TIDMMNG
RNS Number : 9961M
M&G PLC
20 September 2023
20 September 2023
M&G plc half year 2023 results
GOOD OPERATIONAL AND FINANCIAL PERFORMANCE WITH PROGRESS AGAINST
CORE STRATEGIC PRIORITIES
Net client Adjusted Operating Operating Dividends Shareholder
flows Profit Capital Generation per Share Solvency II
excl. Heritage ratio
GBP390m GBP505m 6.5p
GBP0.7bn 199%
HY 2022: GBP298m HY 2022: GBP433m HY 2022: 6.2p
HY 2022: GBP1.2bn FY 2022: 199%
Andrea Rossi, Group Chief Executive Officer, said:
"Today's results demonstrate the underlying strength of our
business model, the resilience of our balance sheet, the
attractiveness of our propositions as well as the hard work and
commitment of our colleagues to deliver for our clients and execute
on our strategic ambitions.
"Against the backdrop of ongoing market volatility and
uncertainty we have made progress against all three pillars of the
strategy that we launched in March - maintaining our financial
strength through capital discipline; mobilising the Transformation
programme to simplify our business and improve client outcomes; and
delivering growth with positive net client inflows.
"As we look ahead, I remain confident we have the right
ingredients for success that will enable us to continue to deliver
attractive outcomes for our clients and shareholders. We are,
however, not complacent and will continue to focus on ensuring that
our balance sheet remains strong and we deliver on our purpose and
strategic objectives."
Growth
- Positive net client flows, excluding Heritage, of GBP0.7 billion (30
June 2022: GBP1.2 billion). Net flows remain positive into a third consecutive
year despite known headwinds from UK institutional clients.
- Gross inflows to PruFund UK of GBP3.3 billion (30 June 2022: GBP2.5 billion)
are the highest for a six-month period since 2019. The launch of all
PruFund solutions on our M&G Wealth Platform will support further reach
of propositions and underpin flows in H2 and beyond.
- Re-entered the Defined Benefit pension market through two targeted deals
with a combined premium of GBP617 million which maximise the synergies
of our business model and provide a third avenue of growth along with
Asset Management and Wealth.
- Further momentum in Wholesale Asset Management with net client inflows
of GBP1.3 billion (30 June 2022: GBP0.8 billion) and continued strong
investment performance. As of 30 June 2023, 70% of our mutual funds ranked
in the upper two performance quartiles over one year (31 December 2022:
68%) and 71% over three years (31 December 2022: 67%).
- Net client inflows of GBP0.7 billion in Private Markets; a core area
of our Asset Management business accounting for c. 40% of total revenues,
with resilient flows and attractive average margins of 55 bps.
- Expected redemptions from UK clients as a result of the mini budget with
net client outflows of GBP1.4 billion (31 December 2022: outflows of
GBP0.7 billion) in Institutional Asset Management business but encouraging
progress with positive net flows in Europe and the in-housing of a GBP5.5
billion Asian mandate from the internal client.
Transformation and Simplification
- Good momentum in the first phase of our Transformation programme, creating
a leaner and more efficient organisation and improving our ability to
serve clients, reduce costs and unlock growth.
- Cost savings initiatives are expected to deliver a GBP50 million reduction
on our 2023 cost base.
- Completion of voluntary redundancy scheme with approximately 200 colleague
exits in the final quarter of 2023 and early 2024.
- Appointment of Clive Bolton (CEO, Life Insurance) and Caroline Connellan
(CEO, Wealth), who alongside Joseph Pinto (CEO, Asset Management), now
provide dedicated leadership for each of our three business areas.
Financial strength
- Adjusted operating profit before tax of GBP390 million up 31% (30 June
2022: GBP298 million), reflecting the strength of our diversified businesses.
- IFRS profit before tax of GBP75 million (30 June 2022: IFRS loss before
tax of GBP1,143 million) following a reduction in losses in short-term
fluctuations in investment returns .
- Operating capital generation of GBP505 million up 17% (30 June 2022:
GBP433 million), with a strong underlying contribution of GBP352 million
(30 June 2022: GBP386 million) and higher management actions .
- These results demonstrate our continued focus on proactively managing
our capital base as we remain on track to generate our target of GBP2.5
billion operating capital generation by December 2024 - 18 months into
this three-year period we have delivered 53% of the target.
- Shareholder Solvency II coverage ratio remained strong, and above the
top end of our target range, at 199% (31 December 2022: 199%) and our
balance sheet remains conservatively positioned, as we experienced no
defaults in the first half of the year.
- The interim ordinary dividend of 6.5 pence per share is up 5%. This
means that since listing in 2019, M&G will have returned over GBP2.5
billion to shareholders. The dividend is payable on 3 November 2023.
Outlook
- Our focus is to continue the good progress we have made over the last
six months in transforming M&G.
- M&G is well positioned to navigate the current uncertain economic climate
due to its diversified business model, international footprint, compelling
products and services, investment capabilities and expertise.
- Our results for the first half of 2023 underpin our confidence in the
delivery of our strategic objectives and financial targets.
- We continue to focus on our programme of business simplification and
transformation, aligned to client-driven values, which will unlock growth
and enable us to invest selectively, focusing our disciplined approach
to capital allocation.
- We remain on track to achieve our operating capital generation target
of GBP2.5 billion by 2024, and we are making good progress on our 2025
financial targets:
- Generate GBP200 million of cost savings, gross of inflation;
- Reduce core Asset Manager cost to 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, excluding Corporate Centre(i)
; and
- Reduce our leverage ratio to below 30%.
- Our dividend policy of delivering stable or growing dividends to our
shareholders remains unchanged.
(i) Based on IFRS 4 Insurance Contracts and financial
segmentation as relevant at the time of the 2022 full year
results.
For the six For the
months ended year ended
30 June 31 December
Performance highlights(i) 2023 2022 2022
--------------------------------------------------- ------ ------- ------------
Adjusted operating profit before tax (GBPm)(ii) 390 298 625
IFRS profit/(loss) after tax (GBPm)(ii) 75 (1,143) (2,055)
Assets under management and administration (GBPbn) 332.8 348.9 342.0
Net client flows (excluding Heritage) (GBPbn) 0.7 1.2 0.3
Operating capital generation (GBPm) 505 433 821
Total capital generation (GBPm) 73 24 (397)
Shareholder Solvency II coverage ratio (%) 199% 214% 199%
(i) Definitions of key performance measures are provided in the
Supplementary information section of the Interim Financial
Report.
(ii) Comparative numbers restated as a result of the
introduction of IFRS 17 (Insurance Contracts) and IFRS 9 (Financial
Instruments).
Enquiries:
Media Investors/Analysts
Irene Chambers +44(0)7825 696815 Luca Gagliardi +44(0)20 8162 7307
Irene.Chambers@mandg.com Luca.Gagliardi@mandg.com
Ben Davies +44 (0)20 8162 2174
Ben.Davies@mandg.com
Notes to editors
1. The condensed consolidated financial statements have been
prepared in accordance with IAS 34 Interim Financial Reporting
('IAS 34'), as adopted by the UK, and the Disclosure and
Transparency Rules of the Financial Conduct Authority based on the
consolidated financial statements of M&G plc.
2. The 2022 comparative results, which were previously prepared
under IFRS 4, have been restated following the adoption of IFRS 17
Insurance Contracts and IFRS 9 Financial Instruments from 1 January
2023.
3. On 20 July 2023 we published indicative restated adjusted
operating profit before tax for the year ended 31 December 2022.
Since then we have revised the calculation of the amortisation
factor applied to the with-profits Contractual Service Margin which
is the unearned profit on this business and made some refinements
to our adjusted operating methodology. As a result of these changes
the indicative restated adjusted operating profit for the year end
31 December 2022 published previously of GBP552 million has since
been revised to GBP625 million.
4. The shareholder view and regulatory view of the Solvency II
coverage ratio as at 30 June 2023 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, and include the impact of the Own
Funds restriction.
5. Total number of M&G plc shares in issue as at 30 June 2023 was 2,374,712,121.
6. A live webcast of the Half Year 2023 Results presentation and
Q&A will be hosted by Andrea Rossi (CEO) and Kathryn McLeland
(CFO) on Wednesday 20th September at 09:00 BST. Register to join
at: https://mngresults.connectid.cloud/register
Or dial in by phone in the UK: 0800 358 1035 or +44 20 4587 0498
Access code: 291856
For global dial-in numbers see: https:/ / w
ww.netroadshow.com/events/global-numbers?confid=55138
The Results presentation will be available to download from
07:00 BST on our Results, reports and presentations web page:
https:/ / w
ww.mandg.com/investors/results-reports-and-presentations
Dividend to be paid in November 2023
Ex-dividend date 28 September 2023
Record date 29 September 2023
Payment of dividend 3 November 2023
About M&G plc
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 30 June
2023, we had GBP332.8 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
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
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.
Management statement
We are pleased with our results for the first half of 2023 and
the good progress we have made on the three key priorities for the
business that we launched in March: maintaining our financial
strength, simplifying our business and delivering sustainable
growth. Operating capital generation of GBP505 million and adjusted
operating profit before tax of GBP390 million have increased by 17%
and 31%, respectively, compared to the first half of 2022.
Operating capital generation of GBP505 million (30 June 2022:
GBP433 million) is underpinned by continuing strong underlying
capital generation and increased capital generated by management
actions.
Adjusted operating profit before tax of GBP390 million (30 June
2022: GBP298 million) reflects a strong contribution from our
Retail and Savings segment driven by an improved result from
with-profits business and higher returns from excess assets in the
shareholder annuity portfolio following the rise in interest rates.
Higher investment returns from our treasury activities improved our
Corporate Centre results, which more than offset a slight reduction
in adjusted operating profit from our Asset Management segment.
Our IFRS result is a profit after tax attributable to equity
holders in the period of GBP75 million (30 June 2022: GBP1,143
million loss) following a reduction in losses on short-term
fluctuations in investment returns. Increases in yields in the
period have not been as significant as the prior period, resulting
in lower fair value losses on the interest rate hedging we have in
place to protect our Solvency II capital position and improvements
in the expected long term return on surplus assets in annuity
portfolio. IFRS results are reported for the first time on the
basis of the new insurance accounting standard, IFRS 17, marking a
significant milestone for our business and the insurance industry
as a whole. The comparative periods have been restated accordingly
.
Delivering profitable growth
We have achieved net client inflows (excluding Heritage) of
GBP0.7 billion for the six months to 30 June 2023 compared to net
client inflows of GBP1.2 billion over the first six months of 2022.
We more than offset the anticipated redemptions from UK
institutional clients triggered by the mini-budget crisis in
September 2022 by achieving net client inflows in both Wholesale
Asset Management and Wealth.
After returning to net client inflows in 2022, momentum in
Wholesale Asset Management accelerated further, with net client
inflows of GBP1.3 billion for the first half of 2023, compared to
GBP0.8 billion for the six months to 30 June 2022. As of 30 June
2023, 70% of our wholesale funds ranked in the upper two
performance quartiles over one year (31 December 2022: 68%) and 71%
over three years (31 December 2022: 67%). The positive trend in
Wholesale Asset Management follows the review and improvement of
our propositions in respect of client demands and pricing
structures, and leveraging a high quality offering diversified
across equities, fixed income and developed and emerging
markets.
Our Institutional Asset Management business saw net client
outflows of GBP1.4 billion (30 June 2022: inflows of GBP0.3
billion) driven by the exceptional and expected redemptions from UK
clients triggered by the mini-budget crisis. Despite these known
headwinds in the UK, we have continued to expand our presence in
Europe, winning large mandates in the Netherlands and Switzerland,
where amongst others, we secured a GBP0.8 billion mandate from the
Swiss Investment Fund for Emerging Markets. Our expertise in
private markets, which offers private credit, structured credit,
impact & private equity, real estate and infrastructure
offerings, is a key component of our institutional investment
capability and generated over 40% of Asset Management revenue, at
an average fee of 55 bps.
Wealth and Other Retail and Savings achieved net client inflows
of GBP0.8 billion (30 June 2022: GBP0.1 billion), driven by strong
gross inflows to PruFund of GBP3.8 billion for the first half of
2023, which are the highest for a six month period since 2019. In
May we launched PruFund Growth, PruFund Cautious and PruFund Risk
Managed on our M&G Wealth platform, further expanding the reach
of this unique proposition, while improving and digitising advisor
journeys. The wider PruFund range being now more accessible to
advisors will support flows in the second half of the year and
beyond. We have grown our tied-advisors network to over 500 people,
achieved through organic recruiting, in-house training, and the
completion of the Continuum acquisition.
In our FY 2022 results announcement, we outlined our intention
to offer innovative solutions to selected defined benefit pension
funds given the marked change in market conditions with UK pensions
schemes fundamentally reassessing their strategies. We are
delighted that, within the UK, we have closed two bulk-purchase
annuity transactions in September 2023, for a combined premium of
GBP617 million (not included in these HY results), one of those
being an internal Defined Benefit pension scheme of the Group.
Re-entering this market formed a key component of our strategy and
represents the first deals we have completed since closing the
annuity book to new business in 2016. In doing so, we have opened a
third channel to bring growth into M&G alongside Asset
Management and Wealth.
Simplifying our business
We made good progress over the first half of the year under our
transformation programme to deliver a leaner and more efficient
organisation to support better outcomes for our clients and expect
to achieve GBP50 million of cost savings, gross of inflation, by
the end of the year. We have already started to roll out a new
target operating model and this is reflected in our decision to
reshape our leadership team and rationalise our location footprint
by expanding our presence in low cost locations through offshoring,
while reducing our presence in London. We offered voluntary
redundancy to colleagues and accepted applications for redundancy
from approximately 200 colleagues who will leave the business in
the final quarter of 2023 and early 2024.
We also achieved a significant milestone in the first half of
the year when we successfully migrated nearly 2 million clients to
a new policy administration system. This allows us to deliver a
better experience to clients and at the same time, decommission
legacy IT and lower costs.
Maintaining our financial strength
Operating capital generation increased to GBP505 million (30
June 2022: GBP433 million), driven by strong underlying capital
generation (albeit down 9% on 2022). We are well positioned to
achieve our target of GBP2.5 billion of cumulative operating
capital generation by 2024 and have achieved 53% of the target we
committed to within the first 18 months.
Our shareholder Solvency II coverage ratio remains strong at
199% (31 December 2022: 199%). Total capital generation during the
period, net of a GBP280 million Own Funds restriction, was GBP73
million (30 June 2022: GBP24 million). This demonstrates our
continued focus on proactively and efficiently generating capital,
and our strategy of hedging the impact of market volatility on the
Solvency II balance sheet.
The strength of our financial position and the capital generated
allows us to declare an interim ordinary dividend of 6.5 pence per
share (30 June 2022: 6.2 pence per share), payable on 3 November
2023.
Our leverage ratio, defined as the nominal value of debt as a
percentage of the shareholder view of M&G plc's Solvency II
unrestricted own funds at 30 June 2023, is 36% (31 December 2022:
35%). The increase in the ratio is due to the fall in unrestricted
own funds.
Leadership changes
In order to drive the growth agenda for our Wealth and Life
Insurance operations, and following the decision of Clare
Bousfield, Retail and Savings CEO, to leave the business, we
welcome Caroline Connellan as our new Wealth CEO, and Clive Bolton
as our new Life Insurance CEO, both joining us this month. Caroline
has over 25 years of experience in retail financial services, with
a proven track record of transforming and growing wealth management
businesses with a strong customer-centric focus. Clive has worked
for over 30 years in financial services, and comes with experience
of developing successful businesses that provide innovative
savings, retirement, and later life solutions.
As previously announced, Joseph Pinto joined us as CEO of our
Asset Management business in March 2023, following Jack Daniels'
retirement. Rob Lewis joined us as our new Chief Auditor in April
2023, Rob is a highly-skilled audit professional and an experienced
leader. Charlotte Heiss has also joined as General Counsel and
Company Secretary, Charlotte has over 20 years' legal and
governance experience and has advised a number of blue-chip
companies across a range of sectors.
Outlook
Our focus is to continue the good progress we have made over the
first half of 2023 in transforming M&G.
M&G is well positioned to navigate the current uncertain
economic climate due to its diversified business model,
international footprint, compelling products and services,
investment capabilities and expertise.
Our results for the first half of 2023 underpin our confidence
in the delivery of our core priorities and financial targets.
We continue to focus on our programme of business simplification
and transformation, aligned to client-driven values, which will
unlock growth and enable us to invest selectively focusing our
disciplined approach to capital allocation.
We remain on track to achieve our operating capital generation
target of GBP2.5 billion by end 2024, and we are making good
progress on our 2025 financial targets:
- Generate GBP200 million of cost savings, gross of inflation; expect
to achieve GBP50 million by the end of the year;
- 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, excluding Corporate Centre(i)
; and
- Reduce our leverage ratio to below 30%.
Our dividend policy of delivering stable or growing dividends to
our shareholders remains unchanged.
(i) Based on IFRS 4 Insurance Contracts and financial
segmentation as relevant at the time of the 2022 full year
results.
Restatement of comparative information for IFRS results and adjusted operating
profit before tax
On 1 January 2023 we adopted the new accounting standards IFRS 17 Insurance
Contracts and IFRS 9 Financial Instruments and as a result the IFRS comparative
results have been restated for the retrospective application of the standards.
For details of the impact of the new standards refer to Note 1.3 of the
condensed consolidated financial statements. The adoption of the new standards
has led to changes to our adjusted operating profit methodology. As a result,
adjusted operating profit before tax for the year ended 31 December 2022
and the six months ended 30 June 2022 has been restated from that reported
previously. The restatement is driven by the change in profit recognition
profile of the annuities and with-profits business in the Retail and Savings
segment as a result of the new insurance standard and also other changes
to our adjusted operating profit methodology, unrelated to the adoption
of IFRS 17, which were implemented at the same time. These unrelated changes
to our adjusted operating methodology are to classify foreign exchange
movements on non-GBP denominated subordinated debt and fair value movements
on strategic investments as non-operating items. The changes to our adjusted
operating profit methodology are discussed further in Note 3 of the condensed
consolidated financial statements. This includes the new adjusted operating
profit methodology for our IFRS 17 in-scope business.
On 20 July 2023 we published indicative restated adjusted operating profit
before tax for the year ended 31 December 2022. Since then we have revised
the calculation of the amortisation factor applied to the with-profits
CSM (Contractual Service Margin) which is the unearned profit on this business.
Our IFRS 17 accounting policies are set out in Note 1 of the condensed
consolidated financial information. We have also made refinements to our
adjusted operating profit methodology for annuities and with-profits business.
These refinements have been made so that adjusted operating profit better
reflects the longer term performance of the Group and are detailed in Note
3 to the condensed consolidated financial statements. As a result of the
revised CSM calculation and the refinements of our adjusted operating profit
methodology the indicative restated adjusted operating profit for the year
ended 31 December 2022 published previously of GBP552 million has since
been revised to GBP625 million.
Overview of Group results
Adjusted operating profit before tax
The following table shows adjusted operating profit before tax
split by segment. Results for the comparative period have been
marked as restated where they have been impacted by changes in
adjusted operating profit methodology in the period as set out
above and to reflect the retrospective application of IFRS 17,
'Insurance Contracts' and IFRS 9, 'Financial Instruments' from 1
January 2023, as outlined below in Note 1.3.1.
For the
For the six year
months ended ended
30 June 31 December
Restated Restated
GBPm 2023 2022 2022
Asset Management 118 124 264
===================================== ===== ======== ============
Wealth 91 93 158
Heritage 279 201 441
Other 4 - 19
===================================== ===== ======== ============
Retail and Savings 374 294 618
===================================== ===== ======== ============
Corporate Centre (102) (120) (257)
===================================== ===== ======== ============
Adjusted operating profit before tax 390 298 625
===================================== ===== ======== ============
Adjusted operating profit before tax increased to GBP390 million
in the six months to 30 June 2023 (30 June 2022: GBP298
million).
In Asset Management, the reduction in adjusted operating profit
before tax to GBP118 million (30 June 2022: GBP124 million)
includes an increase in investment return from GBP(4) million to
GBP13 million which is more than offset by an increase in the
operational cost base primarily due to the acquisition of
responsAbility.
In Retail and Savings the return from Wealth PruFund and
Heritage traditional with-profits business was up GBP46 million to
GBP248 million benefiting from a higher opening CSM balance due to
an increase in yields over 2022. The return on shareholder
annuities increased by GBP45 million to GBP151 million driven by
upward movements in yields and the expected return on excess
assets. This is partly offset by increase in losses in Wealth
Platform and Advice business of GBP11 million and Other Wealth of
GBP7 million due to the increase in cost bases as a result of
inflation. This has led to an increase in Retail and Savings
adjusted operating profit of GBP80 million to GBP374 million (30
June 2022: GBP294 million).
