====== ======== ===== =========
i Includes carried interest.
1.2 (ii) Adjusted operating profit/(loss) before tax by segment
and source
Asset Management Retail and Savings Corporate
centre
---------------------------- ----------------------- ---------
Performance
fees(i)
Core Asset and investment
Management income Wealth Heritage Other Other
For the year ended 31 December
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Fee-based revenue 953 23 144 76 58 -
Annuity margin - - - 369 - -
With-profits shareholder
transfer net of hedging
and other gains/losses - - 63 205 - -
================================= =========== =============== ====== ======== ===== =========
Adjusted operating income 953 23 207 650 58 -
Asset management operating
expenses (672) - - - - -
Other operating expenses - - (168) (85) (43) (95)
================================= =========== =============== ====== ======== ===== =========
Adjusted operating expenses (672) - (168) (85) (43) (95)
Other shareholder profit/(loss) - 17 2 55 (16) (159)
Share of profit from joint
ventures and associates 6 - - - - -
Adjusted operating profit
attributable to non-controlling
interests (10) (2) - - - -
================================= =========== =============== ====== ======== ===== =========
Adjusted operating profit/(loss)
before tax 277 38 41 620 (1) (254)
================================= =========== =============== ====== ======== ===== =========
i Includes carried interest.
Adjusted operating profit before tax arising from annuity margin
is further analysed in the table below:
2022 2021
For the year ended 31 December GBPm GBPm
Return on excess assets and margin release 163 172
Asset trading and other optimisation 35 10
Longevity assumption changes 193 125
Mismatching losses(i) (122) (6)
Other assumption and model changes(ii) (19) 10
Experience variances and model improvements (8) 12
Other provisions and reserves (15) 46
============================================ ===== ====
Annuity margin 227 369
============================================ ===== ====
i Mismatching losses of GBP122m for the year ended 31 December
2022 (2021: GBP6m) relates to short-term mismatches between the
value of annuity liabilities and the long-term assets backing these
liabilities due to the impact of market movements.
ii Other assumptions and model changes of GBP(19)m for the year
ended 31 December 2022 (2021: GBP10m) include assumption changes
other than those relating to longevity, including the impact of
expense assumption changes and the impact of improvements to
models.
1.2 (iii) Reconciliation of adjusted operating profit before tax
to IFRS profit after tax
2022 2021
For the year ended 31 December GBPm GBPm
Adjusted operating profit before tax 529 721
Short term fluctuations in investment returns (2,484) (537)
Profit on disposal of business and corporate transactions - 35
Restructuring and other costs (147) (146)
Amortisation and impairment of intangible assets acquired
in business combinations (35) (4)
IFRS profit before tax attributable to non-controlling
interests 19 12
========================================================== ======= =====
IFRS (loss)/profit before tax attributable to equity
holders (2,118) 81
========================================================== ======= =====
Tax credit attributable to equity holders 499 11
========================================================== ======= =====
IFRS (loss)/profit after tax attributable to equity
holders (1,619) 92
========================================================== ======= =====
1.3 Assets under management and administration (AUMA) and net
client flows
1.3 (i) Detailed AUMA and net client flows
2022
-----------------------------------------------------------------------
As at As at
1 January Gross Gross Net client Market/Other 31 December
2022 inflows outflows flows movements 2022
For the year ended 31 December GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Institutional Asset Management 103.1 13.1 (13.8) (0.7) (3.2) 99.2
Wholesale Asset Management 52.7 16.0 (15.5) 0.5 0.7 53.9
Other 0.9 - - - 0.2 1.1
==================================== ========== ======== ========= ========== ============ ============
Total Asset Management 156.7 29.1 (29.3) (0.2) (2.3) 154.2
==================================== ========== ======== ========= ========== ============ ============
Wealth 84.2 8.0 (7.8) 0.2 (1.0) 83.4
Of which PruFund 52.4 5.4 (4.9) 0.5 (0.6) 52.3
Heritage 117.8 0.2 (6.2) (6.0) (17.7) 94.1
Of which Shareholder annuities 22.2 - (1.1) (1.1) (5.7) 15.4
Of which traditional with-profits 81.4 0.2 (5.1) (4.9) (9.0) 67.5
Other Retail and Savings 9.1 0.9 (0.6) 0.3 (0.5) 8.9
Of which PruFund 6.0 0.7 (0.5) 0.2 (0.2) 6.0
==================================== ========== ======== ========= ========== ============ ============
Total Retail and Savings 211.1 9.1 (14.6) (5.5) (19.2) 186.4
==================================== ========== ======== ========= ========== ============ ============
Corporate assets 2.2 - - - (0.8) 1.4
==================================== ========== ======== ========= ========== ============ ============
Group Total(i) 370.0 38.2 (43.9) (5.7) (22.3) 342.0
==================================== ========== ======== ========= ========== ============ ============
i Included in total AUMA of GBP342.0 billion (2021: GBP370.0
billion) is GBP12.7 billion (2021: GBP7.9 billion) of assets under
advice.