The Corporate Centre has benefitted from higher investment
return from our treasury function, of GBP30 million (30 June 2022:
GBP3 million) as a result of higher variable-linked interest rates.
This was partly offset by an increase in Head Office expenses
linked to inflation.
Adjusted operating profit before tax to IFRS profit/(loss)
before tax
The following table shows a reconciliation of adjusted operating
profit before tax to IFRS profit/(loss) after tax:
For the six For the
months ended year ended
30 June 31 December
Restated Restated
GBPm 2023 2022 2022
Adjusted operating profit before tax 390 298 625
============================================================ ===== ======== ============
Short-term fluctuations in investment returns (177) (1,614) (2,858)
Mismatches arising on application of IFRS 17 (40) (50) (244)
Amortisation of intangible assets acquired in business
combinations (6) (3) (35)
Restructuring and other costs(i) (74) (64) (147)
============================================================ ===== ======== ============
IFRS profit/(loss) before tax and non-controlling interests
attributable to equity holders 93 (1,433) (2,659)
============================================================ ===== ======== ============
IFRS profit attributable to non-controlling interests 8 8 19
============================================================ ===== ======== ============
IFRS profit/(loss) before tax attributable to equity
holders 101 (1,425) (2,640)
============================================================ ===== ======== ============
Tax (charge)/credit attributable to equity holders (26) 282 585
============================================================ ===== ======== ============
IFRS profit/(loss) after tax attributable to equity
holders 75 (1,143) (2,055)
============================================================ ===== ======== ============
(i) Restructuring and other costs excluded from adjusted
operating profit relate to transformation costs allocated to the
shareholder. These differ to restructuring costs included in the
analysis of administrative and other expenses in Note 6 which
include costs allocated to the policyholder.
IFRS profit/(loss) after tax
The IFRS result after tax attributable to equity holders is a
profit of GBP75 million compared to a GBP1,143 million loss for the
six months ended 30 June 2022. The favourable movement reflects a
reduction in losses from short-term fluctuations in investment
returns to GBP177 million in the period (30 June 2022: GBP1,614
million loss).
Market conditions have led to lower losses from short-term
fluctuations in investment returns in the current period, with the
impact of rising interest rates in the six months to 30 June 2023
not as significant as the six months to 30 June 2022. These losses
primarily comprise a GBP118 million loss (30 June 2022: GBP602
million loss) on interest rate swaps purchased to protect PAC's
Solvency II capital position against falls in interest rates and a
GBP22 million loss (30 June 2022: GBP817 million loss) from the
difference in actual and long-term expected investment return on
surplus assets backing the annuity portfolio, both of which have
significantly reduced due to the smaller increase in yields in 2023
compared to 2022. There were also losses of GBP101 million (30 June
2022: GBP130 million gain) on the hedging instruments held to
protect the Solvency II capital position from falling equity
markets, which moved to a loss as a result of increases in the US
and European equity markets.
In the half year to 30 June 2023, restructuring and other costs
of GBP74 million mainly relate to transformation costs of GBP40
million, GBP15 million of investment spend in building out
capability in our Asset Management business and GBP11 million for
the development of the M&G Wealth platform business. This
compares to GBP64 million of restructuring costs for the half year
to 30 June 2022.
The equity holders tax charge for the six months ended 30 June
2023 was GBP26 million (30 June 2022: tax benefit of GBP282
million) representing an effective tax rate of 25.7% (30 June 2022:
19.8%). The equity holders' effective tax rate of 25.7% was higher
than the UK statutory rate of 23.5% (30 June 2022: 19.0%) primarily
due to non-deductible expenses for the period.
Capital generation
The following table shows an analysis of total capital
generation:
For the
For the six year
months ended ended
30 June 31 December
GBPm 2023 2022 2022
----------------------------------- ------- ------ ------------
Asset Management 119 142 246
Retail and Savings 344 370 641
Corporate Centre (111) (126) (259)
=================================== ======= ====== ============
Underlying capital generation 352 386 628
=================================== ======= ====== ============
Other operating capital generation 153 47 193
=================================== ======= ====== ============
Operating capital generation 505 433 821
=================================== ======= ====== ============
Market movements (141) (482) (1,225)
Restructuring and other costs (61) (71) (166)
Tax 50 144 173
Eligible Own Funds restriction (280) - -
=================================== ======= ====== ============
Total capital generation 73 24 (397)
=================================== ======= ====== ============
Total capital generation was GBP73 million for the six months
ended 30 June 2023 (30 June 2022: GBP24 million), reflecting
benefits from changes in the strategic asset allocation in the
With-Profits Fund and an improved result from market movements,
offset by the impact of the eligible Own Funds restriction. There
are limits, prescribed by the regulator, on the amount of different
types of Own Funds that can be used to demonstrate solvency. As at
30 June 2023, the sum of capital classed as Tier 2 and Tier 3
exceeds 50% of the regulatory Group Solvency Capital Requirement by
GBP280 million. While this capital remains available to the Group,
as it is above this regulatory threshold Own Funds must be
restricted by this amount to determine eligible Own Funds.
Underlying capital generation fell to GBP352 million (30 June
2022: GBP386 million). The fall is mainly attributable to lower
capital generation from the asset management business and losses
within Wealth.
The increase in other operating capital generation in the first
half of 2023 to GBP153 million (30 June 2022: GBP47 million) mainly
reflects higher benefits from asset trading, in particular a GBP122
million capital benefit from an update to the strategic asset
allocation for the With-Profits Fund. There was a further
contribution from asset trading in the annuity portfolio, albeit
slightly reduced from the contribution at 30 June 2022.
Market movements in the first half of 2023 have resulted in a
negative impact of GBP141 million (30 June 2022: negative GBP482
million). Although equity markets have improved, returns on the
With-Profits Fund were lower than expected, and credit has already
been taken for the expected return in underlying capital
generation. The movement of GBP341 million is mainly driven by a
reduction in the benefit from the present value of shareholder
transfers less equity hedges to GBP(186) million (30 June 2022:
positive GBP221 million), and a loss on the value of surplus assets
in the annuity fund of GBP42 million (30 June 2022: GBP936 million
loss). Other market impacts include a loss on interest rate swaps,
designed to protect the Solvency II capital position in a falling
interest rate environment, of GBP118 million (30 June 2022: GBP621
million loss). These impacts are partially offset by a reduction in
solvency capital requirement of GBP92 million (30 June 2022: GBP784
million reduction), driven by the increase in yields.
Restructuring and other costs of GBP61 million (30 June 2022:
GBP71 million) reflect the impact on the capital position of
transformation costs, integration of the Wealth business, and
changes to our office space in respect of our future ways of
working.
Capital position
The Group's shareholder Solvency II coverage ratio remained
strong at 199% (31 December 2022: 199%). However, Solvency II
surplus decreased to GBP4.4 billion as at 30 June 2023 (31 December
2022: GBP4.6 billion), driven by a reduction in eligible Own Funds.
Although capital generation, net of the eligible Own Funds
restriction, was positive GBP73 million, this was offset by the
payment of GBP310 million in dividends to shareholders. The
solvency ratio remained stable as the Solvency Capital Requirement
(SCR) also reduced, driven by the rise in yields.
Our With-Profits Fund continues to have a strong Solvency II
coverage ratio of 429%. Although the surplus remained stable, the
ratio increased from the 362% reported at 31 December 2022 due to a
reduction in SCR driven by the expected surplus from in-force
business, management actions including hedging and managing credit
risk, and market movements in the period.
The regulatory Solvency II coverage ratio of the Group as at 30
June 2023 was 168% (31 December 2022: 164%). This view of solvency
combines the shareholder position and the With-Profits Fund, but
excludes all surplus within the With-Profits Fund .
Financing and liquidity
The following table shows key financing and liquidity
information:
As at
As at 30 June 31 December
GBPm 2023 2022 2022
----------------------------------- ------- ------ ------------
Nominal value of subordinated debt 3,243 3,262 3,264
Shareholder Solvency II own funds 9,086 9,711 9,268
Leverage ratio 36% 34% 35%
=================================== ======= ====== ============
The leverage ratio is defined as the nominal value of debt as a
percentage of the shareholder view of M&G plc's Solvency II
available own funds, which excludes the eligible Own Funds
restriction noted in the capital position section above. Our
leverage ratio of 36% (31 December 2022: 35%) has increased as a
result of the fall in Solvency II available own funds in the
period.
The following table shows the movement in cash and liquid assets
held by the Group's holding companies during the period:
For the six For the
months ended year ended
30 June 31 December
2023 Restated(i) Restated(i)
GBPm 2022 2022
-------------------------------------------------------- ----- ----------- ------------
Opening cash and liquid assets at the beginning of
the period 986 1,895 1,895
Cash dividends from subsidiaries 333 333 579
Corporate costs (80) (89) (140)
Interest paid on core structural borrowings (94) (94) (190)
Cash dividends paid to equity holders (310) (311) (465)
Share buy-back - (85) (503)
Shares purchased by employee benefits trust (5) - -
Acquisition of and capital injections into subsidiaries (46) (205) (221)
Other 47 32 31
======================================================== ===== =========== ============
Closing cash and liquid assets at the end of the period
(ii) 831 1,476 986
======================================================== ===== =========== ============
(i) In previous periods we disclosed cash and liquid assets for
the Parent company only. These periods have been restated to
include the Group's other holding companies (M&G Group
Regulated Entity Holding Company Limited and M&G Corporate
Holdings Limited) as we believe it provides a more meaningful
disclosure.
(ii) Closing cash and liquid assets at 30 June 2023 included a
GBP768 million (31 December 2022: GBP950 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 holding
companies for the six months ended 30 June 2023 represent the
dividends and payments that will arise in the normal course of
business. Total cash and liquid assets have decreased with dividend
payments to equity holders of GBP310 million and interest paid on
structural borrowings of GBP94 million. This has been partly offset
by cash dividends of GBP333 million received from our
subsidiaries.
Asset Management
The momentum in the Wholesale Asset Management business has
continued with an increase in net client inflows in the first six
months of the year. However, expected redemptions triggered by
challenging market conditions in the UK in 2022 led to net client
outflows in Institutional Asset Management.
Assets under management and administration and net client
flows
Net client flows AUMA
For the For the
six months six months For the
ended ended year ended As at As at
30 June 30 June 31 December 30 June 31 December
GBPbn 2023 2022 2022 2023 2022
------------------------------- ----------- ----------- ------------ -------- ------------
Institutional Asset Management (1.4) 0.3 (0.7) 94.0 99.2
Wholesale Asset Management 1.3 0.8 0.5 52.3 53.9
Other - - - 1.1 1.1
=============================== =========== =========== ============ ======== ============
Total Asset Management (i) (0.1) 1.1 (0.2) 147.4 154.2
=============================== =========== =========== ============ ======== ============
(i) Included in total Asset Management AUMA of GBP147.4 billion
(31 December 2022: GBP154.2 billion) is GBP10.4 billion assets
under advice (31 December 2022: GBP10.1 billion).
Wholesale Asset Management flows continued to strengthen, having
returned to net client inflows in 2022 for the first time since
2018, with net client inflows of GBP1.3 billion in the first six
months of the year (30 June 2022: GBP0.8 billion). There has been a
continued improvement in investment performance and as of 30 June
2023, 70% of our Wholesale funds ranked in the upper two
performance quartiles over one year (31 December 2022: 68%) and 71%
in the upper two performance quartiles over three years (31
December 2022: 67%). Much of the growth has come from the UK, where
we have attracted net client inflows of GBP1.5 billion.
Wholesale assets under management and administration (AUMA)
decreased by GBP1.6 billion to GBP52.3 billion driven by negative
market and other movements of GBP2.9 billion in the year to
date.
Net client outflows of GBP1.4 billion (30 June 2022: GBP0.3
billion net client inflows) in our Institutional Asset Management
business reflects the significant market volatility experienced in
the UK in 2022, with redemptions triggered following September's
mini-budget leading to net client outflows in the first half of the
year of GBP2.8 billion. Despite these expected redemptions in the
UK, we have continued to expand our presence in Europe, winning
large mandates in both the Netherlands and Switzerland, where we
won GBP0.8 billion of client inflows from the Swiss Investment Fund
for Emerging Markets in the first half of 2023.
Institutional AUMA decreased by GBP5.2 billion to GBP94.0
billion driven by negative market and other movements of GBP3.8
billion in the main from the weakening of foreign currency
denominated AUMA, notably in South Africa.
Our expertise in private markets, which offers private credit,
structured credit, impact and private equity, real estate and
infrastructure offerings, is a key component of our institutional
investment capability, and represents a resilient, high-margin
source of revenues. Our private assets under management decreased
to GBP73.8 billion of AUMA as at 30 June 2023 (31 December 2022:
GBP76.6 billion) owing to negative market and other movements which
more than offset GBP0.7 billion net inflows.
Adjusted operating profit before tax
The following table shows an analysis of adjusted operating
profit before tax:
For the six For the
months ended year ended
30 June 31 December
GBPm 2023 2022 2022
Fee-based revenue 507 503 1,051
Asset Management operating expenses (394) (367) (763)
Investment return 13 (4) (5)
Adjusted operating profit attributable to non-controlling
interests (8) (8) (19)
========================================================== ======= ====== ============
Adjusted operating profit before tax 118 124 264
========================================================== ======= ====== ============
Adjusted operating profit before tax from our Asset Management
business has decreased to GBP118 million in the six months to 30
June 2023 (30 June 2022: GBP124 million) with improved investment
return partly offsetting increased expenses.
Revenue earned by Institutional Asset Management was GBP293
million (30 June 2022: GBP291 million) which includes GBP20 million
of revenue recognised from responsAbility, which was acquired in
May 2022. This was partly offset by lower revenue earned on public
fixed income, due to the impact of lower AUMA from market
volatility and outflows from the mini-budget crisis. Wholesale
Asset Management revenue increased marginally to GBP203 million (30
June 2022: GBP201 million). In addition income earned from
performance fees and carried interest included in fee-based revenue
was GBP11 million (30 June 2022: GBP11 million).
Asset Management average fee margin of 33bps was up 2bps from 30
June 2022. Average fee margins in the Institutional Asset
Management business increased to 30bps (30 June 2022: 28bps) driven
by the inclusion of responsAbility, while Wholesale Asset
Management fee margins remained flat at 38bps.
Asset Management operating expenses have increased by GBP27
million to GBP394 million (30 June 2022: GBP367 million) with
additional costs of GBP19 million from responsAbility. The
remainder of the cost increase relates to impacts from rising
inflation. The impact on revenue, partly mitigated by better
margins, and the increased cost has resulted in an increase to the
cost/income ratio for the Asset Management business to 79% (30 June
2022: 75%).
Investment return relates to returns on seed investments, units
held to hedge management incentive schemes and interest income on
cash balances which have increased by GBP17 million compared to the
prior period reflecting an improvement in market conditions.
Capital generation
The following table shows an analysis of operating capital
generation:
For the
For the six year
months ended ended
30 June 31 December
GBPm 2023 2022 2022
----------------------------------- ------- ------ ------------
Underlying capital generation 119 142 246
Other operating capital generation (5) (6) (33)
=================================== ======= ====== ============
Operating capital generation 114 136 213
=================================== ======= ====== ============
Underlying capital generation for the six months ended 30 June
2023 decreased to GBP119 million (30 June 2022: GBP142 million).
The contribution from the Asset Management business fell primarily
due to the impact on revenue in the period as a result of adverse
market conditions and an increase in costs in the period.
Other operating capital generation has remained flat; this
mainly reflects investment income offset by adverse foreign
exchange movements.
Retail and Savings
We continue to see growth in our Wealth business, demonstrated
by improvement in net client inflows and a strong performance from
our with-profits business.
Assets under management and administration and net client
flows
Net client flows AUMA(i)
For the For the
six months six months For the
ended ended year ended As at As at
30 June 30 June 31 December 30 June 31 December
GBPbn 2023 2022 2022 2023 2022
----------------------------- ----------- ----------- ------------ -------- ------------
Wealth 0.6 - 0.2 84.6 83.4
Heritage (3.2) (3.1) (6.0) 90.3 94.1
Other 0.2 0.1 0.3 9.1 8.9
============================= =========== =========== ============ ======== ============
Total Retail and Savings (i) (2.4) (3.0) (5.5) 184.0 186.4
============================= =========== =========== ============ ======== ============
(i) GBP156.9 billion of AUMA is managed internally by the
Group's Asset Management business (31 December 2022: GBP149.9
billion).
Overall, Retail and Savings (excluding Heritage) achieved net
client inflows of GBP0.8 billion (30 June 2022: GBP0.1 billion).
PruFund is an investment solution offered to clients of both Wealth
and Other Retail and Savings. PruFund attracted net client inflows
of GBP1.1 billion for the six months to 30 June 2023 (30 June 2022:
GBP0.1 billion) across both business lines due to higher gross
inflows of GBP3.8 billion, which are the highest for a six month
period since 2019.
The improved inflows into PruFund follow strong investment
performance and further digitisation. The trends underscore the
importance of broadening the accessibility of our propositions
offered to our Wealth clients. In May we launched PruFund Growth,
PruFund Cautious and PruFund Risk Managed on our M&G Wealth
platform, further expanding the reach of this unique proposition,
while improving and digitising advisor journeys. We have grown our
tied-advisors network to over 500 people, achieved through organic
recruiting, in-house training, and the completion of the Continuum
acquisition.
Retail and Savings AUMA decreased to GBP184.0 billion driven by
a fall in Heritage AUMA due to expected net client outflows of
GBP3.2 billion (30 June 2022: GBP3.1 billion).
Adjusted operating profit before tax by source of earnings
The following table shows adjusted operating profit before tax
split by source of earnings:
For the six For the
months ended year ended
30 June 31 December
Restated Restated
GBPm 2023 2022 2022
Wealth 91 93 158
- With-profits 119 103 190
- Platform and advice (19) (8) (23)
- Other (9) (2) (9)
Heritage 279 201 441
- With-profits 129 99 200
- Shareholder annuities and other(i) 150 102 241
Other Retail and Savings 4 - 19
=================================================== ===== ======== ============
Total Retail and Savings adjusted operating profit
before tax 374 294 618
=================================================== ===== ======== ============
(i) Includes adjusted operating profit before tax from
shareholder annuities of GBP151 million (six months ended 30 June
2022: GBP106 million, year ended 31 December 2022: GBP239 million)
and adjusted operating loss before tax from other heritage business
of GBP1 million (six months ended 30 June 2022: GBP4 million loss,
year ended 31 December 2022: GBP2 million profit).
Adjusted operating profit before tax from our Retail and Savings
business increased to GBP374 million (30 June 2022: GBP294 million)
driven by an improvement in Heritage.
Wealth
Wealth adjusted operating profit before tax of GBP91 million
remained consistent with the first six months of 2022 since an
increase in the adjusted operating profit arising from with-profits
business was offset by higher losses from our platform and advice
business. Wealth with-profits business relates to PruFund and has
benefited from an increase in the amount released from the
contractual service margin (CSM). The losses from the platform and
advice business increased to GBP19 million (30 June 2022: GBP8
million) driven by an increase in costs owing to inflation and a
one-off intangible asset write-off in the period of GBP7
million.
The following table provides further analysis of the
with-profits business (PruFund) result in Wealth:
For the six For the
months ended year ended
30 June 31 December
Restated Restated
GBPm 2023 2022 2022
CSM release 101 79 154
Expected return on excess assets 21 10 21
Other (3) 14 15
================================= ===== ======== ============
PruFund 119 103 190
================================= ===== ======== ============
The CSM is based on the expected value of future shareholder
transfers which has been impacted by the rise in yields over 2022.
As a result, the CSM at the start of 2023 is higher than at the
start of 2022, and there has been an increase of GBP22 million in
the amount of the CSM released to profit compared to the first six
months of 2022. This represents 11.6% p.a. of the opening CSM
attributable to the shareholder (30 June 2022: 11.1% p.a.).
The expected return on the shareholders' share of excess assets
in Wealth has increased by GBP11 million to GBP21 million as a
result of the increased expected rate of return from 2.4% p.a. over
2022, to 6.0% p.a. in the six months to 30 June 2023, driven by the
rise in risk-free rates over 2022.
In Other, the six months to 30 June 2022 benefited from the
release of a provision for new business expense overruns which has
not repeated in this period.
Heritage
Adjusted operating profit before tax from Heritage has increased
to GBP279 million (30 June 2022: GBP201 million) following an
increase in the results from both the with-profits business and
shareholder annuities that reflect the impact of the increase in
yields.
The following table provides further analysis of the
with-profits business (traditional with-profits) result in
Heritage:
For the six For the
months ended year ended
30 June 31 December
Restated Restated
GBPm 2023 2022 2022
CSM release 111 89 186
Expected return on excess assets 17 9 19
Other 1 1 (5)
================================= ===== ======== ============
Traditional with-profits 129 99 200
================================= ===== ======== ============
The CSM released in respect of the traditional with-profits
business increased by GBP22 million compared to the first six
months of 2022 for similar reasons as for Wealth PruFund. However,
the amortisation rate for traditional with-profits business is
higher than for PruFund business since the business is more mature
and is running off faster. The amount of CSM released is equal to
14.0% p.a. of the opening traditional with-profits CSM attributable
to the shareholder (30 June 2022: 13.6% p.a.).
The expected return on the shareholders' share of excess assets
in Heritage has increased by GBP8 million to GBP17 million as a
result of the increased expected rate of return from 2.4% p.a. over
2022, to 6.0% p.a. in the six months to 30 June 2023, driven by the
rise in risk-free rates over 2022.
The following table provides further analysis of the shareholder
annuities result in Heritage:
For the six For the
months ended year ended
30 June 31 December
Restated Restated
GBPm 2023 2022 2022
----------------------------------------------- ----- -------- ------------
Expected return on excess assets 101 57 113
CSM release 47 42 89
Risk adjustment unwind 9 11 24
Asset trading and portfolio management actions 12 6 41
Experience variances (16) (10) -
Other provisions and reserves (2) - (28)
=============================================== ===== ======== ============
Shareholder annuities 151 106 239
=============================================== ===== ======== ============
The shareholder annuities result has increased by GBP45 million
to GBP151 million. The recurring sources of earnings from the
annuity book are primarily the returns on surplus assets in excess
of IFRS 17 insurance liabilities based on long-term expected
investment returns and the release of the CSM. The expected return
on excess assets have increased by GBP44 million to GBP101 million
as a result of the rise in yields during 2022.
The release of the CSM to profit on shareholder annuities was
GBP47 million compared to GBP42 million in the period to 30 June
2022, benefiting from a higher opening CSM balance. The amount of
CSM released represents 7.4% p.a. of the 30 June 2023 CSM before
amortisation (30 June 2022: 6.9% p.a.).
Experience variances primarily relate to expense variances.
Actual expenses were GBP6 million higher in the period due to
additional one-off costs.
The credit quality of fixed income assets in the annuity
portfolio remained strong over the first half of 2023. Over 98% of
the debt securities held by the shareholder annuity portfolio are
investment grade and only 20% are BBB. In addition 83% of the
shareholder annuity portfolio is held in debt securities either
categorised as Risk Free or Secured (including cash). Rating
migrations resulted in very low level of downgrade experience
(defined as movements in BBB notching and, otherwise, letter
downgrades), with less than 0.5% of bonds in the portfolio being
impacted. Overall a net upgrade has been experienced in the
portfolio over the first six months of 2023.
Capital generation
The following table shows an analysis of operating capital
generation:
For the six For the
months ended year ended
30 June 31 December
GBPm 2023 2022 2022
---------------------------------------------------------- ------- ------ ------------
Wealth 75 88 155
- of which With-profits 102 96 180
- in-force 118 106 216
- new business (16) (10) (36)
- of which Platform and advice (17) (9) (25)
- of which Other (10) 1 -
Heritage 269 266 503
- of which With-profits 96 100 192
- of which Shareholder annuities and other 173 166 311
Other Retail and Savings - 16 (17)
========================================================== ======= ====== ============
Underlying capital generation 344 370 641
========================================================== ======= ====== ============
Model improvements - 4 (17)
Assumption changes 6 - 158
Management actions and other (incl. experience variances) 157 54 53
========================================================== ======= ====== ============
Other operating capital generation 163 58 194
========================================================== ======= ====== ============
Operating capital generation 507 428 835
========================================================== ======= ====== ============
Underlying capital generation from Wealth decreased in the six
months to 30 June 2023 to GBP75 million (30 June 2022: GBP88
million). The contribution from in-force with-profits business
increased to GBP118 million (30 June 2022: GBP106 million) as a
result of the increase in expected return given the rise in yields
over 2022, partially offset by a reduction in the value of equity
hedges. However, new business strain from the with-profits business
has increased to GBP16 million (30 June 2022: GBP10 million); the
increase in risk-free rates reduced the new business strain, but
this is more than offset by the removal of a one-off benefit in the
first half of 2022 from the release of a provision for new business
expense overruns. Platform and advice and 'other' wealth business
contributed negative capital generation, driven mainly by the
operating losses discussed in the adjusted operating profit section
above.
Underlying capital generation from Heritage of GBP269 million
remained relatively consistent with the first six months of 2022.
Traditional with-profits business generated underlying capital of
GBP96 million during the six months to 30 June 2023 (30 June 2022:
GBP100 million); this business is less sensitive to increases in
yields compared to PruFund business, with the result that increases
in capital generation driven by higher yields over 2022 were offset
by losses on equity hedges. There also continued to be significant
capital generation from the shareholder annuity and other business,
contributing GBP173 million (30 June 2022: GBP166 million). The
underlying capital generation for annuity business has increased
because the rise in yields over 2022 results in an increase in the
expected return on surplus assets in the annuity portfolio.
Other operating capital generation increased to GBP163 million
(30 June 2022: GBP58 million), largely reflecting the substantial
GBP122 million capital benefit of an update to the strategic asset
allocation mix of the With-Profits Fund. Asset trading in the
annuity portfolio contributed another GBP23 million. In comparison,
asset trading and hedging in the With-Profits Fund and annuity
portfolio in the six months to 30 June 2022 totalled GBP124
million. The impact of non-market experience was broadly neutral,
in comparison to a c.GBP50 million loss over the period to 30 June
2022.
Risk management statement
Overview of risk profile
The principal risks we are currently facing and to which we will
continue to be exposed to remain broadly unchanged from those
detailed in the 2022 Annual Report and Accounts, namely: business
environment and market forces; sustainability and ESG; investment
risk; financial risks (market, credit, corporate liquidity and
insurance); operational risks (including resilience, third party
suppliers and technology); change; people; regulatory compliance;
reputational; and conduct.
Economic and geopolitical backdrop
The business environment and market outlook remain uncertain due
to ongoing geopolitical conflicts and negative economic trends. The
global economy continues to be impacted by high inflation,
increases in interest rates, economic slowdown in key economies and
commercial real estate market weakness. Markets stabilised during
the first half of the year once worries regarding US mid-size banks
and the potential impact of the Credit Suisse collapse receded.
Sustainability and ESG
As noted in our latest Sustainability Report, we anticipate the
external ESG risk environment to continue to evolve. Climate change
physical and transition risks are accelerating, biodiversity risks
are emerging and social issues continue to be important. The
importance of robust ESG risk management and controls will continue
to grow as the industry develops its approach to ESG. This includes
addressing issues such as: the quality of ESG data; greenwashing;
enhancement of climate change methodologies; and the implementation
of regulatory requirements.
Consumer Duty
On 31 July 2023 new FCA rules came into force establishing a
Consumer Duty for new and existing products and services. The new
conduct rules sets a higher standard of care than previous rules by
requiring firms and their staff to act to deliver good outcomes for
retail customers. To prepare for the new rules, projects were
delivered to develop and implement enhancements to existing
procedures and controls. A key element of this work was defining
and putting in place "outcome monitoring" to enable business areas
to assess, report and improve performance against the four outcomes
(products and services; price and value; consumer understanding;
and customer support) on an ongoing basis.
Statement of Directors' responsibilities
The directors confirm that these condensed consolidated interim
financial statements have been prepared in accordance with UK
adopted International Accounting Standard 34, 'Interim Financial
Reporting' and the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority and
that the interim management report includes a fair review of the
information required by DTR 4.2.7 and DTR 4.2.8, namely:
- an indication of important events that have occurred during the first six months
and their impact on the condensed consolidated set of financial statements, and a
description of the principal risks and uncertainties for the remaining six months
of the financial year; and
- material related-party transactions in the first six months and any material changes
in the related-party transactions described in the last annual report.
The maintenance and integrity of the M&G plc website is the
responsibility of the directors; the work carried out by the
auditors does not involve consideration of these matters and,
accordingly, the auditors accept no responsibility for any changes
that might have occurred to the condensed consolidated interim
financial statements since they were initially presented on the
website.
The directors of M&G plc are listed in the M&G plc
annual report for 31 December 2022, with the exception of the
following change in the period, Ms. Fiona Clutterbuck resigned on
24 May 2023.
A list of current directors is maintained on the M&G plc
website: www.mandgplc.com.
By order of the board:
Andrea Rossi Kathryn McLeland
Group Chief Executive Chief Financial Officer
Officer
19 September 2023 19 September 2023
Independent review report to M&G plc
Report on the condensed consolidated interim financial
statements
Our conclusion
We have reviewed M&G plc's condensed consolidated interim
financial statements (the "interim financial statements") in the
interim financial report of M&G plc for the 6 month period
ended 30 June 2023 (the "period").
Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting'
and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority.
The interim financial statements comprise:
- the condensed consolidated statement of financial position as at 30 June 2023;
- the condensed consolidated income statement and condensed
consolidated statement of comprehensive income for the period then
ended;
- the condensed consolidated statement of cash flows for the period then ended;
- the condensed consolidated statement of changes in equity for the period then ended; and
- the explanatory notes to the interim financial statements.
The interim financial statements included in the interim
financial report of M&G plc have been prepared in accordance
with UK adopted International Accounting Standard 34, 'Interim
Financial Reporting' and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
Basis for conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410, 'Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity' issued by the Financial Reporting Council for use in the
United Kingdom ("ISRE (UK) 2410"). A review of interim financial
information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying
analytical and other review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the interim
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
conclusion section of this report, nothing has come to our
attention to suggest that the directors have inappropriately
adopted the going concern basis of accounting or that the directors
have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on
the review procedures performed in accordance with ISRE (UK) 2410.
However, future events or conditions may cause the group to cease
to continue as a going concern.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The interim financial report, including the interim financial
statements, is the responsibility of, and has been approved by the
directors. The directors are responsible for preparing the interim
financial report in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority. In preparing the interim financial report,
including the interim financial statements, the directors are
responsible for assessing the group's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or to cease
operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim
financial statements in the interim financial report based on our
review. Our conclusion, including our conclusions relating to going
concern, is based on procedures that are less extensive than audit
procedures, as described in the Basis for conclusion paragraph of
this report. This report, including the conclusion, has been
prepared for and only for the company for the purpose of complying
with the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority and for no other
purpose. We do not, in giving this conclusion, accept or assume
responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
London
19 September 2023
Condensed consolidated income statement (unaudited)
For the six For the
months ended year ended
30 June 31 December
Restated(i) Restated(i)
2023 2022 2022
Note GBPm GBPm GBPm
Insurance revenue 4 1,815 1,783 3,587
Insurance service expenses (1,495) (1,525) (2,949)
Net (expenses)/income from reinsurance contracts
held (5) 23 (15)
======================================================== ==== ======= =========== ============
Insurance service result 315 281 623
======================================================== ==== ======= =========== ============
Interest revenue from financial assets not measured
at FVTPL 318 49 217
Interest revenue from financial assets measured at
FVTPL 1,155 1,073 2,203
Net change in investment contract liabilities without
DPF (204) 1,485 1,637
Net movement in expected credit losses (6) 26 31
Other investment return (125) (12,704) (18,097)
======================================================== ==== ======= =========== ============
Investment return 1,138 (10,071) (14,009)
======================================================== ==== ======= =========== ============
Finance (expenses)/income from insurance contracts
issued (654) 9,113 11,561
Finance (expenses)/income from reinsurance contracts
held (19) (343) (472)
======================================================== ==== ======= =========== ============
Net insurance finance (expenses)/income (673) 8,770 11,089
======================================================== ==== ======= =========== ============
Net insurance and investment result 780 (1,020) (2,297)
======================================================== ==== ======= =========== ============
Fee income 5 508 506 1,037
Other income 30 33 70
Administrative and other expenses 6 (1,053) (1,214) (2,255)
Finance costs 6 (79) (80) (162)
Movements in third party interest in consolidated
funds (94) (55) 550
Share of profit from joint ventures and associates 36 63 38
======================================================== ==== ======= =========== ============
Profit/(loss) before tax (ii) 128 (1,767) (3,019)
======================================================== ==== ======= =========== ============
Tax (charge)/credit attributable to policyholders'
returns 7 (27) 342 379
Profit/(loss) before tax attributable to equity
holders 101 (1,425) (2,640)
======================================================== ==== ======= =========== ============
Total tax (charge)/credit (53) 624 964
Less tax charge/(credit) attributable to policyholders'
returns 7 27 (342) (379)
======================================================== ==== ======= =========== ============
Tax (charge)/credit attributable to equity holders 7 (26) 282 585
======================================================== ==== ======= =========== ============
Profit/(loss) for the period 75 (1,143) (2,055)
======================================================== ==== ======= =========== ============
Attributable to equity holders of M&G plc 68 (1,149) (2,068)
Attributable to non-controlling interests 7 6 13
======================================================== ==== ======= =========== ============
Profit/(loss) for the period 75 (1,143) (2,055)
======================================================== ==== ======= =========== ============
Earnings per share:
Basic (pence per share) 8 2.9 (45.2) (83.6)
Diluted (pence per share) 8 2.9 (45.2) (83.6)
(i) The comparative amounts have been restated for the first
time adoption of IFRS 17 and IFRS 9. See Note 1.3.1 for further
information. Additionally, following a review of the Group's
presentation of tax positions within consolidated investment funds,
comparative amounts have been restated from those previously
reported with the restatement having no impact on profit for the
period or net assets. See Note 1.2 for further information.
(ii) The profit/(loss) before tax comprises the pre-tax result
attributable to equity holders and an amount equal and opposite to
the tax charge attributable to policyholder returns. This is the
formal measure of profit or loss before tax under IFRS, but it is
not the result attributable to equity holders. This is principally
because the corporate taxes of the Group include taxes borne by
policyholders. These amounts are required to be included in the tax
charge of the company under IFRS. The tax charge/(credit)
attributable to policyholder returns is removed from the Group's
total profit/(loss) before tax in arriving at the Group's
profit/(loss) before tax attributable to equity holders. As the net
of tax profits attributable to policyholders is zero, the Group's
pre-tax profit attributable to policyholders is an amount equal and
opposite to the tax charge attributable to policyholders included
in the total tax charge.
Condensed consolidated statement of comprehensive income
(unaudited)
For the six For the
months ended year ended
30 June 31 December
Restated(i) Restated(i)
2023 2022 2022
GBPm GBPm GBPm
Profit/(loss) for the period 75 (1,143) (2,055)
======================================================== ===== =========== ============
Items that may be reclassified subsequently to profit
or loss:
Exchange movements arising on foreign operations (28) 12 20
======================================================== ===== =========== ============
Other comprehensive (loss)/income on items that may
be reclassified subsequently to profit or loss (28) 12 20
======================================================== ===== =========== ============
Items that will not be reclassified to profit or loss:
(Loss)/gain on remeasurement of defined benefit pension
scheme (34) 95 29
Tax on remeasurement of defined benefit pension scheme 8 (22) (7)
======================================================== ===== =========== ============
Other comprehensive (loss)/income on items that will
not be reclassified to profit or loss (26) 73 22
======================================================== ===== =========== ============
Other comprehensive (loss)/income for the period, net
of related tax (54) 85 42
======================================================== ===== =========== ============
Total comprehensive income/(loss) for the period 21 (1,058) (2,013)
======================================================== ===== =========== ============
Attributable to equity holders of M&G plc 21 (1,064) (2,026)
Attributable to non-controlling interests - 6 13
======================================================== ===== =========== ============
Total comprehensive income/(loss) for the period 21 (1,058) (2,013)
======================================================== ===== =========== ============
(i) The comparative amounts have been restated for the first
time adoption of IFRS 17 and IFRS 9. See Note 1.3.1 for further
information. Additionally, following a review of the Group's
presentation of tax positions within consolidated investment funds,
comparative amounts have been restated from those previously
reported with the restatement having no impact on profit for the
year or net assets. See Note 1.2 for further information.
Condensed consolidated statement of financial position
(unaudited)
As at As at As at
30 June 31 December 1 January
Restated(i) Restated(i)
2023 2022 2022
Note GBPm GBPm GBPm
Assets
Goodwill and intangible assets 1,836 1,877 1,615
Deferred acquisition costs 28 31 35
Defined benefit pension asset 10 109 155 38
Investment in joint ventures and associates accounted
for using the equity method 390 413 469
Property, plant and equipment 1,949 1,953 2,536
Investment property 15,806 16,505 19,698
Deferred tax assets 7 326 445 114
Insurance contract assets 11 47 39 28
Reinsurance contract assets 11 1,086 1,082 1,715
Equity securities and pooled investment funds 66,694 70,127 74,069
Loans 3,277 3,234 5,880
Debt securities 64,718 62,821 81,059
Derivative assets 3,168 2,850 3,373
Deposits 21,499 21,399 17,632
Current tax assets 7 270 255 358
Accrued investment income and other debtors 2,925 2,404 2,833
Assets held for sale(ii) 549 684 1,023
Cash and cash equivalents 4,743 4,884 6,908
====================================================== ==== ======== ============ ===========
Total assets 189,420 191,158 219,383
====================================================== ==== ======== ============ ===========
Equity
Share capital 119 119 130
Share premium reserve 370 370 370
Shares held by employee benefit trust (26) (70) (93)
Treasury shares (44) (47) (1)
Retained earnings 15,214 15,504 18,469
Other reserves (11,630) (11,613) (11,660)
====================================================== ==== ======== ============ ===========
Equity attributable to equity holders of M&G plc 4,003 4,263 7,215
====================================================== ==== ======== ============ ===========
Non-controlling interests 38 48 49
====================================================== ==== ======== ============ ===========
Total equity 4,041 4,311 7,264
====================================================== ==== ======== ============ ===========
Liabilities
Insurance contract liabilities 11 140,000 141,976 160,821
Reinsurance contract liabilities 11 333 348 546
Investment contracts without DPF 12 12,015 11,937 14,884
Third party interest in consolidated funds 8,985 10,389 12,636
Subordinated liabilities and other borrowings 13 7,799 7,537 8,930
Defined benefit pension liability 10 - - 84
Deferred tax liabilities 7 532 795 1,718
Lease liabilities 399 420 413
Current tax liabilities 7 64 58 314
Derivative liabilities 4,021 4,185 2,689
Other financial liabilities 2,424 2,172 2,882
Provisions 116 90 138
Accruals, deferred income and other liabilities 8,657 6,768 6,064
Liabilities held for sale(ii) 34 172 -
====================================================== ==== ======== ============ ===========
Total liabilities 185,379 186,847 212,119
====================================================== ==== ======== ============ ===========
Total equity and liabilities 189,420 191,158 219,383
====================================================== ==== ======== ============ ===========
(i) The comparative amounts have been restated for the first
time adoption of IFRS 17 and IFRS 9. See Note 1.3.1 for further
information. Additionally, following a review of the Group's
presentation of tax positions within consolidated investment funds,
comparative amounts have been restated from those previously
reported with the restatement having no impact on profit for the
year or net assets. See Note 1.2 for further information.
(ii) Assets held for sale on the consolidated statement of
financial position as at 30 June 2023 includes GBP82m (31 December
2022: GBP158m, 1 January 2022: GBP127m) of seed capital classified
as held for sale as it is expected to be divested within 12 months
and GBP158m of investment property classified as held for sale (31
December 2022: GBP333m, 1 January 2022; GBP896m). 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 GBP309m (31 December 2022: GBP193m, 1
January 2022: GBPnil) of assets held for sale and GBP34m (31
December 2022: GBP172m, 1 January 2022: GBPnil) of liabilities held
for sale are in relation to the Group's consolidated infrastructure
capital private equity vehicles.