2021
-----------------------------------------------------------------------
As at As at
1 January Gross Gross Net client Market/Other 31 December
2021 inflows outflows flows movements 2021
For the year ended 31 December GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Institutional Asset Management 85.5 16.2 (10.4) 5.8 11.8 103.1
Wholesale Asset Management 58.1 14.9 (18.7) (3.8) (1.6) 52.7
Other 0.8 - - - 0.1 0.9
==================================== ========== ======== ========= ========== ============ ============
Total Asset Management 144.4 31.1 (29.1) 2.0 10.3 156.7
==================================== ========== ======== ========= ========== ============ ============
Wealth 79.5 7.1 (8.5) (1.4) 6.1 84.2
Of which PruFund 50.0 3.8 (5.2) (1.4) 3.8 52.4
Heritage 133.7 0.3 (7.2) (6.9) (9.0) 117.8
Of which Shareholder annuities 35.3 - (1.8) (1.8) (11.3) 22.2
Of which traditional with-profits 84.3 0.3 (5.1) (4.8) 1.9 81.4
Other Retail and Savings 8.4 0.6 (0.6) - 0.7 9.1
Of which PruFund 5.5 0.4 (0.4) - 0.5 6.0
==================================== ========== ======== ========= ========== ============ ============
Total Retail and Savings 221.6 8.0 (16.3) (8.3) (2.2) 211.1
==================================== ========== ======== ========= ========== ============ ============
Corporate assets 1.2 - - - 1.0 2.2
==================================== ========== ======== ========= ========== ============ ============
Group Total(i) 367.2 39.1 (45.4) (6.3) 9.1 370.0
==================================== ========== ======== ========= ========== ============ ============
1.3 (ii) AUMA by asset class
2022
On-balance sheet AUMA External AUMA Total
-------------------------------------------------------------------- ------------------------------------------ -----
Shareholder-backed
annuities Total
& other on balance Total
long-term Corporate sheet external Total
With-Profits Unit-linked business assets AUMA Wealth Wholesale Institutional AUMA AUMA
As at 31 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
December
Investment
property 9.1 - 0.9 - 10.0 - 0.8 16.0 16.8 26.8
Reinsurance
assets - - 1.0 - 1.0 - - - - 1.0
Equity
securities
and pooled
investment
funds 69.3 9.7 - 0.2 79.2 3.6 28.6 18.1 50.3 129.5
Loans 1.1 - 1.4 - 2.5 - - 9.4 9.4 11.9
Debt securities 32.3 2.5 12.4 1.2 48.4 2.1 22.7 51.6 76.4 124.8
of which
Corporate 23.5 1.8 8.7 1.2 35.2 2.1 14.4 34.8 51.3 86.5
of which
Government 7.5 0.6 3.1 - 11.2 - 7.1 8.7 15.8 27.0
of which ABS 1.3 0.1 0.6 - 2.0 - 1.2 8.1 9.3 11.3
Derivatives(i) 0.1 - (1.5) (0.1) (1.5) - 0.3 0.3 0.6 (0.9)
Deposits(ii) 14.5 1.2 1.4 - 17.1 - - - - 17.1
Cash and cash
equivalents 1.5 0.3 0.6 0.7 3.1 - 1.5 3.8 5.3 8.4
Other 1.0 0.2 0.2 0.4 1.8 - - - - 1.8
=============== ============ =========== ================== ========= ========== ====== ========= ============= ======== =====
Other AUMA - - - - - - - - - 21.6
=============== ============ =========== ================== ========= ========== ====== ========= ============= ======== =====
Total (iii) 128.9 13.9 16.4 2.4 161.6 5.7 53.9 99.2 158.8 342.0
=============== ============ =========== ================== ========= ========== ====== ========= ============= ======== =====
i Derivatives assets are shown net of derivative
liabilities.
ii Deposits are shown net of unsettled reverse repos.
iii Included in total AUMA of GBP342.0 billion (2021: GBP370.0
billion) is GBP12.7 billion (2021: GBP7.9 billion) of assets under
advice.