Condensed consolidated statement of changes in equity
(unaudited)
Total
Shares equity
held attributable
by to equity
employee holders
Share Share benefit Treasury Retained Other of M&G Non-controlling Total
capital premium trust shares earnings reserves plc interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
As at 1 January 2023 119 370 (70) (47) 15,504 (11,613) 4,263 48 4,311
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Profit for the
period - - - - 68 - 68 7 75
Other comprehensive
loss
for the period - - - - (26) (21) (47) (7) (54)
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Total comprehensive
income
for the period - - - - 42 (21) 21 - 21
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Shares purchased in
buy-back - - - - - - - - -
Dividends paid to
equity
holders of M&G plc - - - - (310) - (310) - (310)
Dividends paid to
non-controlling
interests - - - - - - - (10) (10)
Shares distributed
by the
trust or from
Treasury shares - - 49 3 (49) - 3 - 3
Vested employee
share-based
payments - - - - 27 (27) - - -
Expense recognised
in respect
of share-based
payments - - - - - 29 29 - 29
Shares acquired by
employee
trusts - - (5) - - - (5) - (5)
Tax effect of items
recognised
directly in equity - - - - - 2 2 - 2
Net
increase/(decrease)
in equity - - 44 3 (290) (17) (260) (10) (270)
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
As at 30 June 2023 119 370 (26) (44) 15,214 (11,630) 4,003 38 4,041
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Total
Shares equity
held attributable
by to equity
employee holders
Share Share benefit Treasury Retained Other of M&G Non-controlling Total
capital premium trust shares earnings reserves plc interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
As at 1 January 2022
as
previously reported 130 370 (93) (1) 16,550 (11,660) 5,296 49 5,345
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Adjustment on
initial application
of IFRS 17 and IFRS
9, net
of tax - - - - 1,919 - 1,919 - 1,919
Restated balance at
1 January
2022 130 370 (93) (1) 18,469 (11,660) 7,215 49 7,264
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
(Loss)/profit for
the period - - - - (1,149) - (1,149) 6 (1,143)
Other comprehensive
income
for the period - - - - 73 12 85 - 85
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Total comprehensive
income
for the period
(restated) - - - - (1,076) 12 (1,064) 6 (1,058)
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Shares purchased in
buy-back(ii) (2) - - - (85) 2 (85) - (85)
Dividends paid to
equity
holders of M&G plc - - - - (311) - (311) - (311)
Dividends paid to
non-controlling
interests - - - - - - - (10) (10)
Shares distributed
by the
trust - - 15 - (15) - - - -
Vested employee
share-based
payments - - - - 17 (17) - - -
Expense recognised
in respect
of share-based
payments - - - - - 11 11 - 11
Tax effect of items
recognised
directly in equity - - - - (1) 2 1 - 1
Net
(decrease)/increase
in equity (2) - 15 - (1,471) 10 (1,448) (4) (1,452)
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Restated balance at
30
June 2022 128 370 (78) (1) 16,998 (11,650) 5,767 45 5,812
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Total
Shares equity
held attributable
by to equity
employee holders
Share Share benefit Treasury Retained Other of M&G Non-controlling Total
capital premium trust shares earnings reserves plc interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
As at 1 January 2022 130 370 (93) (1) 16,550 (11,660) 5,296 49 5,345
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Adjustment on
initial application
of IFRS 17 and IFRS
9,
net of tax - - - - 1,919 - 1,919 - 1,919
Restated balance at
1
January 2022(i) 130 370 (93) (1) 18,469 (11,660) 7,215 49 7,264
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
(Loss)/profit for
the year - - - - (2,068) - (2,068) 13 (2,055)
Other comprehensive
income
for the year - - - - 22 20 42 - 42
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Total comprehensive
income
for the year
(restated) - - - - (2,046) 20 (2,026) 13 (2,013)
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Shares purchased in
buy-back(ii) (11) - - (47) (456) 11 (503) - (503)
Dividends paid to
equity
holders of M&G plc - - - - (465) - (465) - (465)
Dividends paid to
non-controlling
interests - - - - - - - (14) (14)
Shares distributed
by the
trust - - 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) (2,965) 47 (2,952) (1) (2,953)
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
Restated balance at
31
December 2022 119 370 (70) (47) 15,504 (11,613) 4,263 48 4,311
==================== ======= ======= ======== ======== ======== ======== ============ =============== =======
(i) The comparative amounts have been restated for the first
time adoption of IFRS 17 and IFRS 9. See Note 1.3.1 for further
information.
(ii) On 27 October 2022 the share buy-back programme completed
with 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. For the period ended 30 June 2022:
GBP85m had been purchased and shares with a nominal value of GBP2m
cancelled, leading to a capital redemption reserve for the same
amount.
Condensed consolidated statement of cash flows (unaudited)
For the six For the
months ended year ended
30 June 31 December
Restated(i) Restated(i)
2023 2022 2022
GBPm GBPm GBPm
Cash flows from operating activities:
Profit/(loss) before tax 128 (1,767) (3,019)
Non-cash and other movements in operating assets and
liabilities included in profit/(loss) before tax:
Investments 791 14,419 26,645
Other non-investment and non-cash assets (203) 371 2,014
Insurance and reinsurance contract liabilities (2,043) (13,074) (18,976)
Investment contract liabilities 170 (2,480) (2,982)
Other liabilities (including operational borrowings) 1,433 1,619 (4,378)
Interest income and expense and dividend income (2,786) (2,401) (4,491)
Other non-cash items 366 855 290
Operating cash items:
Interest receipts 1,517 1,269 2,529
Interest payments(i) (98) (36) (88)
Dividend receipts 1,392 1,240 2,220
Tax paid(ii) (149) (218) (268)
============================================================= ======= =========== ============
Net cash flows from operating activities (iii) 518 (203) (504)
============================================================= ======= =========== ============
Cash flows from investing activities:
Purchases of property, plant and equipment (232) (404) (573)
Proceeds from disposal of property, plant and equipment - 1 1
Net cash paid on acquisition of subsidiaries, joint
ventures and associates(iv) (22) (210) (210)
Divestment in subsidiaries by consolidated private equity
vehicles(v) 55 84 429
Investment in subsidiaries by consolidated private equity
vehicles(v) - (15) (15)
============================================================= ======= =========== ============
Net cash flows from investing activities (199) (544) (368)
============================================================= ======= =========== ============
Cash flows from financing activities:
Interest paid (93) (94) (190)
Lease repayments (20) (17) (30)
Shares purchased in buy-back - (85) (503)
Dividends paid to equity holders of M&G plc (310) (311) (465)
Dividends paid to non-controlling interests (10) (10) (14)
============================================================= ======= =========== ============
Net cash flows from financing activities (433) (517) (1,202)
============================================================= ======= =========== ============
Net decrease in cash and cash equivalents (114) (1,264) (2,074)
Cash and cash equivalents at 1 January 4,884 6,908 6,908
Effect of exchange rate changes on cash and cash equivalents (27) 44 50
============================================================= ======= =========== ============
Cash and cash equivalents at end of period 4,743 5,688 4,884
============================================================= ======= =========== ============
(i) The comparative amounts have been restated for the first
time adoption of IFRS 17 and IFRS 9. See Note 1.3.1 for further
information. Additionally, following a review of the Group's
presentation of tax positions within consolidated investment funds,
comparative amounts have been restated from those previously
reported with the restatement having no impact on profit for the
year or net assets. See Note 1.2 for further information.
Furthermore, interest payments on leases have been reallocated to
Interest payments, these were previously reported within Lease
repayments.
(ii) Tax paid for the six months ended 30 June 2023 includes
GBP45m (30 June 2022: GBP56m, year ended 31 December 2022: GBP68m)
paid on profit taxable at policyholder rather than shareholder
rates.
(iii) 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.
(iv) Net cash (paid)/acquired on acquisition of subsidiaries,
joint ventures and associates consists of GBP22m (six months ended
30 June 2022: GBP227m for the six months ended, year ended 31
December 2022: GBP227m) of cash paid, net of GBP17m for the six
months ended 30 June 2022 and year ended 31 December 2022 cash
acquired. Refer to note 2.2 for further information on shareholder
acquisitions made in the period.
(V) 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. As at 30
June 2023, GBPnil (six months ended 30 June 2022: GBP15m, year
ended 31 December 2022: GBP15m) relates to investments in these
vehicles and GBP55m (six months ended 30 June 2022: GBP84m, year
ended 31 December 2022: GBP429m) divestment in these vehicles.
1 Basis of preparation and material accounting policies
1.1 Basis of preparation
The condensed consolidated financial statements for the half
year ended 30 June 2023 comprise the condensed consolidated
financial statements of M&G plc ('the Company') and its
subsidiaries (together referred to as 'the Group'). The condensed
consolidated financial statements are unaudited but have been
reviewed by our auditors, PricewaterhouseCoopers LLP.
The condensed consolidated financial statements have been
prepared in accordance with IAS 34 Interim Financial Reporting (IAS
34), as adopted by the United Kingdom, and the Disclosure Guidance
and Transparency Rules of the Financial Conduct Authority. The
accounting policies and the key sources of estimation uncertainty
applied in the condensed consolidated financial statements are
consistent with those set out in the 2022 consolidated financial
statements, except for the new standards, interpretations and
amendments that became effective in the current period, as stated
below.
The condensed consolidated financial statements are stated in
million pounds sterling, the Group's presentation currency.
The condensed consolidated financial statements do not include
all the information and disclosures required in the Group's 2022
consolidated financial statements and do not comprise statutory
accounts within the meaning of section 434 of the Companies Act
2006. The Group's 2022 Annual Report and Accounts for the year
ended 31 December 2022 were delivered to the Registrar of
Companies. The report of the auditors PricewaterhouseCoopers LLP on
those accounts was unqualified, did not contain an emphasis of
matter paragraph and did not contain any statement under section
498 of the Companies Act 2006. The consolidated financial
statements from the full year 2022 and half year 2022 have been
restated to reflect the retrospective application of IFRS 17,
'Insurance Contracts' and IFRS 9, 'Financial Instruments' from 1
January 2023, as outlined below in Note 1.3.1, and are
unaudited.
Going concern
The Directors have reasonable expectation that the Group as a
whole has adequate resources to continue in operational existence
over a period of at least twelve months from the date of approval
of the condensed consolidated financial statements.
To satisfy themselves of the appropriateness of the use of the
going concern assumption in relation to the condensed consolidated
financial statements, the Directors have considered the liquidity
projections of the Group, including the impact of applying specific
liquidity stresses. The Directors also considered the ability of
the Group to access external funding sources, including access to
the GBP1,500m 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 projections of the Group under a base scenario and its
sensitivity to various individual economic stresses and tested the
resilience of the balance sheet to adverse scenarios using reverse
stress testing.
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).
The results of the assessment demonstrated the ability of the
Group to meet all obligations and future business requirements for
the foreseeable future. In addition, the assessment demonstrated
that the Group was able to remain above its regulatory solvency
requirements in a stressed scenario.
For this reason, the Directors continue to adopt the going
concern basis in preparing the condensed consolidated financial
statements.
Presentation of risk and capital management disclosures
We have provided additional disclosures relating to the nature
and extent of certain financial risks and capital management in the
Supplementary Information section of this report.
1.2 Restatement of tax related balances
The condensed consolidated statement of financial position as at
30 June 2022 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 condensed consolidated income statement for the six months
to 30 June 2022 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 six months to 30 June 2022
has been restated.
The reallocation from Profit before tax relates to policyholder
tax and does not impact Profit before tax attributable to equity
holders for the six months ended 30 June 2022 or total equity
attributable to shareholders as at 30 June 2022.
The impact of the restatement on the condensed consolidated
statement of financial position and condensed consolidated income
statement is set out in the tables below:
For the
six months Restated(i)
ended For the
30 June six months
2022 ended
as previously 30 June
reported Adjustments 2022
GBPm GBPm GBPm
Consolidated income statement:
Administrative and other expenses (1,474) 74 (1,400)
Loss before tax (1,736) 74 (1,662)
Tax credit attributable to policyholders' returns 411 (74) 337
Total tax credit 691 (74) 617
Less tax credit attributable to policyholders' returns 411 (74) 337
======================================================= ============== =========== ===========
As at
30 June Restated(i)
2022 as As at
previously 30 June
reported Adjustments 2022
GBPm GBPm GBPm
Consolidated statement of financial position:
Liabilities:
Deferred tax liabilities 732 352 1,084
Current tax liabilities 80 34 114
Accruals, deferred income and other liabilities 10,263 (386) 9,877
Other 190,306 - 190,306
================================================ =========== =========== ============
Total liabilities 201,381 - 201,381
================================================ =========== =========== ============
(i Restated amounts are prior to IFRS 17 and IFRS 9 adjustments
being applied.)
In the consolidated statement of cash flows, GBP74m has been
reallocated from Profit before tax and split between Other
liabilities of GBP(88)m, Other non-cash items of GBP40m and Tax
paid of GBP(26)m, 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 condensed consolidated
financial statements have also been restated.
1.3 New accounting pronouncements
1.3.1 New accounting pronouncements adopted by the Group
In these financial statements, the Group has applied IFRS 17
'Insurance Contracts' and IFRS 9 'Financial Instruments', for the
first time. The Group has not early adopted any other standard,
interpretation or amendment that has been issued but is not yet
effective.
IFRS 17 Insurance Contracts
IFRS 17 replaces IFRS 4 Insurance Contracts for annual periods
beginning on or after 1 January 2023.
The Group has applied the standard retrospectively by applying
the transitional provisions in Appendix C of IFRS 17. The Group has
made the election under IFRS 17 to not present certain quantitative
information required by IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors as follows:
Where a new standard is adopted, IAS 8 requires for the current
period and each prior period presented, the amount of the
adjustment:
(i) for each financial statement line item affected; and
(ii) if IAS 33 Earnings per Share applies to the entity, for
basic and diluted earnings per share;
The nature of the changes in accounting policies can be
summarised, as follows:
(i) Recognition, measurement and presentation of insurance
contracts
IFRS 17 establishes principles for the recognition, measurement,
presentation and disclosure of insurance contracts, reinsurance
contracts and investment contracts with discretionary participation
features (DPF). It introduces a model that measures groups of
contracts based on the Group's estimates of the present value of
future cash flows that are expected to arise as the Group fulfills
the contracts, an explicit risk adjustment for non-financial risk
and a contractual service margin ("CSM").
Under IFRS 17, insurance revenue in each reporting period
represents the provision of services arising from the group of
insurance contracts at an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those
services. This includes amounts relating to the changes in the
liability for remaining coverage and the allocation of the portion
of the premiums that relate to recovery of insurance acquisition
cash flows. Investment components are not included within insurance
revenue.
Insurance finance income and expenses, are presented separately
from insurance revenue and insurance service expenses.
Previously, acquisition costs in relation to insurance contracts
were recognised and presented under IFRS 4 as separate assets from
the related insurance contract liabilities until those costs were
included in profit or loss. Under IFRS 17, insurance acquisition
cash flows in relation to all contracts in scope that arise before
the recognition of the related insurance contracts are recognised
as separate assets and are tested for recoverability. These assets
are presented in the carrying amount of the related portfolio of
contracts and are derecognised once the related contracts have been
recognised.
(i) Recognition, measurement and presentation of insurance
contracts (continued)
There is no change in accounting policy for investment contracts
without DPF which are not in scope of IFRS 17. For these contracts,
deferred acquisition costs continue to be presented as separate
assets and amortised into profit or loss in line with revenue.
Income and expenses from reinsurance contracts other than
insurance finance income and expenses are now presented as a single
net amount in profit or loss. Previously, amounts recovered from
reinsurers and reinsurance premium ceded were presented
separately.
For an explanation of how the Group accounts for insurance and
reinsurance contracts under IFRS 17, see Note 1.4 and Note 11.
(ii) Transition
Changes in accounting policies resulting from the adoption of
IFRS 17 have been applied using a fully retrospective approach to
the extent practicable. Under the fully retrospective approach, at
1 January 2022 the Group:
(-) identified, recognised and measured each group of insurance contracts,
investment contracts with discretionary participation features and reinsurance
contracts as if IFRS 17 had always been applied;
(-) derecognised previously reported balances that would not have existed
if IFRS 17 had always been applied, such as the unallocated surplus of
the With-Profits Fund; and
(-) recognised any resulting net difference in equity, after allowing for
any deferred tax adjustment.
In addition, there are also changes in presentation in the
condensed consolidated statement of financial position line items
from the adoption of IFRS 17:
(-) The inclusion of insurance receivables and payables balances as cash
flows in the measurement of insurance and reinsurance held contracts.
(-) The presentation of reinsurance held contracts as an asset or liability
based on the net position of all contracts within a portfolio, rather
than the previous IFRS 4 treatment which was recognised on an individual
contract basis.
(-) Investment contract liabilities with discretionary participation features
within the scope of IFRS 17 are present within insurance contract liabilities.
Where it is impracticable to apply a fully retrospective
approach to a group of contracts, then the Group has, as permitted
under IFRS 17, used either the modified retrospective approach or
the fair value approach.
The Group has applied the following approaches to valuing the
CSM on transition to IFRS 17:
Transition approach Applied to products
Fully Retrospective Approach 90:10 With-Profits contracts written 2020-2021(i)
(FRA) PruProtect contracts written June 2010 - June 2016(ii)
Non-Profit protection in Poland written 2020-2021
Rothesay reinsurance treaty(iii)
============================ =======================================================
Modified Retrospective 90:10 With-Profits contracts written 2004-2019(i)
Approach (MRA) PruProtect contracts written before June 2010(ii)
============================ =======================================================
Fair Value Approach (FVA) 90:10 With-Profits contracts written before 2004(i)
All other insurance and reinsurance contracts written
up to 2021
============================ =======================================================
(i.) Shareholder transfers for most contracts in the WPSF are up
to one-ninth of the cost of bonus declared to policyholders, in
accordance with the Articles of Association. These contracts are
referred to as 90:10 business.
(ii.) PruProtect is a non-profit contract providing life and
sickness cover that the Group issued through a joint venture
arrangement with Vitality Life.
(iii.) The Rothesay Part VII transfer in December 2021, which
involved the sale of an annuity portfolio from M&G plc to
Rothesay Life PLC, 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 FRA.
The impact of adopting IFRS 17 on the total equity at 1 January
2022 are presented in the condensed consolidated statement of
changes in equity.
Fully retrospective approach
The Group has applied the fully retrospective approach on
transition to products as shown above. On transition to IFRS 17,
the Group has applied the fully retrospective approach unless
impracticable.
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 was not collected, or was not 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. This
rationale does not apply to PruProtect contracts, which have been
managed through a joint venture and for which the approach to
managing the business prior to 2019 (and back until 2010) is known
without the need to apply hindsight.
- Where the fully retrospective approach is impracticable for the valuation of a portfolio
of insurance contracts written then it is also impracticable for the valuation of
any 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 has applied 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 has determined 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 has been assessed based on
information at 1 January 2022.
Groups of contracts valued under the modified retrospective
approach contain contracts issued more than one year apart.
90:10 with-profits contracts written 2004-2019
For groups of with-profits contracts issued between 2004 and
2019 transitioning under the modified retrospective approach, the
Group has determined 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 was estimated by
reference to the release of risk for similar contracts that the Group
issued at 1 January 2022.
If the calculation resulted in a CSM, the Group measures 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 was determined by comparing the remaining coverage
units at 1 January 2022 with coverage units prior to 1 January
2022.
If the calculation resulted in a loss component then the Group
adjusted the loss component to nil and increased the liability for
remaining coverage excluding the loss component by the same
amount.
PruProtect contracts written before June 2010
The PruProtect contracts written before June 2010 are
transitioning under the modified retrospective approach by applying
the modification that contracts issued more than one year apart are
grouped together.
Fair value approach
The Group has applied the fair value approach on transition for
contracts for which the fully retrospective approach was considered
impracticable, and for which reasonable and supportable information
to apply the modified retrospective approach was not available
without undue cost or effort.
The Group has determined the CSM of the liability for remaining
coverage at the transition date, as the difference between the fair
value of the group of insurance contracts and the fulfilment cash
flows measured at that date. In determining fair value, the Group
has applied the requirements of IFRS 13 Fair Value Measurement.
Using Level 3 inputs in accordance with the IFRS 13 hierarchy,
the Group has measured the fair value of the contracts as the sum
of:
(-) The best estimate of the liability, determined using a discounted cash flow technique
and assumptions used for Solvency II reporting; 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 for with-profits contracts an amount to reflect the risk around the quantum of
future shareholder transfers.
For reinsurance contracts held the calculation above has been
carried out twice, using gross of reinsurance cash flows and net of
reinsurance cash flows. The fair value of reinsurance contracts
held has been determined as the difference between the two
amounts.
The allowance for the cost of capital is based on:
(-) Capital at 135% of the Group Solvency II internal model Solvency Capital Requirements
(SCR) on a diversified basis, plus Group Solvency II Risk Margin less allowance for
the Group's Transitional Measure on Technical Provisions (TMTP) for pre-2016 incepting
contracts.