2021
On-balance sheet AUMA External AUMA Total
-------------------------------------------------------------------- ------------------------------------------ -----
Shareholder-backed
annuities Total
& other on balance Total
long-term Corporate sheet external Total
With-Profits Unit-linked business assets AUMA Wealth Wholesale Institutional AUMA AUMA
As at 31 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
December
Investment
property 9.4 0.1 1.1 - 10.6 - 0.6 14.6 15.2 25.8
Reinsurance
assets - 0.2 1.5 - 1.7 - - - - 1.7
Equity
securities
and pooled
investment
funds 72.4 10.7 - 0.3 83.4 3.9 21.3 19.5 44.7 128.1
Loans 1.4 - 2.2 - 3.6 - - 11.2 11.2 14.8
Debt securities 42.6 3.3 18.2 1.3 65.4 2.5 29.2 55.4 87.1 152.5
of which
Corporate 30.8 2.1 12.7 1.3 46.9 2.5 17.2 32.0 51.7 98.6
of which
Government 9.7 1.1 4.8 - 15.6 - 10.2 13.2 23.4 39.0
of which ABS 2.1 0.1 0.7 - 2.9 - 1.8 10.3 12.1 15.0
Derivatives(ii) 1.4 - (0.6) - 0.8 - 0.1 (0.2) (0.1) 0.7
Deposits(iii) 11.9 1.3 1.0 - 14.2 - (0.1) - (0.1) 14.1
Cash and cash
equivalents 2.5 0.2 1.0 1.5 5.2 - 1.6 2.6 4.2 9.4
Other 1.4 0.3 0.1 - 1.8 - - - - 1.8
================ ============ =========== ================== ========= ========== ====== ========= ============= ======== =====
Other AUMA 21.1
================ ============ =========== ================== ========= ========== ====== ========= ============= ======== =====
Total(iv) 143.0 16.1 24.5 3.1 186.7 6.4 52.7 103.1 162.2 370.0
================ ============ =========== ================== ========= ========== ====== ========= ============= ======== =====
1.3 (iii) AUMA by geography
The below table illustrates AUMA by geography based on the
country of the underlying client:
2022 2021
As at 31 December GBPbn GBPbn
UK 264.1 299.9
Rest of Europe 52.7 48.3
Asia-Pacific 11.1 9.5
Middle East and Africa 12.7 11.0
Americas 1.4 1.3
======================= ===== =====
Total AUMA(i) 342.0 370.0
======================= ===== =====
i Included in total AUMA of GBP342.0 billion (2021: GBP370.0
billion) is GBP12.7 billion (2021: GBP7.9 billion) of assets under
advice.
1.4 Solvency II capital position
1.4.1 Solvency II overview
The Group is supervised as an insurance group by the Prudential
Regulation Authority. Individual insurance undertakings within the
Group are also subject to the supervision of the Prudential
Regulation Authority (or other supervisory authorities) on a solo
basis under Solvency II.
The Solvency II surplus represents the aggregated capital (own
funds) held by the Group less the SCR. Own funds is the Solvency II
measure of capital available to meet losses, and is based on the
assets less liabilities of the Group, subject to certain
restrictions and adjustments. The SCR is calculated using the
Group's Internal Model, which calculates the SCR as the 99.5th
percentile (or 1-in-200) worst outcome over the coming year, out of
100,000 equally likely scenarios, allowing for the dependency
between the risks the business is exposed to.
1.4.2 Estimated reconciliation of IFRS shareholders' equity to
Group Solvency II own funds
2022 2021
GBPbn GBPbn
IFRS shareholders' equity 2.8 5.3
======================================================== ===== =====
Add back unallocated surplus of the With-Profits Fund 15.1 16.7
Deduct goodwill and intangible assets (1.6) (1.4)
Net impact of policyholder liabilities and reinsurance
assets on Solvency II basis (0.7) (0.3)
Impact of introducing Solvency II risk margin (net of
transitional measures) (1.0) (1.1)
Impact of measuring assets and liabilities in line with
Solvency II principles 0.8 0.2
Recognise own shares 0.1 0.1
Other - -
======================================================== ===== =====
Solvency II excess of assets over liabilities 15.5 19.5
======================================================== ===== =====
Subordinated debt capital 3.0 3.7
Ring-fenced fund restrictions (6.6) (7.8)
Deduct own shares (0.1) (0.1)
Solvency II eligible own funds 11.8 15.3
======================================================== ===== =====
The key items in the reconciliation are explained below:
- Unallocated surplus of the With-Profits Fund: this amount is treated
as a liability under IFRS, but considered surplus assets under
Solvency II.