(-) Cost of capital at 7%.
(-) Investment return based on assets backing capital, net of investment management expenses
and corporation tax.
In addition to the allowance for the cost of capital, key
assumptions underpinning the determination of the fair value are
set out below:
(-) Discount rate
The discount rate used for with-profits contracts is the prescribed
Solvency II risk-free curve.
The discount rate used for non-profit annuity contracts is the prescribed
Solvency II risk-free curve plus the Group's matching adjustment. The
matching adjustment for the shareholder non-profit annuities is 106
basis points ("bps") per annum and for the non-profit annuities in the
With-Profits Fund is 94 bps per annum.
(-) Longevity assumptions
The longevity assumptions for annuity contracts are consistent with
the best estimate basis used for the Group's Solvency II reporting as
at 31 December 2021, as disclosed in the Group Solvency and Financial
Condition Report as at 31 December 2021.
(-) Shareholder transfers
For with-profits contracts the level of compensation required to reflect
the risk in relation to future shareholder transfers is 20% of the present
value of future shareholder transfers.
(-) Expense assumptions
Renewal expenses are based on the Group's best estimate view and are
considered to be in line with what other market participants would assume.
Investment management fees are negotiated on an arms-length basis, including
those for the assets managed by the Group's asset managers. Therefore
the Group assumes that a market participant would adopt comparable investment
management expense assumptions.
The fair value was calculated at an aggregate level based on
availability of Solvency II inputs. The fair value was then
allocated to IFRS 17 portfolios based on estimates of the
underlying inputs at a more granular level based on consideration
of the characteristics of the portfolio and output from the SCR
reporting processes.
The fair value has been 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 has determined 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 contain contracts issued more than one year
apart. For contracts valued under the General Measurement Model,
locked-in discount rates and financial assumptions applied after
transition have been determined as at 1 January 2022.
The tables below show selected sensitivities of the fair value
to the assumed parameters.
Sensitivity of the fair value of with-profits business to the
compensation required in relation to shareholder transfers
Impact
on fair
Parameter Fair value value
GBPm GBPm
Base 20% 42,130 n/a
============ ========= ========== ========
Sensitivity 25% 42,233 103
============ ========= ========== ========
Sensitivity of the fair value to the cost of capital rate
With-profits Annuity contracts
contracts
Impact Impact
on fair on fair
Parameter Fair value value Fair value value
GBPm GBPm GBPm GBPm
Base 7% 42,130 n/a 28,670 n/a
============ ========= ========== ======== ========== ========
Sensitivity 6% 42,123 (7) 28,379 (291)
============ ========= ========== ======== ========== ========
Sensitivity 8% 42,135 5 28,922 252
============ ========= ========== ======== ========== ========
Fulfilment cash flows
The fulfilment cash flows at 1 January 2022 have been measured
in accordance with the accounting policies set out in Note 1.4. For
this purpose the key assumptions are set out below.
The risk-free yield curve for with-profits and annuity contracts
is shown in the table below:
Risk-free yield curve (excluding illiquidity premium)
1 year 5 years 10 years 15 years 20 years
As at 1 January 2022 0.76% 1.05% 0.95% 0.91% 0.88%
===================== ====== ======= ======== ======== ========
For with-profits contracts, future investment return assumptions
and discount rates (using a bottom-up approach) are set at the
above risk-free yield curve plus an illiquidity premium of 34
bps.
For annuity contracts, discount rates (using a top-down
approach) are set at the above risk-free yield curve plus an
illiquidity premium of 109 bps for shareholder-backed annuities and
99 bps for annuities in the With-Profits Fund.
The longevity assumptions for annuity contracts are consistent
with the best estimate basis used for the Group's Solvency II
reporting, as disclosed in the Group Solvency and Financial
Condition Report as at 31 December 2021.
Comparison with IFRS 4
The timing of profit recognition changed 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
prudent 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 represented
the excess of the fund's assets over policyholder liabilities that
is yet to be appropriated between policyholders and shareholders with
no allocation to equity. There is no unallocated surplus under IFRS
17 although IFRS 17 requires a liability to be held for the policyholders'
share of the surplus assets in the With-Profits Fund. Under IFRS 17
there is equity for the first time relating to the With-Profits Fund.
The main drivers of change in equity attributable to equity
holders as reported in the consolidated statement of financial
position on adoption of IFRS 17 on 1 January 2022 are as
follows:
Driver Description GBPm
Equity attributable to equity holders as previously
reported 5,345
Includes impact of:
* Removing the prudent margins required under IFRS 4
for annuity liabilities (primarily for demographic
and expenses assumptions).
* Different basis for determining discount rate for
Liability remeasurement both annuity and with-profit liabilities. 1,334
Under IFRS 17 the present value of all future shareholder
transfers are allowed for as a negative liability through
Value of shareholder the Variable Fee component (broadly the entity's expected
transfers future profit). 3,954
Introduction of CSM which represents unearned profit
on insurance contracts and investment contracts with
DPF which will be released over the life of the contract
CSM in line with the provision of service. (4,400)
Introduction of risk adjustment which represents compensation
for non-financial risk and replaces the IFRS 4 prudent
Risk adjustment margins. (487)
Shareholder
interest in As a consequence of applying the mutualisation requirements
excess assets of IFRS 17, a portion of the with-profits estate is
in the With-Profits allocated to shareholders. Under IFRS 4, this was included
Fund within the unallocated surplus of the With-Profits Fund. 1,687
Tax and other Impact of change in deferred tax and other minor effects. (169)
======================== ================================================================ =======
Remeasurement of equity attributable to equity holders
on adoption 1,919
========================================================================================= =======
Equity attributable to equity holders restated 7,264
========================================================================================= =======
IFRS 9 Financial Instruments
IFRS 9 replaced IAS 39 Financial Instruments: Recognition and
Measurement for annual periods beginning on or after 1 January
2018. However, the Group elected, under the amendments to IFRS 4 to
apply the temporary exemption from IFRS 9, deferring the initial
application date of IFRS 9 to align with the initial application of
IFRS 17.
The Group has applied IFRS 9 retrospectively and restated
comparative information for the six months ended 30 June 2022 and
for the year ended 31 December 2022 for financial instruments in
the scope of IFRS 9. Differences arising from the adoption of IFRS
9 have been recognised in retained earnings as of 1 January 2022
and presented in the condensed consolidated statement of changes in
equity and have been disclosed below.
The nature of the changes in accounting policies can be
summarised as follows:
(i) Classification of financial assets and financial
liabilities
IFRS 9 includes three classification categories for financial
assets: measured at amortised cost, Fair Value through Other
Comprehensive Income (FVOCI) and Fair Value Through Profit or Loss
(FVTPL). The classification of financial assets is generally based
on the business model in which a financial asset is managed and its
contractual cash flow characteristics. It eliminates the previous
categories of held-to-maturity investments, loans and receivables,
and available-for-sale financial assets applied by IAS 39.
IFRS 9 has not had a significant effect on the Group's financial
instruments classification as the majority were already measured at
FVTPL. The Group does not hold any assets measured at FVOCI.
(ii) Impairment of financial assets
IFRS 9 replaced the 'incurred loss' model in IAS 39 with a
forward-looking 'expected credit loss' model for recording
impairment. The new impairment model applies to financial assets
measured at amortised cost and contract assets under IFRS 15. The
expected credit loss model results in earlier recognition of
impairment as compared to the previous model which required
objective evidence of impairment to exist before any impairment was
recorded.
(iii) Transition
Changes in accounting policies resulting from the adoption of
IFRS 9 have been applied retrospectively, except as described
below:
- The comparative period has been restated adopting the overlay approach.
- The following assessments have been made on the basis of the facts and
circumstances that existed at 1 January 2023.
- The determination of the business model within which a financial asset
is held.
- The designation and revocation of previous designations of certain
financial assets and financial liabilities as measured at FVTPL.
- If a financial asset had low credit risk at 1 January 2023, then the
Group determined that the credit risk on the asset had not increased
significantly since initial recognition .
The adoption of IFRS 9 has not had a material impact on the
Group's basic or diluted EPS for the six months ended 30 June 2023,
30 June 2022 and 31 December 2022.
Details of the changes and implications resulting from the
adoption of IFRS 9 are presented below.
(iv) Effect of initial application
Classification of financial assets and financial liabilities
The following table and the accompanying notes below explain the
original measurement categories under IAS 39 and the new
measurement categories under IFRS 9 for each class of the Group's
financial assets and financial liabilities as at 1 January
2023.
As at 31 December As at 1 January As at 31 As at 1 January
2022 2023 December 2023
2022
Original
New classification carrying New carrying
Original classification under IFRS amount under amount under
under IAS 39 9 IAS 39 IFRS 9
GBPm GBPm
Financial assets
Equity securities and pooled
investment funds FVTPL designated FVTPL mandatory 70,127 70,127
Loans Loans and receivables FVTPL mandatory 2,114 2,018
Loans FVTPL mandatory FVTPL mandatory 1,216 1,216
Debt securities FVTPL designated FVTPL mandatory 62,821 62,821
FVTPL held for
Derivative assets trading FVTPL mandatory 2,850 2,850
Deposits Amortised cost Amortised cost 21,401 21,399
Accrued investment income
and other debtors(i) Loans and receivables Amortised cost 2,408 2,404
Cash and cash equivalents Loans and receivables Amortised cost 4,884 4,884
============================= ======================== =================== ============= ===============
Total financial assets 167,821 167,719
============================================================================ ============= ===============
(i) Original carrying value differs from that published in the
Annual Report and Accounts for the year ended 31 December 2022
following reclassifications.
As at 31 December As at 1 January As at 31 As at 1 January
2022 2023 December 2023
2022
Original
New classification carrying New carrying
Original classification under IFRS amount under amount under
under IAS 39 9 IAS 39 IFR 9
GBPm GBPm
Financial liabilities
Investment contract liabilities
without DPF FVTPL designated FVTPL designated 11,937 11,937
Third party interest in consolidated
funds FVTPL designated FVTPL designated 10,389 10,389
Subordinated liabilities and
other borrowings Amortised cost Amortised cost 7,537 7,537
FVTPL held for
Derivative liabilities trading FVTPL mandatory 4,185 4,185
Other financial liabilities Amortised cost Amortised cost 2,172 2,172
Accruals, deferred income
and other liabilities FVTPL designated FVTPL designated 246 246
Accruals, deferred income
and other liabilities(i) Amortised cost Amortised cost 6,522 6,522
===================================== ======================== =================== ============= ===============
Total financial liabilities 42,988 42,988
==================================================================================== ============= ===============
(i) Original carrying value differs from that published in the
Annual Report and Accounts for the year ended 31 December 2022
following reclassifications.
The Group's accounting policies on the classification of
financial instruments under IFRS 9 are set out in Note 1.4. The
application of the revised Group's accounting policies resulted in
the reclassifications set out in the table above and explained
below.
- As at 31 December 2022, Loans of GBP2,114m which have previously been
classified as loans and receivables are managed on a fair value basis
and are, therefore, measured at FVTPL on the basis of the business model
for managing loans under IFRS 9.
The following table reconciles the carrying amounts of financial
assets under IAS 39 to the carrying amounts under IFRS 9 on
transition on 1 January 2023.
31 December 1 January
2022 2023
IAS 39 Reclassification Remeasurement IFRS 9
GBPm GBPm GBPm GBPm
FVTPL:
Equity securities and pooled investment
funds 70,127 - - 70,127
Loans 1,216 2,114 (96) 3,234
Debt securities 62,821 - - 62,821
Derivative assets - net of derivative
liabilities (1,335) - - (1,335)
======================================== =========== ================ ============= =========
Total FVTPL 132,829 2,114 (96) 134,847
======================================== =========== ================ ============= =========
31 December 1 January
2022 2023
IAS 39 Reclassification Remeasurement IFRS 9
GBPm GBPm GBPm GBPm
Amortised cost:
Loans 2,114 (2,114) - -
Deposits 21,401 - (2) 21,399
Accrued investment income and
other debtors 2,408 - (4) 2,404
Cash and cash equivalents 4,884 - - 4,884
============================== =========== ================ ============= =========
Total amortised cost 30,807 (2,114) (6) 28,687
============================== =========== ================ ============= =========
As at 1 January 2023 the transition to IFRS 9 did not result in
reclassification or remeasurement of the carrying amounts of
financial liabilities.
Impairment of financial assets
The following table reconciles the closing impairment allowance
under IAS 39 as at 31 December 2022 with the opening expected
credit losses (ECLs) under IFRS 9 as at 1 January 2023.
Impairment
allowance
under IAS ECLs under
39 at 31 IFRS 9 at
December 1 January
2022 Remeasurement 2023
GBPm GBPm GBPm
Loans 30 (30) -
Deposits - 2 2
Accrued investment income and other debtors 37 4 41
Cash and cash equivalents - - -
============================================ ========== ============= ==========
Total impairment allowances/ECLs 67 (24) 43
============================================ ========== ============= ==========
IFRS 7 includes disclosure requirements at the date of initial
application of IFRS 9 (1 January 2023). As the Group has restated
comparative balances effective 1 January 2022, the following
additional tables have been included to provide the user with
additional information about the transition to IFRS 9 and the
adjustments to opening balances of retained earnings as at 1
January 2022, in conjunction with the effects of the transition to
IFRS 17 on that date.
A reconciliation between the carrying amounts under IAS 39 and
the balances reported under IFRS 9 as at 1 January 2022 is, as
follows:
As at 31 December As at 1 January As at 31 As at 1 January
2021 2022 December 2022
2021
Original
New classification classification New carrying
Original classification under IFRS amount under amount under
under IAS 39 9 IAS 39 IFRS 9
GBPm GBPm GBPm GBPm
Financial assets
Equity securities and pooled
investment funds FVTPL designated FVTPL mandatory 74,069 74,069
Loans Loans and receivables FVTPL mandatory 2,534 2,605
Loans FVTPL designated FVTPL mandatory 3,275 3,275
Debt securities FVTPL designated FVTPL mandatory 81,059 81,059
FVTPL held for
Derivative assets trading FVTPL mandatory 3,373 3,373
Deposits Loans and receivables Amortised cost 17,633 17,632
Accrued investment income
and other debtors(i) Loans and receivables Amortised cost 2,837 2,833
Cash and cash equivalents Loans and receivables Amortised cost 6,908 6,908
============================= ======================== =================== =============== ===============
Total financial assets 191,688 191,754
============================================================================ =============== ===============
(i) Original carrying value differs from that published in the
Annual Report and Accounts for the year ended 31 December 2021
following reclassifications.
As at 31 December As at 1 January As at 31 As at 1 January
2021 2022 December 2022
2021
Original
New classification classification New carrying
Original classification under IFRS amount under amount under
under IAS 39 9 IAS 39 IFRS 9
GBPm GBPm GBPm GBPm
Financial liabilities
Investment contract liabilities
without DPF FVTPL designated FVTPL designated 14,884 14,884
Third party interest in consolidated
funds FVTPL designated FVTPL designated 12,636 12,636
Subordinated liabilities and
other borrowings FVTPL designated FVTPL designated 1,159 1,159
Subordinated liabilities and
other borrowings Amortised cost Amortised cost 7,771 7,771
Derivative liabilities FVTPL designated FVTPL designated 2,689 2,689
Other financial liabilities Amortised cost Amortised cost 2,882 2,882
Accruals, deferred income
and other liabilities FVTPL designated FVTPL designated 403 403
Accruals, deferred income
and other liabilities(i) Amortised cost Amortised cost 5,661 5,661
===================================== ======================== =================== =============== ===============
Total financial liabilities 48,085 48,085
==================================================================================== =============== ===============
(i) Original carrying value differs from that published in the
Annual Report and Accounts for the year ended 31 December 2021
following reclassifications.
The tables above and below explain the reclassifications of
assets and liabilities on application of the new Group accounting
policies for classification of financial instruments under IFRS 9
set out in Note 1.4.
- As at 31 December 2021, Loans of GBP2,534m which have previously been
classified as loans and receivables under IAS 39, are managed on a fair
value basis and are, therefore, measured at FVTPL on the basis of the
business model for managing loans under IFRS 9.
The following table reconciles the carrying amounts of financial
assets under IAS 39 to the carrying amounts under IFRS 9 on
transition to IFRS 9 on 1 January 2022.
31 December 1 January
2021 2022
IAS 39 Reclassification Remeasurement IFRS 9
GBPm GBPm GBPm GBPm
FVTPL:
Equity securities and pooled investment
funds 74,069 - - 74,069
Loans 3,275 2,534 71 5,880
Debt securities 81,059 - - 81,059
Derivative assets - net of derivative
liabilities 684 - - 684
======================================== =========== ================ ============= =========
Total FVTPL 159,087 2,534 71 161,692
======================================== =========== ================ ============= =========
31 December 1 January
2021 2022
IAS 39 Reclassification Remeasurement IFRS 9
GBPm GBPm GBPm GBPm
Amortised cost:
Loans 2,534 (2,534) - -
Deposits 17,633 - (1) 17,632
Accrued investment income and
other debtors 2,837 - (4) 2,833
Cash and cash equivalents 6,908 - - 6,908
============================== =========== ================ ============= =========
Total amortised cost 29,912 (2,534) (5) 27,373
============================== =========== ================ ============= =========
As at 1 January 2022 the transition to IFRS 9 did not result in
reclassification or remeasurement of the carrying amounts of
financial liabilities.
The following table reconciles the closing impairment allowance
under IAS 39 as at 31 December 2021 with the opening loss allowance
under IFRS 9 as at 1 January 2022.
Impairment
allowance
under IAS ECLs under
39 at 31 IFRS 9 at
December 1 January
2021 Remeasurement 2022
GBPm GBPm GBPm
Loans 18 (18) -
Deposits - 1 1
Accrued investment income and other debtors 77 4 81
Cash and cash equivalents - - -
============================================ ========== ============= ==========
Total impairment allowances/ECLs 95 (13) 82
============================================ ========== ============= ==========
The impact on key financial statement lines in the Group's
consolidated statement of financial position on transition to IFRS
9 and IFRS 17 is presented below:
Reclassification Remeasurement
due to adoption due to adoption
31 December of IFRS 9 of IFRS 9
2021 as previously and IFRS and IFRS 1 January
reported 17 17 2022 restated
Financial statement line item GBPm GBPm GBPm GBPm
IFRS 9
Equity securities and pooled investment
funds 74,069 - - 74,069
Loans 5,809 - 71 5,880
Debt securities 81,059 - - 81,059
Derivative assets - net of derivative
liabilities 684 - - 684
Cash and cash equivalents 6,908 - - 6,908
IFRS 17
Reinsurance contract assets 1,669 - 46 1,715
Reinsurance contract liabilities - - (546) (546)
Insurance contract assets - - 28 28
Insurance contract liabilities (63,223) (99,466) 1,868 (160,821)
Investment contract liabilities
with discretionary participation
features (82,743) 82,743 - -
Investment contract liabilities
without discretionary participation
features (14,884) - - (14,884)
IFRS 9 and IFRS 17
Accrued investment income and
other debtors 2,647 - 186 2,833
Unallocated surplus of the With-Profits
Fund (16,723) 16,723 - -
Other 10,073 - 266 10,114
======================================== =================== ================ ================ ==============
Equity attributable to equity
holders 5,345 - 1,919 7,039
======================================== =================== ================ ================ ==============
Other accounting announcements adopted by the Group
The Group has also adopted the following standards,
interpretations and amendments which became effective from 1
January 2023:
- Disclosure of Accounting Policies (Amendments to IAS 1), issued in March
2022
- Definition of Accounting Estimates (Amendments to IAS 8), issued in
March 2022
- Deferred Tax related to Assets and Liabilities arising from a Single
Transaction (Amendments to IAS 12), issued in August 2022
- International Tax Reform - Pillar Two Model Rules (Amendments to IAS
12), issued in May 2023
The above interpretations and amendments to standards are not
considered to have a material effect on these condensed
consolidated interim financial statements. The Group has not early
adopted any other standard, interpretation or amendment that has
been issued but is not yet effective.
1.4 Material accounting policies
The accounting policies applied in the condensed consolidated
financial statements and the judgements made by management in
applying them are consistent with those set out in the 2022
consolidated financial statements, except for changes in relation
to the adoption of IFRS 17 and IFRS 9 as set out above. The updated
accounting policies for Insurance contracts and Financial
instruments are set out below.
1.4.1 Insurance Contracts
(i) 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.
IFRS 17 defines insurance contracts as contracts under which one
party (the issuer) accepts significant insurance risk from another
party (the policyholder) by agreeing to compensate the policyholder
if a specified uncertain future event (the insured event) adversely
affects the policyholder.