- Goodwill and intangible assets: these assets are not recognised
under Solvency II as they are not readily available to meet emerging
losses.
- Policyholder liability and reinsurance asset valuation differences:
there are significant differences in the valuation of technical
provisions between IFRS and Solvency II. The most material differences
relate to the exclusion of prudent margins in longevity assumptions
under Solvency II, and also the use of different discount rates,
both in relation to the valuation of annuity liabilities.
- Solvency II risk margin (net of transitional measures): the risk
margin is a significant component of technical provisions required
to be held under Solvency II. These additional requirements are
partially mitigated by transitional measures which allow the impact
to be gradually introduced over a period of 16 years from the
introduction of Solvency II on 1 January 2016.
- Subordinated debt capital: subordinated debt is treated as a liability
in the IFRS financial statements and in determining the excess
of assets over liabilities in the Solvency II balance sheet. However,
for Solvency II own funds, the debt can be treated as capital.
- Ring-fenced fund restrictions: any excess of the own funds over
the solvency capital requirements from the With-Profits Fund is
restricted as these amounts are not available to meet losses elsewhere
in the Group.
1.4.3 Composition of own funds
The Group's total estimated and unaudited own funds are analysed
by Tier as follows:
2022 2021
As at 31 December GBPbn GBPbn
------------------------- ----- -----
Tier 1 (unrestricted) 8.2 11.5
Tier 2 3.0 3.7
Tier 3 0.6 0.1
========================= ===== =====
Total eligible own funds 11.8 15.3
========================= ===== =====
The Group's Tier 2 capital consists of subordinated debt
instruments. The terms of these instruments allow them to be
treated as capital for the purposes of Solvency II. The instruments
were originally issued by Prudential plc, and subsequently
substituted to the Company, as permitted under the terms and
conditions of each applicable instrument, prior to demerger.
The details of the Group's subordinated liabilities are shown in
Note 12. The Solvency II value of the debt differs to the IFRS
carrying value due to a different basis of measurement on the
respective balance sheets.
The Group's Tier 3 capital of GBP0.6bn (2021: GBP0.1bn) relates
to deferred tax asset balances.
1.4.4 Estimated shareholder view of the Solvency II capital
position
The Group focuses on a shareholder view of the Solvency II
capital position, which is considered to provide a more relevant
reflection of the capital strength of the Group.
The estimated and unaudited shareholder Solvency II capital
position for the Group is shown below:
2022 2021
As at 31 December GBPbn GBPbn
------------------------------------------- ----- -----
Shareholder Solvency II eligible own funds 9.3 11.4
Shareholder Solvency II SCR (4.7) (5.2)
=========================================== ===== =====
Solvency II surplus 4.6 6.2
=========================================== ===== =====
Shareholder Solvency II coverage ratio(i) 199% 218%
=========================================== ===== =====
i Shareholder Solvency II coverage ratio has been calculated
using unrounded figures.
The Group's shareholder Solvency II capital position excludes
the contribution to own funds and SCR from the ring-fenced
With-Profits Fund. Further information on the ring-fenced
With-Profits Fund's capital position is provided in Section
1.4.5.
In accordance with the Solvency II requirements, these results
include:
- An SCR which has been calculated using the Group's Internal Model.
- Transitional measures, which are presented assuming a recalculation
as at the valuation date, using management's estimate of the
impact of operating and market conditions.
- A matching adjustment for non-profit annuities, based on approval
from the Prudential Regulation Authority.
- M&G Group Limited and other undertakings carrying out financial
activities consolidated under local sectoral or notional sectoral
capital requirements
Breakdown of the shareholder Solvency II SCR by risk type
The shareholder undiversified capital requirement is presented
by risk type below.