Reinsurance contracts are insurance contracts issued by one
entity (the reinsurer) to compensate another entity for claims
arising from one or more insurance contracts issued by that other
entity (underlying contracts).
The Group judges that a contract transfers significant insurance
risk if there is at least one scenario where the amounts that could
be payable under the contract represent 10% or more than the
amounts payable if the insured event does not occur.
In addition to accepting insurance risk from the insurance
contracts issued the Group is exposed to financial risk from the
insurance and investment contracts it issues and reinsurance
contracts it holds.
The Group's reinsurance contracts are predominantly contracts
held under which risks are transferred to an external third-party.
The Group has one reinsurance contract under which it accepts risks
from with-profits contracts issued by another insurer.
Insurance contracts may be issued and reinsurance contracts may
be initiated by the Group, or they may be acquired in a business
combination or in a transfer of contracts that do not form a
business. All references in these accounting policies to 'insurance
contracts' and 'reinsurance contracts' include contracts issued,
initiated or acquired by the Group, unless otherwise stated.
Investment contracts with DPF have the legal form of insurance
contracts but do not transfer significant insurance risk and so are
classified as financial instruments. Nevertheless such contracts
fall within the scope of IFRS 17.
An investment contract with DPF is a financial instrument that
provides a particular investor with the contractual right to
receive, as a supplement to an amount not subject to the discretion
of the issuer, additional amounts:
- that are expected to be a significant portion of the total contractual
benefits;
- the timing or amount of which are contractually at the discretion of
the issuer; and
- that are contractually based on:
- the returns on a specified pool of contracts or a specified type
of contract;
- realised and/or unrealised investment returns on a specified pool
of assets held by the issuer; or
- the profit or loss of the entity or fund that issues the contract.
The Group judges that the additional discretionary benefits are
significant when they are expected to be at least 5% of the total
contractual benefits.
The Group's investment contracts with DPF comprise the
with-profits business that does not transfer significant insurance
risk. This includes investments in the PruFund range of funds
issued to individual investors.
Investment contracts without DPF are not accounted for under
IFRS 17 but instead fall within the scope of IFRS 9. For the Group
these primarily comprise unit-linked contracts that do not transfer
significant insurance risk. Also within the scope of IFRS 9 are
contracts issued to corporate bodies to facilitate investment in
PruFund, which as a result of cancellation rights included in those
contracts, are judged by the Group to not provide significant
discretionary benefits.
Some investment contracts issued by the Group provide
policyholders with the option to invest their premiums in both
unit-linked funds and with-profits funds (including PruFund). The
Group accounts for such contracts as two separate in substance
contracts enabling the investment in with-profits and PruFund to be
accounted for under IFRS 17 and the investment in unit-linked funds
to be accounted for under IFRS 9.
The Group has previously issued and still holds a book of equity
release mortgages. These contracts contain a no negative equity
guarantee which ensures that should the policyholder pass away or
move into residential care during the term of the instrument and
the accrued loan value is in excess of the sale proceeds of the
house, then the policyholder's beneficiaries would not have to
repay any excess. This feature has been assessed to consider
whether it gives rise to insurance risk. The Group judges the
equity release mortgages meet the definition of an insurance
contract but the compensation for insured events is limited to the
amount otherwise required to settle the policyholder's obligation
created by the contract. In this circumstance IFRS 17 permits the
issuer of contracts to choose whether to account for these
contracts under IFRS 17 or IFRS 9. The Group has opted to account
for these contracts under IFRS 9.
(ii) Separating components
At inception, the Group must identify and separate the following
components from contracts within the scope of IFRS 17 and account
for the components as if they were stand-alone financial
instruments:
- derivatives embedded in the contract whose economic characteristics
and risks are not closely related to those of the host contract, and
where the component issued as standalone contract is not itself a contract
that falls within the scope of IFRS 17; and
- distinct investment components other than investment components with
discretionary participation features: i.e. investment components that
are not highly inter-related with the insurance components and for which
contracts with equivalent terms are sold, or could be sold, separately
in the same market or the same jurisdiction.
After separating any financial instrument components, the Group
must separate any promises to transfer to policyholders distinct
goods or services other than insurance coverage and investment
services and account for them as separate contracts with customers
(i.e. these are accounted for under IFRS 15). A good or service is
distinct if the policyholder can benefit from it either on its own
or with other resources that are readily available to the
policyholder. A good or service is not distinct and is accounted
for together with the insurance component if the cash flows and
risks associated with the good or service are highly inter-related
with the cash flows and risks associated with the insurance
component, and the Group provides a significant level of service by
integrating the good or service with the insurance component.
The Group has assessed the contracts it has issued and no
contracts were identified as containing embedded derivatives,
distinct investment components or distinct goods and non-insurance
services that must be separated and accounted for under other IFRS
Standards.
Certain contracts have been determined to contain non-distinct
investment components, rights to a refund of premiums, and other
non-insurance components (i.e. amounts payable to a policyholder
that are not contingent on the occurrence of an insured event)
which are not required to be separated from the host insurance
contract but do require specific treatment under IFRS 17. These
payments are excluded from the value of insurance revenue and
insurance service expenses presented in profit and loss.
Non-distinct investment components, rights to a refund of
premiums, and other non-insurance components typically arise in
contracts where there is some form of surrender benefit payable at
any time of the policyholder's choosing. The Group has opted as an
accounting policy choice to consistently define the surrender value
to be net of surrender charges or penalties when determining the
amounts to exclude from insurance revenue and insurance service
expenses.
(iii) Level of aggregation
Insurance contracts
Insurance contracts issued are aggregated into groups for
measurement purposes. Groups of insurance contracts are first
determined by identifying portfolios of insurance contracts, each
comprising contracts subject to similar risks and managed
together.
The Group interprets that, when aggregating contracts by similar
risk, all risks must be considered but 'similar risks' is not
interpreted to mean 'identical risks'. The Group judges that an
appropriate method is to aggregate contracts according to which of
the three risk categories of protection, longevity and investment
is the dominant risk which the Group is exposed to from writing the
contract. These three categories have been chosen as they best
represent the risks that the Group is exposed to without
unnecessary granularity and subdivision.
In aggregating contracts that are managed together the Group
considers the following factors:
- The existence of a common pool of assets backing the contracts;
- the approach to risk management, for example hedging strategies or the
existence of reinsurance arrangements;
- for business in a with-profits fund, the approach to risk-bearing, profit-sharing
and the application of discretion;
- the source of the business, e.g. UK or overseas; and
- the categorisation of contracts for the segmental reporting reported
in the accounts or for internal management information.
Each portfolio is divided into a minimum of:
- a group of contracts that are onerous on initial recognition, if any;
- a group of contracts that at initial recognition have no significant
possibility of becoming onerous subsequently, if any; and
- a group of the remaining contracts in the portfolio, if any.
The Group does not currently have any groups of contracts that
fall into the category that on initial recognition have no
significant possibility of becoming onerous subsequently.
Each of these groups must then be further subdivided, if
necessary to ensure that each group does not contain contracts that
have been issued more than one year apart.
For annuities, unisex pricing may be required under gender
neutral pricing regulations, and may for example result in policies
sold to females being onerous and policies sold to males being
non-onerous. As the other elements of the pricing basis are
identical, the difference in onerousness is solely due to the legal
constraint. IFRS 17 permits such contracts to be included in the
same group.
Reinsurance contracts held
Reinsurance contracts held are similarly aggregated into groups
for measurement purposes by first identifying portfolios. However,
rather than dividing the portfolios into three groups based on
profitability, the contracts are grouped according to whether or
not there is net gain at initial recognition for a group, that is
into a minimum of:
- a group of contracts for which there is a net gain on initial recognition,
if any;
- a group of contracts for which, on initial recognition, there is no significant
possibility of there being a net gain subsequently, if any; and
- a group of the remaining contracts in the portfolio, if any.
As for groups of contracts issued, no group may contain
contracts that have been issued more than one year apart and so the
groups must be further subdivided to meet this requirement as
necessary.
The Group does not currently have any groups of contracts that
fall into the category of, on initial recognition, having no
significant possibility of there being a net gain subsequently.
Some reinsurance contracts provide cover for underlying
contracts that are included in different groups. However, the Group
concludes that the reinsurance contract's legal form of a single
contract reflects the substance of the Group's contractual rights
and obligations, considering that the different covers lapse
together and are not sold separately. As a result, the reinsurance
contract is not separated into multiple insurance components that
relate to different underlying groups.
(iv) Recognition
A group of contracts issued by the Group is recognised from the
earliest of:
- the beginning of the coverage period of the group (i.e. the period during
which the Group provides services in respect of any premiums within
the boundaries of the contracts);
- when the first payment from a policyholder in the group becomes due
or, if there is no contractual due date, when it is received from a
policyholder; and
- for a group of onerous contracts, when the group becomes onerous.
The Group is required to determine whether any contracts form a
group of onerous contracts before the earlier of the first two
dates above if facts and circumstances indicate there is such a
group.
An insurance contract acquired in a transfer of contracts or a
business combination is recognised on the date of acquisition.
When the contract is recognised, it is added to an existing
group of contracts or, if the contract does not qualify for
inclusion in an existing group, it forms a new group to which
future contracts are added. Groups of contracts are established on
initial recognition and their composition is not revised once all
contracts have been added to the group.
The recognition date of an investment contract with DPF is the
date that the entity becomes party to the contract.
A group of reinsurance contracts held is recognised from the
earlier of the following:
- the beginning of the coverage period of the group of reinsurance contracts
held; and
- the date the Group recognises an onerous group of underlying insurance
contracts, if the Group entered into the related reinsurance contract
held in the group of reinsurance contracts held at or before that date.
For groups of reinsurance contracts held that provide
proportionate coverage, which for the Group consists of quota share
reinsurance contracts, recognition is delayed until the date that
any underlying insurance contract is initially recognised, if that
date is later than the beginning of the coverage period of the
group of reinsurance contracts held.
Reinsurance contracts that are acquired are recognised from the
date of acquisition.
(v) Onerous groups of contracts
The Group considers the following factors to identify if a group
of contracts is onerous:
- The Group's pricing frameworks;
- profit testing results; and
- calculations for individual contracts.
(vi) Contract boundary
The measurement of a group of contracts includes all of the
future cash flows within the boundary of each contract in the
group, determined as follows:
Insurance contracts
Cash flows are within the contract boundary if they arise from
substantive rights and obligations that exist during the reporting
period in which the Group can compel the policyholder to pay
premiums or has a substantive obligation to provide services
(including insurance coverage and any investment services).
A substantive obligation to provide services ends when:
- the Group has the practical ability to reassess the risks of the particular
policyholder and can set a price or level of benefits that fully reflects
those reassessed risks; or
- the Group has the practical ability to reassess the risks of the portfolio
that contains the contract and can set a price or level of benefits
that fully reflects the risks of that portfolio, and the pricing of
the premiums up to the reassessment date does not take into account
risks that relate to periods after the reassessment date.
The reassessment of risks considers only risks transferred from
policyholders to the Group, which may include both insurance and
financial risks, but exclude lapse and expense risks.
Investment contracts with discretionary participation
features
Cash flows are within the contract boundary of an investment
contract with discretionary participation features if they result
from a substantive obligation of the entity to deliver cash at a
present or future date. The entity has no substantive obligation to
deliver cash if it has the practical ability to set a price for the
promise to deliver the cash that fully reflects the amount of cash
promised and related risks.
Reinsurance contracts
Cash flows are within the contract boundary if they arise from
substantive rights and obligations that exist during the reporting
period in which the Group is compelled to pay amounts to the
reinsurer or has a substantive right to receive services from the
reinsurer. A substantive right to receive services from the
reinsurer ends when the reinsurer:
- has the practical ability to reassess the risks transferred to it and
can set a price or level of benefits that fully reflects those reassessed
risks; or
- has a substantive right to terminate the coverage.
In assessing contract boundaries the Group makes the following
judgements:
Granularity of contract boundary assessment
The contract boundary is assessed at an individual contract
level.
Practical ability to set a price or level of benefits that fully
reflect the risks
Only policyholder risks (the insurance and financial risks that
the insurance contract transfers from the policyholder to the
Group) are considered when assessing the Group's ability to set a
price or level of benefits that fully reflects the risks.
Individual components of a single insurance contract are assessed
separately, and the full insurance contract is subject to the same
single boundary which is the longest of the individual
components.
The Group considers the practical ability to set a price or
level of benefits that fully reflects the risks only exists where
the Group is not prevented from setting the same price it would for
a new contract with the same characteristics. In addition to the
constraints that apply in relation to new business, constraints on
the Group's ability to set a price or level of benefits that fully
reflects the risks also include wider market competitiveness and
commercial considerations and contractual, legal or regulatory
restrictions.
The constraints must have commercial substance to bind the
Group, where commercial substance is defined as having a
'discernible effect on the economics of the transaction'.
Right to terminate the contract
Policyholder behaviour is not relevant in assessing whether a
contract binds the Group. The Group includes, within the fulfilment
cash flows, the probability-weighted expectation of such
events.
Adding insurance coverage
Where there is an option to add insurance coverage to the same
contract at a future date, then the cashflows arising from the
option will only fall outside the contract boundary if the Group
has the practical ability to fully reassess the risks for the
entire contract (including the option) at the point the option is
exercised.
Frequency of assessment
The assessment of the contract boundary is performed and
reassessed to include the effect of changes in circumstances on the
entity's substantive rights and obligations.
Treatment of non-contractual premium top-ups for accumulating
with-profits and PruFund
The Group judges that, on initial recognition of an accumulating
with-profits or PruFund contract, it has no substantive right to
any profits associated with future non-contractual premiums and no
substantive obligations. Therefore future non-contractual premiums
are considered to be outside the contract boundary of the original
contract. Non-contractual top-up premiums for these contracts are
recognised from the date of payment and are reported as new
business in the year of payment.
(vii) Measurement
Insurance contracts - initial measurement
On initial recognition, the Group measures a group of insurance
contracts as the total of
a the fulfilment cash flows, which comprise estimates of future cash flows,
adjusted to reflect the time value of money and the associated financial
risks, and a risk adjustment for non-financial risk; and
b the CSM.
Estimates of future cash flows
The estimated future cash flows are an explicit, unbiased and
probability-weighted estimate (i.e. expected value) of the present
value of the future cash outflows minus the present value of the
future cash inflows that will arise as the entity fulfils insurance
contracts. For most contracts the cash inflows and outflows
primarily consist of premiums, claims and costs relating to the
fulfilment of the contracts.
The With-Profits Fund contains surplus assets that have
accumulated from a number of sources over a long period. Surpluses
may continue to arise, 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. The
expression "mutualisation" is used to refer to the feature whereby
the cash flows of some contracts may affect or be affected by the
cash flows of other contracts.
This feature of the With-Profits Fund is recognised under IFRS
17 through:
- Adjustments to the estimated future cash flows of each with-profits group
of insurance contracts to reflect the policyholders' share of the future
surpluses/deficits that are expected to emerge from that group of insurance
contracts.
- A liability that is separate to the liabilities for the groups of insurance
contracts that reflects the additional amounts expected to be paid to
current or future policyholders (in accordance with paragraph B71 of
IFRS 17).
- Estimating the policyholders' share of the surplus assets is an area
requiring significant judgement.
IFRS 17 requires that only costs that are directly attributable
to fulfilling the insurance contracts are included in the cash
flows. Management considers that the majority of the expenses
incurred in relation to contracts within the scope of IFRS 17 meet
this requirement. Examples of costs that would typically be
excluded are those relating to corporate restructuring, brand
marketing, and regulatory failings.
IFRS 17 requires that cash flows within the contract boundary
include costs that the entity will incur in providing an investment
activity to enhance benefits for the policyholder. The Group's
interpretation is that the Investment Management Expenses (IMEs)
incurred on assets backing the fulfilment cash flows should be
included in the fulfilment cash flows for the majority of business,
with the exception of non-profit protection contracts. This is on
the basis of the effect of the Group's investment activities and
expected investment returns on the benefits payable, even if the
benefits are contractually fixed at inception (as for annuity
contracts). If the Group were to invest the premiums received for
annuity contracts in less risky asset classes, a lower level of
benefits would then be offered for the same premiums. Therefore,
the benefits to the policyholder if an insured event occurs are
enhanced by the investment activities performed, and so the
associated expenses are included within the fulfilment cash
flows.
Where there are cash flows between different components of the
reporting entity (such as policyholder funds and shareholder funds)
IFRS 17 requires that these are not included when estimating the
cash flows that will arise as the entity fulfils an existing
insurance contract, provided these cash flows do not change the
amount that will be paid to the policyholders.
The Group's interpretation is that expenses should reflect the
costs incurred by the Group, which may differ from the internal
charges to companies within the Group.
The cash flows of a group of insurance contracts do not reflect
the Group's non-performance risk.
Discount rates
Cash flows are discounted using risk-free yield curves adjusted
to reflect the liquidity characteristics of the contracts.
The Group determines 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. There is no requirement 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 applies the top-down approach for non-profit annuity
contracts and the bottom-up approach for all other contracts,
including with-profits.
The reference portfolios chosen for non-profit annuities are the
Assigned Portfolios used for the Solvency II Matching Adjustment.
These are considered to be suitable as reference portfolios for
IFRS 17 reporting because their objective is to closely match the
liability cash flows and there is strong governance around their
management.
The largest adjustment made to reference portfolio yield is in
relation to credit risk. IFRS 17 is not prescriptive as to how the
adjustment for credit risk should be determined other than that it
should reflect market risk premiums for credit risk. The Group
continues to calculate the credit risk adjustment using the same
approach previously used for IFRS 4 reporting. This methodology is
considered appropriate for IFRS 17 reporting as it incorporates
allowances for expected and unexpected credit events, including
internal and external views on the outlook for credit risk, and
considers the relationship between credit risk and yield
spreads.
For with-profits contracts the illiquidity premium is derived
from a portfolio of fixed interest assets, comprising highly liquid
government bonds and less liquid corporate bonds, that have similar
characteristics and duration to the liabilities. The illiquidity
premium for this portfolio is determined as the spread over
risk-free rates less an allowance for credit risk. A weighting is
then applied to this premium to reflect the relative liquidity
characteristics of the with-profits contracts.
Risk adjustment for non-financial risk
The risk adjustment for non-financial risk for a group of
insurance contracts, determined separately from the other
estimates, is the compensation that the Group requires for bearing
uncertainty about the amount and timing of the cash flows that
arises from non-financial risk, such as insurance risk, expense
risk and lapse risk.
For all lines of business, the Group uses a confidence level
technique under which the target confidence level is determined by
consideration of the Group's pricing framework for insurance
contracts issued and the prices at which the Group has previously
transacted reinsurance contracts held. The target confidence level
is translated into specific non-financial assumptions by reference
to the Group's view of the likely risk distributions of
non-financial risk events, which have a time horizon of one year.
The risk adjustment for non-financial risk is determined as the
increase in the discounted value of the future cash flows from
using these assumptions instead of unbiased non-financial
assumptions.
The risk adjustment reflects the impact of diversification of
non-financial risks within each entity in the Group but not
diversification of risks between entities.
The risk adjustment is calculated separately gross of
reinsurance and for reinsurance contracts held.
For reinsurance contracts held, the risk adjustment represents
the amount of risk being transferred by the Group to the reinsurer.
The same approach is used to determine the risk adjustment, i.e. as
the difference in the discounted value of future cash flows between
using best estimate assumptions and assumptions calibrated to the
required confidence level.
CSM
The CSM of a group of insurance contracts represents the
unearned profit that the Group will recognise as it provides
services under those contracts. On initial recognition of a group
of insurance contracts, if the total of (a) the fulfilment cash
flows, (b) any cash flows arising at that date and (c) any amount
arising from the derecognition of any assets or liabilities
previously recognised for cash flows related to the group is a net
inflow, then the group is not onerous. In this case, the CSM is
measured as the value of the net inflow, which results in no income
or expenses arising on initial recognition.
For groups of contracts acquired in a transfer of contracts or a
business combination, the consideration received for the contracts
is included in the fulfilment cash flows as a proxy for the
premiums received at the date of acquisition. In a business
combination, the consideration received is the fair value of the
contracts at that date.
If the total is a net outflow, then the group is onerous. In
this case, the net outflow is recognised as a loss in profit or
loss, or as an adjustment to goodwill or a gain on a bargain
purchase if the contracts are acquired in a business combination. A
loss component is created to depict the amount of the net outflow,
which determines the amounts that are subsequently presented in
profit or loss as reversals of losses on onerous contracts and are
excluded from insurance revenue.