2022 2021
As at 31 December GBPbn GBPbn
---------------------------------------- ----- -----
Equity 1.7 1.7
Property 0.9 0.9
Interest rate 0.6 0.3
Credit 1.6 2.7
Currency 1.1 1.0
Longevity 0.9 1.6
Lapse 0.5 0.3
Operational & expense 1.3 1.4
Sectoral(i) 0.7 0.6
======================================== ===== =====
Total undiversified 9.3 10.5
======================================== ===== =====
Diversification, deferred tax and other (4.6) (5.3)
======================================== ===== =====
Shareholder SCR 4.7 5.2
======================================== ===== =====
i Includes entities included within the Group's Solvency II
capital position on a sectoral or notional sectoral basis, the most
material of which is M&G Group Limited.
Sensitivity analysis of the Group's Solvency II surplus and
shareholder Solvency II coverage ratio
The estimated sensitivity of the Group's Solvency II surplus and
shareholder Solvency II coverage ratio to significant changes in
market conditions are shown below. All sensitivities are presented
after an assumed recalculation of transitional measures.
1.4 Solvency II capital position continued
2022 2021
Shareholder Shareholder
coverage coverage
Surplus ratio Surplus ratio
As at 31 December GBPbn % GBPbn %
----------------------------------- ------- ----------- ------- -----------
Base (as reported) 4.6 199% 6.2 218%
20% instantaneous fall in equity
markets 4.0 187% 5.5 208%
20% instantaneous fall in property
markets 4.2 190% 5.7 211%
50bp reduction in interest rates 4.4 191% 6.1 208%
100bp widening in credit spreads 4.3 196% 5.9 218%
20% credit asset downgrade(i) 4.4 194% 5.9 211%
=================================== ======= =========== ======= ===========
i Average impact of one full letter downgrade across 20% of
assets exposed to credit risk.
1.4.5 Estimated With-Profits Fund view of the Solvency II
capital position
The With-Profits Fund view of the Solvency II capital position
represents the standalone capital strength of the Group's
ring-fenced With-Profits Fund. This view of Solvency II capital
takes into account the assets, liabilities, and risk exposures
within the ring-fenced With-Profits Fund, which includes the WPSF
and DCPSF.
The estimated and unaudited Solvency II capital position for the
Group under the With-Profits Fund view is shown below:
2022 2021
As at 31 December GBPbn GBPbn
With-Profits Fund Solvency II own funds 9.1 11.6
With-Profits Fund Solvency II SCR (2.5) (3.8)
================================================ ===== =====
With-Profits Fund Solvency II surplus 6.6 7.8
================================================ ===== =====
With-Profits Fund Solvency II coverage ratio(i) 362% 302%
================================================ ===== =====
i With-Profits Fund Solvency II coverage ratio has been
calculated using unrounded figures.
1.4.6 Estimated regulatory view of the Solvency II capital
position
The estimated and unaudited Solvency II capital position for the
Group under the regulatory view is shown below:
2022 2021
As at 31 December GBPbn GBPbn
Solvency II own funds 11.8 15.3
Solvency II SCR (7.2) (9.1)
============================== ===== =====
Solvency II surplus 4.6 6.2
============================== ===== =====
Solvency II coverage ratio(i) 164% 168%
============================== ===== =====
i Solvency II coverage ratio has been calculated using unrounded
figures. On a regulatory approved transition measures on technical
provisions basis, the surplus is GBP4.8bn (2021: GBP6.2bn) and the
solvency coverage ratio is 168% (2021: 168%).
The results include transitional measures, which are presented
assuming a recalculation as at the valuation date, using
management's estimate of the impact of operating and market
conditions. As at 31 December 2022, the recalculated transitional
measures do not align to the latest approved regulatory position
and therefore the estimated and unaudited Solvency II capital
position differs from the position disclosed in the formal
regulatory Quantitative Reporting Templates and Group Solvency and
Financial Condition Report of the same date. As at 31 December
2021, the recalculation was approved for the reporting date and the
positions were aligned.
1.5 Capital generation
The level of surplus capital is an important financial
consideration for the Group. Capital generation measures the change
in surplus capital during the reporting period, and is therefore
considered a key measure for the Group. It is integral to the
running and monitoring of the business, capital allocation and
investment decisions, and ultimately the Group's dividend
policy.
The overall change in Solvency II surplus capital over the
period is analysed as follows:
Total capital generation is the total change in Solvency II
surplus capital before dividends and capital movements and capital
generated from discontinued operations.