Insurance contracts - subsequent measurement
The carrying amount of a group of insurance contracts at each
reporting date is the sum of the liability for remaining coverage
and the liability for incurred claims. The liability for remaining
coverage comprises (a) the fulfilment cash flows that relate to
services that will be provided under the contracts in future
periods and (b) any remaining CSM at that date. The liability for
incurred claims includes the fulfilment cash flows for incurred
claims and expenses that have not yet been paid, including claims
that have been incurred but not yet reported.
The fulfilment cash flows of groups of insurance contracts are
measured at the reporting date using current estimates of future
cash flows, current discount rates and current estimates of the
risk adjustment for non-financial risk.
The method for calculating the CSM for a group of contracts
subsequent to initial recognition of the group depends on whether
the group consists of contracts that are with or without direct
participation features.
A contract within the scope of IFRS 17 is considered to have
direct participation features (i.e. required to be measured
applying the variable fee approach) if at inception:
a. the contractual terms specify that the policyholder
participates in a share of a clearly identified pool of underlying
items;
b. the entity expects to pay to the policyholder an amount equal
to a substantial share of the fair value returns on the underlying
items; and
c. the entity expects a substantial proportion of any change in
the amounts to be paid to the policyholder to vary with the change
in fair value of the underlying items.
Conversely all contracts that do not meet the definition of
being with direct participation features at inception are contracts
without direct participation features.
Contracts must be individually assessed to determine whether
they are with direct participation features and once classified
they are not reassessed unless the contract is modified.
Where contracts are subject to mutualisation, criteria (b) and
(c) are assessed allowing for the impact of mutualisation.
The Group's contracts with direct participation features
comprise all of the with-profits business and unit-linked contracts
accounted for under IFRS 17.
All of the Group's other business that is within the scope of
IFRS 17 are contracts without direct participation features. In
particular IFRS 17 prescribes that reinsurance contracts, held or
issued, can only be contracts without direct participation
features.
Underlying items
The underlying items are items that determine some of the
amounts payable to a policyholder. Underlying items can comprise
any items, for example, a reference portfolio of assets, the net
assets of the entity, or a specified subset of the net assets of
the entity.
For in-force with-profits contracts the Group defines the
underlying items to be the assets backing asset shares (which are
the accumulated value of all items of income and outgo) and, where
applicable, the assets backing the amounts expected to be added to
asset shares in the future, for example to reflect miscellaneous
surplus that has arisen (such as from some non-profit business
written in the With-Profits Fund).
A liability, that is separate to the liabilities for the
in-force with-profits contracts (in accordance with paragraph B71
of IFRS 17), is held in the With-Profits Fund that reflects the
additional amounts expected to be paid to current or future
policyholders. The Group defines the underlying items for these
benefits to be:
- the entirety of the assets in the With-Profits Fund;
- less: the underlying items of the in-force with-profits contracts;
- less: the assets held to meet other liabilities of the With-Profits Fund, for example
for non-profit contracts.
For unit-linked contracts the Group defines the underlying items
to be the assets backing the units allocated to all contracts in
the unit of account (the 'unit fund'). For contracts where
actuarial funding is used the underlying items are defined as the
funded value of units, that is the face value of units multiplied
by the actuarial funding factor.
Insurance contracts without direct participation features
For insurance contracts without direct participation features,
the carrying amount of the CSM subsequent to initial recognition is
calculated using the General Measurement Model (GMM). Applying GMM,
the carrying amount of the CSM at each reporting date is the
carrying amount at the start of the reporting period, adjusted
for:
- the effect of any new contracts that are added to the group in the reporting period;
- interest accreted on the carrying amount of the CSM during the reporting period,
measured at the discount rates determined on initial recognition;
- changes in fulfilment cash flows that relate to future service, except to the extent
that:
- any increases in the fulfilment cash flows exceed the carrying amount
of the CSM, in which case the excess is recognised as a loss in profit
or loss and creates a loss component; or
- any decreases in the fulfilment cash flows are allocated to the loss
component;
- the effect of any currency exchange differences on the CSM; and
- the amount recognised as insurance revenue because of the services provided in the
reporting period.
Changes in fulfilment cash flows that relate to future service
comprise:
- experience adjustments arising from premiums received in the reporting
period that relate to future services and related cash flows, measured
at the discount rates determined on initial recognition;
- changes in estimates of the present value of future cash flows in the
liability for remaining coverage, measured at the discount rates determined
on initial recognition, except for changes that arise from the effects
of the time value of money, financial risk and changes therein;
- differences between (a) any investment component expected to become
payable in the reporting period, determined as the payment expected
at the start of the reporting period plus any insurance finance income
or expenses related to that expected payment before it becomes payable;
and (b) the actual amount that becomes payable in the reporting period;
and
- changes in the risk adjustment for non-financial risk that relate to
future services.
A key aspect of GMM is that adjustments to the CSM resulting
from changes to the present value of future cash flows must be
measured using the discount rate that applied at inception of the
group of contracts. However, the standard does not explicitly state
whether this is intended to extend to all financial assumptions.
The Group's interpretation is that all financial assumptions must
be set at inception but are only 'locked-in' for future years,
therefore the estimates of cash flows up to the measurement date
reflect the effect of actual historical financial risk experience.
For example, for index-linked annuities the estimated future cash
flows reflect the actual inflationary increases that have been
added to benefits since inception rather than the locked-in assumed
inflationary increases.
After recognising a loss on an onerous group of insurance
contracts, specified fulfilment cash flows must be allocated on a
systematic basis between the loss component of the liability for
remaining coverage and the liability for remaining coverage
excluding the loss component. For this purpose, the proportion
allocated to the loss component is determined as the ratio of the
amount of the loss component to the discounted value of the future
cash outflows plus the risk adjustment for non-financial risk.
Insurance contracts with direct participation features
Direct participating contracts are contracts under which the
Group's obligation to the policyholder is the net of:
- the obligation to pay the policyholder an amount equal to the fair value of the underlying
items; and
- a variable fee in exchange for future services provided by the contracts, being the
amount of the Group's share of the fair value of the underlying items less fulfilment
cash flows that do not vary based on the returns on underlying items. The Group provides
investment services under these contracts by promising an investment return based
on underlying items, in addition to insurance coverage.
In respect of the variable fee for the Group's in-force
with-profits contracts, the Group's share of the fair value of the
underlying items consists of:
- shareholder transfers, gross of tax; and
- the Group's share of the excess of charges and deductions taken from
the asset share (such as annual management charges or surrender penalties)
over shareholder transfers, gross of tax, and costs that vary directly
with the underlying items.
The fulfilment cash flows that do not vary based on the returns
of the underlying items are:
- the Group's share of amounts that are expressed as a monetary amount,
such as administration expenses, policy fees and the risk adjustment
for non-financial risk. For certain types of cost, such as investment
management expenses and additional death benefits in excess of the
asset share, some costs vary directly with the underlying items and
others do not. The whole amount of these types of cost is included
in the fulfilment cash flows that do not vary based on the returns
of the underlying items.
- less the fee margin charged by the Group's asset managers for managing
the investments backing the with-profits contracts.
There is no variable fee or CSM in relation to the additional
amounts expected to be paid to current or future policyholders
(that are recognised in accordance with paragraph B71 of IFRS
17).
In respect of the variable fee for the Group's unit-linked
contracts, the Group's share of the fair value of the underlying
items consists of charges and deductions taken from the unit fund
(such as annual management charges or surrender penalties), less
costs that vary directly with the underlying items. The fulfilment
cash flows that do not vary based on the returns of the underlying
items are amounts that are expressed as a monetary amount, such as
administration expenses, policy fees and the risk adjustment for
non-financial risk. For certain types of cost, such as investment
management expenses and additional death benefits in excess of the
unit fund, some costs vary directly with the underlying items and
others do not. The whole amount of these types of cost is included
in the fulfilment cash flows that do not vary based on the returns
of the underlying items.
For insurance contracts with direct participation features, the
carrying amount of the CSM subsequent to initial recognition is
calculated using the Variable Fee Approach (VFA). When measuring a
group of direct participating contracts, the Group adjusts the
fulfilment cash flows by the whole of the change in the obligation
to pay policyholders an amount equal to the fair value of the
underlying items. These changes do not relate to future services
and are recognised in profit or loss. The Group then adjusts any
CSM for changes in the amount of the Group's share of the fair
value of the underlying items, which relate to future services, as
explained below.
The carrying amount of the CSM at each reporting date is the
carrying amount at the start of the reporting period, adjusted
for:
- the CSM of any new contracts that are added to the group in the reporting
period;
- the change in the amount of the Group's share of the fair value of
the underlying items and changes in fulfilment cash flows that relate
to future services, except to the extent that:
- a decrease in the amount of the Group's share of the fair value of
the underlying items, or an increase in the fulfilment cash flows
that relate to future services, exceeds the carrying amount of the
CSM, giving rise to a loss in profit or loss (included in insurance
service expenses) and creating a loss component; or
- an increase in the amount of the Group's share of the fair value
of the underlying items, or a decrease in the fulfilment cash flows
that relate to future services, is allocated to the loss component;
- the effect of any currency exchange differences on the CSM; and
- the amount recognised as insurance revenue because of the services
provided in the reporting period.
Changes in fulfilment cash flows that relate to future services
include the changes relating to future services specified above for
contracts without direct participation features (measured at
current discount rates) and changes in the effect of the time value
of money and financial risks that do not arise from underlying
items e.g. the effect of financial guarantees.
In determining the change in CSM attributable to the effect of
the time value of money and financial risk on the Group's share of
the fair value of the underlying items and the fulfilment cash
flows, the Group has chosen not to use the risk mitigation option
whereby the changes would be adjusted to reflect the use of
derivatives, non-derivative financial instruments or reinsurance
contracts held to mitigate the effect of financial risk.
After recognising a loss on an onerous group of insurance
contracts, specified fulfilment cash flows must be allocated on a
systematic basis between the loss component of the liability for
remaining coverage and the liability for remaining coverage
excluding the loss component. For this purpose, the proportion
allocated to the loss component is determined as the ratio of the
amount of the loss component to the discounted value of the future
cash outflows plus the risk adjustment for non-financial risk.
Reinsurance contracts
To measure a group of reinsurance contracts, the Group applies
the same accounting policies as are applied to insurance contracts
without direct participation features, with the following
modifications.
The carrying amount of a group of reinsurance contracts at each
reporting date is the sum of the asset or liability for remaining
coverage and the asset or liability for incurred claims. The asset
or liability for remaining coverage comprises (a) the fulfilment
cash flows that relate to services that will be received under the
contracts in future periods and (b) any remaining CSM at that
date.
The Group measures the estimates of the present value of future
cash flows using assumptions that are consistent with those used to
measure the estimates of the present value of future cash flows for
the underlying insurance contracts. The present value of the future
cash flows for reinsurance contracts held is also adjusted for any
risk of non-performance by the reinsurer. The effect of the
non-performance risk of the reinsurer is assessed at each reporting
date and the effect of changes in the non-performance risk is
recognised in profit or loss.
The risk adjustment for non-financial risk is the amount of risk
being transferred by the Group to the reinsurer.
On initial recognition, the CSM of a group of reinsurance
contracts represents a net cost or net gain on purchasing
reinsurance. It is measured as the amount of the total of (a) the
fulfilment cash flows, (b) any amount arising from the
derecognition of any assets or liabilities previously recognised
for cash flows related to the group, (c) any cash flows arising at
that date and (d) any income recognised in profit or loss because
of onerous underlying contracts recognised at that date.
However, if any net cost on purchasing reinsurance coverage
relates to insured events that occurred before the purchase of the
reinsurance, then the Group recognises the cost immediately in
profit or loss as an expense.
The carrying amount of the CSM at each reporting date is the
carrying amount at the start of the reporting period, adjusted
for:
- the effect of any new contracts that are added to the group in the reporting
period;
- interest accreted on the carrying amount of the CSM during the reporting
period, measured at the discount rates determined on initial recognition;
- income recognised in profit or loss in the reporting period on initial
recognition of an onerous group of underlying contracts;
- reversals of a loss-recovery component to the extent that they are not
changes in the fulfilment cash flows of the group of reinsurance contracts;
- changes in fulfilment cash flows that relate to future services, measured
at the discount rates determined on initial recognition, unless they
result from changes in fulfilment cash flows allocated to a group of
underlying contracts that do not adjust the CSM for the group of underlying
insurance contracts;
- the effect of any currency exchange differences on the CSM; and
- the amount recognised in profit or loss because of the services received
in the reporting period.
Reinsurance of onerous underlying insurance contracts
The Group adjusts the CSM of the group to which a reinsurance
contract belongs and as a result recognises income when it
recognises a loss on initial recognition of an onerous group of
underlying contracts, if the reinsurance contract is entered into
before or at the same time as the onerous underlying contracts are
recognised. The adjustment to the CSM is determined by
multiplying:
- the amount of the loss that relates to the underlying contracts; and
- the percentage of claims on the underlying contracts that the Group expects to recover
from the reinsurance contracts.
For reinsurance contracts acquired in a transfer of contracts or
a business combination covering onerous underlying contracts, the
adjustment to the CSM is determined by multiplying:
- the amount of the loss component that relates to the underlying contracts at the
date of acquisition; and
- the percentage of claims on the underlying contracts that the Group expects at the
date of acquisition to recover from the reinsurance contracts.
For reinsurance contracts acquired in a business combination,
the adjustment to the CSM reduces goodwill or increases a gain on a
bargain purchase.
If the reinsurance contract covers only some of the insurance
contracts included in an onerous group of contracts, then the Group
determines the portion of losses recognised on the onerous group of
contracts that relates to underlying contracts covered by the
reinsurance contract.
A loss-recovery component is created or adjusted for the group
of reinsurance contracts to depict the adjustment to the CSM, which
determines the amounts that are subsequently presented in profit or
loss as reversals of recoveries of losses from the reinsurance
contracts and are excluded from the allocation of reinsurance
premiums paid.
(viii) Derecognition and contract modification
The Group derecognises a contract when it is extinguished - i.e.
when the specified obligations in the contract expire or are
discharged or cancelled.
The Group also derecognises a contract if its terms are modified
in a way that would have significantly changed the accounting for
the contract had the new terms always existed, in which case a new
contract based on the modified terms is recognised. If a contract
modification does not result in derecognition, then the Group
treats the changes in cash flows caused by the modification as
changes in estimates of fulfilment cash flows.
On derecognition of a contract from within a group of
contracts:
- the fulfilment cash flows allocated to the group are adjusted to eliminate those
that relate to the rights and obligations derecognised;
- the CSM of the group is adjusted for the change in the fulfilment cash flows, except
where such changes are allocated to a loss component; and
- the number of coverage units for the expected remaining services is adjusted to reflect
the coverage units derecognised from the group (see 'Release of the CSM' below).
If a contract is derecognised because it is transferred to a
third party, then the CSM is also adjusted for the premium charged
by the third party, unless the group is onerous.
If a contract is derecognised because its terms are modified,
then the CSM is also adjusted for the premium that would have been
charged had the Group entered into a contract with the new
contract's terms at the date of modification, less any additional
premium charged for the modification. The new contract recognised
is measured assuming that, at the date of modification, the Group
received the premium that it would have charged less any additional
premium charged for the modification.
The Group has applied judgement in determining the appropriate
treatment for the modification to the Rothesay reinsurance treaty
which occurred when the majority of the underlying contracts that
were reinsured by the treaty were transferred to Rothesay via a
Part VII transfer on 15 December 2021. The Group judges that the
amendment to the treaty to facilitate the continued long-term
reinsurance of contracts that were originally intended to be
transferred but were removed from the scope of the Part VII,
resulted in a significant change to the contract boundary of the
treaty. Therefore the appropriate treatment is to derecognise the
original treaty and recognise the amended treaty as a new contract.
As the amendment occurred shortly before the IFRS 17 transition
date, the Group concludes that it is sufficient to determine the
premium for the amended treaty as the fair value of the reinsured
benefits as at the date of transition.
(ix) Presentation
Portfolios of insurance contracts that are assets and those that
are liabilities, and portfolios of reinsurance contracts that are
assets and those that are liabilities, are presented separately in
the statement of financial position. Any assets or liabilities
recognised for cash flows arising before the recognition of the
related group of contracts are included in the carrying amount of
the related portfolios of contracts.
The Group disaggregates amounts recognised in the statement of
profit or loss into (a) an insurance service result, comprising
insurance revenue and insurance service expenses; and (b) insurance
finance income or expenses. The Group has elected to disaggregate
the change in the risk adjustment for non-financial risk between
the insurance service result and insurance finance income or
expenses.
Income and expenses from reinsurance contracts are presented
separately from income and expenses from insurance contracts.
Income and expenses from reinsurance contracts, other than
insurance finance income or expenses, are presented on a net basis
as 'net expenses from reinsurance contracts' in the insurance
service result.
The Group excludes from both insurance revenue and insurance
service expenses any non-distinct investment components, refunds of
premiums and other non-insurance components.
The Group has made the accounting policy choice that accounting
estimates made in previous interim financial statements may be
changed when applying IFRS 17 in subsequent interim financial
statements and in the annual reporting period.
Insurance revenue
The Group recognises insurance revenue as it satisfies its
performance obligations i.e. as it provides services to groups of
insurance contracts. The insurance revenue relating to the services
provided for each reporting period represents the total of the
changes in the liability for remaining coverage that relate to
services for which the Group expects to receive consideration, and
comprises the following items.
- A release of the CSM, measured based on coverage units provided (see
'Release of the CSM' below).
- Changes in the risk adjustment for non-financial risk relating to current
services.
- Claims and other insurance service expenses incurred in the reporting
period, measured as the amounts expected at the beginning of the reporting
period.
In addition, the Group allocates a portion of premiums that
relate to recovering any insurance acquisition cash flows to each
period in a systematic way based on the passage of time. The Group
recognises the allocated amount, adjusted for interest accretion at
the discount rates determined on initial recognition of the related
group of contracts, as insurance revenue and an equal amount as
insurance service expenses.
Release of the CSM
The amount of the CSM of a group of insurance contracts that is
recognised as insurance revenue in the reporting period is
determined by identifying the coverage units in the group,
allocating the CSM remaining at the end of the reporting period
(before any allocation) equally to each coverage unit provided in
the current reporting period and expected to be provided in future
reporting periods, and recognising in profit or loss the amount of
the CSM allocated to coverage units provided in the current
reporting period. The number of coverage units is the quantity of
services provided by the contracts in the group, determined by
considering for each contract the quantity of benefits provided and
its expected coverage period. The coverage units are reviewed and
updated at each reporting date.
Services provided to insurance contracts include insurance
coverage and, for all direct participating contracts, investment
services for managing underlying items on behalf of policyholders
(investment-related services). In addition, insurance contracts
without direct participation features may also provide investment
services for generating an investment return for the policyholder
(investment-return service), but only if:
- an investment component exists or the policyholder has a right to withdraw
an amount (e.g. the policyholder's right to receive a surrender value
on cancellation of a contract);
- the investment component or withdrawal amount is expected to include
an investment return; and
- the Group expects to perform investment activities to generate that
investment return.
The Group defines the coverage units for its contracts as
follows:
- Insurance coverage (where the benefit is a single lump sum payment,
e.g. term assurances): the sum assured.
- Insurance coverage (where the benefit is a regular income, e.g. annuities
and income protection): the annualised amount of income, as confirmed
by the IFRS Interpretation Committee ("IFRIC") in 2022.
- Investment-related service (with-profits and unit-linked): the asset
share or unit fund value.
- Investment-return service (e.g. annuities): the transfer amount (for
deferred annuities in the accumulation phase) or the payment of annuity
benefits within a guaranteed payment period.
The expected coverage period reflects expectations of lapses and
cancellations of contracts, as well as the likelihood of insured
events occurring to the extent that they would affect the expected
coverage period. The period of investment services ends no later
than the date on which all amounts due to current policyholders
relating to those services have been paid.
Where a contract provides both insurance coverage and investment
services the Group must apply judgement to determine appropriate
weightings to assign to the two types of service in order to
calculate the coverage units for each reporting period. The weights
are not locked-in at inception of the group and instead are
reviewed and updated at each reporting date, consistent with the
treatment of the coverage units.
With-profits and unit-linked contracts are predominantly
investment contracts but may additionally provide insurance
coverage if the contract provides a death benefit in excess of the
underlying items. For these contracts weighted coverage units are
determined as the maximum of the asset share or unit fund and the
amount payable on death.
IFRS 17 does not provide explicit guidance as to whether the
assumptions used to project the expected coverage units for future
reporting periods should be current or locked-in (i.e. those that
applied at inception of the group of contracts). In addition, the
standard does not provide guidance as to whether the future
coverage units should be discounted when determining the amount of
CSM to be released in the current reporting period.