Operating capital generation is the total capital generation
before tax, adjusted to exclude market movements relative to those
expected under long-term assumptions and to remove other
non-operating items, including shareholder restructuring and other
costs as defined under adjusted operating profit before tax. It has
two components:
i. Underlying capital generation, which includes: the underlying
expected surplus capital from the in-force life insurance business;
the change in surplus capital as a result of writing new life
insurance business; the adjusted operating profit before tax
and associated regulatory capital movements from Asset Management;
and other items, including head office expenses and debt interest
costs.
ii. Other operating capital generation, which includes non-market
related experience variances, assumption changes, modelling changes
and other movements.
Dividends and capital movements primarily represent external
dividends paid to shareholders and changes to the capital structure
of the Group, such as issuing or repaying debt instruments. Also
included within capital movements are the Solvency II impact of the
Group's share-based payment awards over and above the amount
expensed in respect of those awards, and the surplus utilised or
generated from transactions relating to the acquisition of business
as defined by IFRS.
The expected surplus capital from the in-force life insurance
business is calculated on the assumption of real-world investment
returns, which are determined by reference to the risk-free rate
plus a risk premium based on the mix of assets held for the
relevant business. For with-profits business, the assumed average
return over the risk-free rate was 4.10% for the year ended 31
December 2022 (2021: 4.00%). For annuity business, the assumed
average return on assets backing capital was 2.19% for the year
ended 31 December 2022 (2021: 1.15%).
The Group's capital generation results in respect of the years
ended 31 December 2022 and 31 December 2021 are shown below
alongside a reconciliation of the total movement in the Group's
Solvency II surplus. The reconciliation is presented showing the
impact on the shareholder Solvency II own funds and SCR, which
excludes the contribution to own funds and SCR from the Group's
ring-fenced With-Profits Fund. The shareholder Solvency II capital
position, and how this reconciles to the regulatory capital
position, is described in detail in Section 1.4.
The capital generation results and comparatives have adopted a
basis of preparation consistent with the IFRS consolidated
financial statements.
Retail and Corporate
Asset Management Savings Centre Total
------------------ ------------ ------------ --------------
2022 2021 2022 2021 2022 2021 2022 2021
For the year ended 31 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
December
------------------------------ -------- -------- ----- ----- ----- ----- ------- -----
Underlying capital generation 246 313 641 459 (259) (288) 628 484
Other operating capital
generation (33) 15 194 621 32 (3) 193 633
============================== ======== ======== ===== ===== ===== ===== ======= =====
Operating capital generation 213 328 835 1,080 (227) (291) 821 1,117
============================== ======== ======== ===== ===== ===== ===== ======= =====
Market movements (1,225) 917
Restructuring & other (166) (181)
Tax 173 (31)
Total capital generation (397) 1,822
============================== ======== ======== ===== ===== ===== ===== ======= =====
A reconciliation of the movement in Group Solvency II surplus is
presented below.
2022 2021
----------------------------- -----------------------------
Own funds(i) SCR(i) Surplus Own funds(i) SCR(i) Surplus
For the year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------------- ------------ ------ ------- ------------ ------ -------
Underlying capital generation
============ ====== ======= ============ ====== =======
Asset Management Asset Management 268 (22) 246 308 5 313
================= =============================== ============ ====== ======= ============ ====== =======
Asset management underlying
capital generation 268 (22) 246 308 5 313
================================================= ============ ====== ======= ============ ====== =======
Retail and
Savings Wealth 214 (59) 155 117 (68) 49
=================
of which with-profits 233 (53) 180 128 (68) 60
- in-force 187 29 216 169 (57) 112
- new business 46 (82) (36) (41) (11) (52)
of which Platform and
advice (21) (4) (25) (11) - (11)
Heritage 339 164 503 185 193 378
of which with-profits 138 54 192 115 27 142
of which annuity and
other 201 110 311 70 166 236
Other Retail and Savings 43 (60) (17) 36 (4) 32
================================================= ============ ====== ======= ============ ====== =======
Retail and savings
underlying capital generation 596 45 641 338 121 459
================================================= ============ ====== ======= ============ ====== =======
Interest and head office
Corporate cost (267) 8 (259) (280) (8) (288)
================= =============================== ============ ====== ======= ============ ====== =======
Underlying capital generation 597 31 628 366 118 484
================================================== ============ ====== ======= ============ ====== =======
Other operating capital generation 194 (1) 193 217 416 633
of which Asset Management 7 (40) (33) 5 10 15
of which Retail and
Savings 188 6 194 201 420 621
of which Corporate
Centre (1) 33 32 11 (14) (3)
================================================= ============ ====== ======= ============ ====== =======
Operating capital generation 791 30 821 583 534 1,117
============ ====== ======= ============ ====== =======
Market movements (2,259) 1,034 (1,225) 739 178 917
Restructuring and other (173) 7 (166) (167) (14) (181)
Tax 652 (479) 173 16 (47) (31)
Total capital generation (989) 592 (397) 1,171 651 1,822
================================================== ============ ====== ======= ============ ====== =======
Dividends and capital movements (1,151) (15) (1,166) (410) (24) (434)
================================================== ============ ====== ======= ============ ====== =======
Total (decrease)/increase in
Solvency II surplus (2,140) 577 (1,563) 761 627 1,388
================================================== ============ ====== ======= ============ ====== =======
i Own funds and SCR movements shown as per the shareholder
Solvency II capital position, and do not include the own funds and
SCR in respect of the ring-fenced With-Profits Fund.
1.6 Financial ratios
Included in this section are details of how some of the
financial ratios used to help analyse the performance of the Asset
Management business are calculated.
1.6 (i) Cost/income ratio
Cost/income ratio is a measure of cost efficiency which analyses
costs as a percentage of revenue.
2022 2021
For the year ended 31 December GBPm GBPm
Total Asset Management operating expenses 763 672
Adjustment for revaluations(i) 2 (3)
==================================================== ===== ====
Total Asset Management adjusted costs 765 669
Total Asset Management fee based revenue 1,051 976
Less: performance fees and carried interest (56) (23)
==================================================== ===== ====
Total Asset Management underlying fee-based revenue 995 953
==================================================== ===== ====
Cost/income ratio (%) 77% 70%
==================================================== ===== ====
i Reflects the revaluation of provisions relating to performance
based awards that are linked to underlying fund performance.
M&G Group Limited hold units in the underlying funds to hedge
the exposure on these awards.
1.6 (ii) Average fee margin
This represents the average fee revenue yield on fee business
and demonstrates the margin being earned on the assets we manage or
administer.
2022 2021
---------------------------------- ----------------------------------
Average Fee Average Fee
AUMA(i) Revenue(ii) margin(ii) AUMA(i) Revenue(ii) margin(ii)
For the year ended 31 December GBPbn GBPm bps GBPbn GBPm bps
Wholesale Asset Management 52 299 58 53 316 59
Institutional Asset Management 102 390 38 93 334 36
Internal 157 306 19 157 303 19
=============================== ======== =========== =========== ======== =========== ===========
Total Asset Management 311 995 32 303 953 32
=============================== ======== =========== =========== ======== =========== ===========
i Average AUMA represents the average total market value of all
financial assets managed and administered on behalf of clients
during the financial period. Average AUMA is calculated using a
13-point average of monthly closing AUMA for full-year periods.
ii Fee margin is calculated by annualising underlying fee-based
revenues earned, which excludes performance fees, in the period
divided by average AUMA for the period. Fee margin relates to the
total margin for internal and external revenue.
1.7 Credit risk
The Group's exposure to credit risk primarily arises from the
annuity portfolio, which holds large amounts of investments on
which a certain level of defaults and downgrades are expected.
While the with-profits and unit-linked funds have large holdings
of assets subject to credit risk, the shareholder results of the
Group are not directly exposed to credit defaults on assets held in
these components. The direct exposure of the Group's shareholders'
equity to credit default risk in the "Other" component is small in
the context of the Group. However, the shareholder is indirectly
exposed to credit risk on these components through lower
shareholder transfers in respect of the with-profits business and
lower charges levied in respect of the "unit-linked" and "other"
components of the business.
Exposure of debt securities by sector
The exposure of annuities and other long term business to debt
securities is analysed below by sector:
2022 2021
As at 31 December GBPm GBPm
Financial 3,987 5,588
Government 3,085 4,861
Real Estate 1,709 2,830
Utilities 1,793 2,467
Consumer 613 817
Industrial 425 617
Communications 274 365
Other 513 721
================== ====== ======
Total 12,399 18,266
================== ====== ======
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END
FR DZGGFKLNGFZG
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March 09, 2023 02:00 ET (07:00 GMT)
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