The Group judges that in regards to the assumptions used for
both GMM and VFA CSM it is appropriate to use current assumptions
to calculate the coverage units expected to be provided in the
future. This is on the basis that it results in the most accurate
estimate of the service that will be provided in future.
In respect of discounting, the Group judges that it is
appropriate to discount the future coverage units as that is
consistent with the CSM calculation allowing for the time value of
money. The discounting approach follows the method applied in the
CSM calculation, namely coverage units for GMM CSM are discounted
using the rates that applied at inception and coverage units for
VFA CSM are discounted using current rates.
Insurance service expenses
Insurance service expenses arising from insurance contracts are
recognised in profit or loss as they are incurred. They exclude
repayments of investment components and comprise the following
items:
- Incurred claims and other insurance service expenses.
- Amortisation of insurance acquisition cash flows: This is equal to the amount of
insurance revenue recognised in the reporting period that relates to recovering insurance
acquisition cash flows.
- Losses on onerous contracts and reversals of such losses.
- Adjustments to the liabilities for incurred claims that do not arise from the effects
of the time value of money, financial risk and changes therein.
- Impairment losses on assets for insurance acquisition cash flows and reversals of
such impairment losses.
Net expenses from reinsurance contracts
Net expenses from reinsurance contracts comprise an allocation
of reinsurance premiums paid less amounts recovered from
reinsurers.
The Group recognises an allocation of reinsurance premiums paid
in profit or loss as it receives services under groups of
reinsurance contracts. The allocation of reinsurance premiums paid
relating to services received for each period represents the total
of the changes in the asset for remaining coverage.
Coverage units for reinsurance contracts held are typically
consistent with the underlying insurance contracts, adjusted for
differences in the services received from the reinsurer. For
reinsurance contracts held that provide reinsurance of mortality or
morbidity risk, the coverage units are typically defined as the sum
at risk reinsured. For longevity swap reinsurance arrangements in
relation to non-profit annuity business , the coverage units are
based on the proportion of the actual annuity payments made on the
underlying contracts that the Group recovers from the
reinsurer.
For a group of reinsurance contracts covering onerous underlying
contracts, the Group establishes a loss-recovery component of the
asset for remaining coverage to depict the recovery of losses
recognised:
- on recognition of onerous underlying contracts, if the reinsurance contract
covering those contracts is entered into before or at the same time as
those contracts are recognised; and
- for changes in fulfilment cash flows of the group of reinsurance contracts
relating to future services that result from changes in fulfilment cash
flows of the onerous underlying contracts.
The loss-recovery component determines the amounts that are
subsequently presented in profit or loss as reversals of recoveries
of losses from the reinsurance contracts and are excluded from the
allocation of reinsurance premiums paid. It is adjusted to reflect
changes in the loss component of the onerous group of underlying
contracts, but it cannot exceed the portion of the loss component
of the onerous group of underlying contracts that the Group expects
to recover from the reinsurance contracts.
Insurance finance income and expenses
Insurance finance income and expenses comprise changes in the
carrying amounts of groups of insurance and reinsurance contracts
arising from the effects of the time value of money, financial risk
and changes therein, unless any such changes for groups of direct
participating contracts are allocated to a loss component and
included in insurance service expenses. They include changes in the
measurement of groups of contracts caused by changes in the value
of underlying items (excluding additions and withdrawals).
The Group has opted as an accounting policy choice to recognise
all insurance finance income or expenses for the reporting period
in profit or loss and to not recognise any part of that income or
expenses in other comprehensive income (OCI).
1.4.2 Financial Instruments
(i) Initial recognition
The classification of financial instruments at initial
recognition depends on their contractual terms and the business
model for managing the instruments. Financial instruments are
initially recognised on the trade date measured at their fair
value.
(ii) Measurement categories
The Group classifies all of its financial assets based on the
business model for managing the assets and the asset's contractual
terms. The categories include the following:
- Amortised cost
- Fair Value Through Profit or Loss (FVTPL)
(iii) Financial instruments measured at amortised cost
Financial instruments are held at amortised cost if both of the
following conditions are met:
- The instruments are held within a business model with the objective
of holding the instrument to collect the contractual cash flows.
- The contractual terms of the debt instrument give rise on specified
dates to cash flows that are solely payments of principal and interest
(SPPI) on the principal amount outstanding.
The details of these conditions are outlined below.
(iv) Business model assessment
The Group determines its business model at the level that best
reflects how it manages groups of financial assets to achieve its
business objective.
The Group holds financial assets to generate returns and provide
a capital base to provide for settlement of claims as they arise.
The Group considers the timing, amount and volatility of cash flow
requirements to support insurance liability portfolios in
determining the business model for the assets as well as the
potential to maximise return for shareholders and future business
development.
The Group's business model is not assessed on an
instrument-by-instrument basis, but at a higher level of aggregated
portfolios that is based on observable factors such as:
- How the performance of the business model and the financial assets
held within that business model are evaluated and reported to the Group's
key management personnel.
- The risks that affect the performance of the business model (and the
financial assets held within that business model) and, in particular,
the way those risks are managed.
- How managers of the business are compensated (for example, whether
the compensation is based on the fair value of the assets managed or
on the contractual cash flows collected).
The expected frequency, value and timing of asset sales are also
important aspects of the Group's assessment.
The business model assessment is based on reasonably expected
scenarios without taking 'worst case' or 'stress case' scenarios
into account. If cash flows after initial recognition are realised
in a way that is different from the Group's original expectations,
the Group does not change the classification of the remaining
financial assets held in that business.
(v) The SPPI test
As a second step of its classification process the Group
assesses the contractual terms to identify whether they meet the
SPPI test. 'Principal' for the purpose of this test is defined as
the fair value of the financial asset at initial recognition and
may change over the life of the financial asset (for example, if
there are repayments of principal or amortisation of the
premium/discount).
The most significant elements of interest within a debt
arrangement are typically the consideration for the time value of
money and credit risk. To make the SPPI assessment, the Group
applies judgement and considers relevant factors such as the
currency in which the financial asset is denominated, and the
period for which the interest rate is set.
(vi) Financial assets measured at fair value through profit or
loss (FVTPL)
Financial assets in this category are those that are managed in
a fair value business model, or that have been designated by
management upon initial recognition, or are mandatorily required to
be measured at fair value under IFRS 9. This category includes debt
instruments whose cash flow characteristics fail the SPPI criterion
or are not held within a business model whose objective is to
collect contractual cash flows.
(vii) Subsequent measurement
After initial measurement, deposits; cash and accrued investment
income and other debtors are measured at amortised cost, using the
Effective Interest Rate (EIR) method, less allowance for
impairment. Amortised cost is calculated by taking into account any
discount or premium on acquisition and fees or costs that are an
integral part of the EIR. Expected Credit Losses (ECLs) are
recognised in investment return in the condensed consolidated
income statement when the investments are impaired.
Financial assets at FVTPL are recorded in the condensed
consolidated statement of financial position at fair value. Changes
in fair value are recorded in investment return in the condensed
consolidated income statement. Interest earned on assets
mandatorily required to be measured at FVTPL is recorded using
contractual interest rate. Dividend income from equity instruments
measured at FVTPL is recorded in investment return in the condensed
consolidated income statement when the right to the payment has
been established.
(viii) Reclassification of financial assets and liabilities
The Group does not reclassify its financial assets subsequent to
their initial recognition, apart from the exceptional circumstances
in which there has been a change in business model.
(ix) Derecognition other than for substantial modification
A financial asset (or, where applicable, a part of a financial
asset or part of a group of similar financial assets) is
derecognised when:
- The rights to receive cash flows from the asset have expired; or
- The Group has transferred its right to receive cash flows from the asset or has assumed
an obligation to pay the received cash flows in full without material delay to a
third party under a 'pass-through' arrangement; and either: (a) the Group has transferred
substantially all the risks and rewards of the asset; or (b) the Group has neither
transferred nor retained substantially all the risks and rewards of the asset, but
has transferred control of the asset.
The Group considers control to be transferred if and only if,
the transferee has the practical ability to sell the asset in its
entirety to an unrelated third party and is able to exercise that
ability unilaterally and without imposing additional restrictions
on the transfer.
(ix) Derecognition other than for substantial modification
(continued)
When the Group has neither transferred nor retained
substantially all the risks and rewards and has retained control of
the asset, the asset continues to be recognised only to the extent
of the Group's continuing involvement, in which case, the Group
also recognises an associated liability. The transferred asset and
the associated liability are measured on a basis that reflects the
rights and obligations that the Group has retained.
Continuing involvement that takes the form of a guarantee over
the transferred asset is measured at the lower of the original
carrying amount of the asset and the maximum amount of
consideration the Group could be required to pay.
(x) Derecognition due to substantial modification of terms and
conditions
The Group derecognises a financial asset when the terms and
conditions have been renegotiated to the extent that,
substantially, it becomes a new instrument, with the difference
recognised as a derecognition gain or loss. In the case of debt
instruments at amortised cost, the newly recognised loans are
classified as Stage 1 for ECL measurement purposes.
When assessing whether or not to derecognise an instrument,
amongst others, the Group considers the following factors:
- Change in currency of the debt instrument.
- Introduction of an equity feature.
- Change in counterparty.
- If the modification is such that the instrument would no longer meet the SPPI criterion.
If the modification does not result in cash flows that are
substantially different, the modification does not result in
derecognition. Based on the change in cash flows discounted at the
original EIR, the Group records a modification gain or loss.
(xi) Impairment of financial assets
The Group recognises an allowance for ECLs for all debt
instruments not held at fair value through profit or loss. ECLs are
based on the difference between the contractual cash flows due in
accordance with the contract and all the cash flows that the Group
expects to receive, discounted at the appropriate effective
interest rate.
ECLs are recognised in two stages. For credit exposures for
which there has not been a significant increase in credit risk
since initial recognition, ECLs are provided for credit losses that
result from default events that are possible within the next 12
months (12-month ECL). For those credit exposures for which there
has been a significant increase in credit risk since initial
recognition, a loss allowance is required for credit losses
expected over the remaining life of the exposure, irrespective of
the timing of the default (a lifetime ECL).
For certain instruments with investment grade rating, the Group
uses the low credit simplification and consequently, a
determination of significant increase in credit risk will not be
required and the impairment loss would always be calculated based
on a 12-month ECL.
The Group also makes use of a simplified impairment approach for
trade receivables and contract assets as allowed under IFRS 9.
Under this approach, impairment is calculated using a provisioning
matrix that is based on days past due.
(xii) Write-offs
Financial assets are written off either partially or in their
entirety only when the Group has stopped pursuing the recovery. If
the amount to be written off is greater than the accumulated loss
allowance, the difference is first treated as an addition to the
allowance that is then applied against the gross carrying amount.
Any subsequent recoveries are credited to credit loss expense.
(xiii) Recognition of interest income
Under IFRS 9, interest income is recorded using the effective
interest rate (EIR) method for all financial assets measured at
amortised cost. The EIR is the rate that exactly discounts
estimated future cash receipts through the expected life of the
financial asset or, when appropriate, a shorter period, to the
gross carrying amount of the financial asset.
The EIR (and therefore, the amortised cost of the financial
asset) is calculated by taking into account transaction costs and
any discount or premium on acquisition of the financial asset as
well as fees and costs that are an integral part of the EIR. The
Group recognises interest income using a rate of return that
represents the best estimate of a constant rate of return over the
expected life of the debt instrument.
If expectations of fixed rate financial assets cash flows are
revised for reasons other than credit risk, the changes to future
contractual cash flows are discounted at the original EIR with a
consequential adjustment to the carrying amount. The difference to
the previous carrying amount is booked as a positive or negative
adjustment to the carrying amount of the financial asset in the
balance sheet with a corresponding increase or decrease in interest
income.
(xiv) Interest and similar income
Interest income comprises amounts calculated using the effective
interest method for assets measured at amortised cost. These are
disclosed separately on the face of the income statement.
Other interest income includes interest on all financial assets
measured at FVTPL, using the contractual interest rate.
The Group calculates interest income on financial assets, other
than those considered credit-impaired, by applying the EIR to the
gross carrying amount of the financial asset.
1.5 Significant judgements and estimates
In preparing these condensed consolidated financial statements,
management has made judgements and estimates that affect the
application of the Group's accounting policies and the reported
amounts of assets, liabilities, income and expenses. Actual results
may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to estimates are recognised prospectively.
The accounting policies adopted by the Group have not changed
materially from those applied in the Group's Annual Report and
Accounts for the year ended 31 December 2022, the exceptions being
those arising from the application of IFRS 17 and IFRS 9. A full
list of the Group's material accounting policies in respect of IFRS
17 and IFRS 9 are provided in Note 1.4.1. In applying these
accounting policies, the Group has made a number of significant
judgements, apart from those relating to estimates, which have a
significant effect on the amounts recognised in the condensed
consolidated financial statements.
The following table sets out the basis of these judgements, and
references the associated accounting policy. Further detail on
specific application can be found in Note 1.4.1.
Financial
statement Accounting
Area Key judgement policy Note
IFRS 17 requires that contracts that transfer
significant insurance risk are accounted for
as insurance contracts. Judgement is required
to determine whether contracts written by the
Group transfer significant insurance risk, unless
a specific scope exception applies (e.g. equity
release mortgages).
Judgement is also required in the case of certain
investment contracts which provide an additional
benefit in addition to guaranteed benefits to
Classification determine whether they meet the criteria to
of insurance be considered as discretionary participation
and investment features, and therefore accounted for under
contracts IFRS 17. 1.4.1(i) 11.1
===================== ======================================================== =========== ====
IFRS 17 requires an assessment of whether contracts
meet the conditions for having direct participation
features and when this is the case such contracts
must use the Variable Fee Approach to measure
the CSM. For with-profit and unit linked contracts,
judgement is required to assess whether the
Group expects to pay to the policyholder an
amount equal to a substantial share of the fair
value returns on the underlying items; and whether
the entity expects a substantial proportion
of any change in the amounts to be paid to the
policyholder to vary with the change in fair
Contractual value of the underlying items. The assessment
Service Margin is carried out at the contract level and judgement
measurement is also applied to determine the extent to which
model mutualisation between contracts is allowed for. 1.4.1(vii) 11.1
===================== ======================================================== =========== ====
Underlying items are items that determine some
of the amounts payable to a policyholder as
part of their with-profit or unit linked contract
and therefore are a component of the insurance
contract or investment contracts with DPF liabilities.
Judgement is required to define underlying items
for with-profits contracts that reflect the
mutualisation between contracts and how to split
Underlying underlying items between current and future
items policyholders. 1.4.1(vii) 11.1
===================== ======================================================== =========== ====
Judgement is required to determine which surplus
should be divided between current and future
with-profits policyholders as well as with the
Group and which surplus is attributable solely
to the Group.
Judgement is also required to assess whether
the current amount of surplus attributed to
with-profits policyholders should be determined
Division retrospectively (i.e. the accumulated value
of the surpluses of the historical surplus attributed to with-profits
relating policyholders) or prospectively (i.e. the discounted
to the With-Profits value of future additions of surplus to with-profits
Fund policies). 1.4.1(vii) 11.1
===================== ======================================================== =========== ====
The amount of CSM recognised in profit or loss
in each reporting period is determined by reference
to coverage units, which represent the insurance
Provision contract services provided in that period. Judgement
of insurance is required to define the services provided,
contract and the relative weighting if these include
services both insurance and investment services. 1.4.1(ix) 11.1
===================== ======================================================== =========== ====
The following table sets out the basis of the judgements made
specifically for the measurement of the condensed consolidated
statement of financial position at the IFRS 17 transition date of 1
January 2022. Further detail on specific application can be found
in Note 1.3.1.
Financial
statement
area Key judgement
Method of Judgement was required to assess for which contracts it would
transition be impracticable to apply the Fully Retrospective Approach (FRA).
approach
=========== ==================================================================
Sources of estimation uncertainty
The preparation of these condensed consolidated financial
statements requires the Group to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues
and expenses, and the related disclosure of contingent assets and
liabilities. These estimates and assumptions have not changed
materially from those applied for the year end 2022 financial
statements, except for the measurement of insurance contracts on
the application of IFRS 17.
The following table sets out the assumptions and estimates which
have a significant risk of resulting in a material adjustment to
the carrying value of the insurance contract liabilities within the
next financial year. Details of the nature of the estimate are
provided in the related accounting policy and details of the
assumptions applied at the statement of financial position date are
provided in the related note.
Financial
statement
asset or Accounting
liability Key estimate and assumptions policy Note
When measuring the insurance contract liabilities,
a number of assumptions are applied to estimate
future amounts due to the policyholder. The
areas where the assumptions could have a material
impact are:
* for with-profits contracts, the assumed future
investment returns on the backing assets, the
assumptions used in determining the allowance for
persistency and maintenance expenses, the
policyholders' share of historic and future surpluses,
and the illiquidity premium in setting the discount
rate; and
Insurance
contract * for annuity contracts, the assumed rates of
liabilities policyholder mortality, maintenance expenses, and the
- Future selection of the reference portfolio and allowance
cash flows for credit risk in setting the discount rate. 1.4.1(vii) 11.1
=================== ==================================================================== =========== ====
When measuring the insurance contract liabilities,
a risk adjustment is included. The assessment
of the risk adjustment requires assumptions
Insurance about the compensation that the Group requires
contract for bearing uncertainty about the amount and
liabilities timing of the cash flows that arises from non-financial
- Risk adjustment risk, the most significant of which is the assumed
for non-financial rates of the policyholder mortality for annuity
risk contracts. 1.4.1(vii) 11.1
=================== ==================================================================== =========== ====
The following table sets out the significant assumptions and
estimates made specifically for the measurement of the condensed
consolidated statement of financial position at the IFRS 17
transition date of 1 January 2022. Further detail on the specific
application can be found in Note 1.3.1.
Financial
statement
asset or
liability Key estimate and assumptions
Insurance When determining fair values, a number of assumptions are applied
contract to estimate a market participant's view of the best estimate
liabilities of the liability and the compensation required for taking on
- Estimation the obligation. The areas where the assumptions could have a
of fair value material impact are:
* the target capital and cost of capital rate;
* for with-profits contracts, the assumed future
investment returns on the backing assets, the
assumptions used in determining the allowance for
persistency and maintenance expenses, the level of
compensation required to reflect the risk in relation
to future shareholder transfers, and the discount
rates used; and
* for annuity contracts, the assumed rates of
policyholder mortality, maintenance expenses, and the
discount rates used.
============== =======================================================================
2 Group structure and products
2.1 Group composition
The Group structure is available in the full PDF version of this
interim report via the following link
https://global.mandg.com/investors/results-reports-and-presentations
.
2.2 Corporate transactions
My Continuum Financial Limited acquisition
On 8 March 2023, M&G Wealth Advice Limited (MGWAL), a wholly
owned subsidiary of the Group, acquired a 49.9% holding in My
Continuum Financial Limited (MCFL) Limited, the holding company of
Continuum (Financial Services) LLP (CFSL) and My Continuum Wealth
(MCW), for a purchase consideration of GBP22m, including an
adjustment for capital, with a view to acquiring the remaining
stake in two future tranches, in March 2024 and March 2025.
Continuum is now part of M&G Wealth within our Retail and
Savings segment and brings to M&G a fast-growing in-house
discretionary Model Portfolio Service as its central investment
offering allowing M&G to further grow and build our advisory
capability across the UK, and to provide a wider range of
investment solutions to more clients. Continuum is based in
Plymouth and has more than 60 self-employed advisers operating
nationally.
The acquisition of the initial stake in Continuum has been
treated as an investment in an associate accounted for under the
equity method in the condensed consolidated statement of financial
position.
2.3 Insurance and investment products
A full description of the main contract types written by the
Group's insurance entities can be found in the Group's 2022
consolidated financial statements.
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 and reportable 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 customers access to savings
contracts with smoothed investment returns and a wide choice of
investment profiles. Unlike the conventional and accumulating
with-profits contracts in the Heritage business, no regular or
final bonuses are declared. Instead, policyholders participate in
profits by means of an increase in their investment, which grows in
line with an expected growth rate.
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 (i) . 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 PAC
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 of the SAIF with-profits sub fund on 1 April
2021.
(i) The Group accepts new members to existing Corporate Pension
schemes and writes a small number of new annuity policies with
clients who have a pension issued by PAC.
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 products which give access to the
non-UK PruFund investment proposition are included in 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.
The Group's adjusted operating profit before tax methodology has
been updated since it was disclosed in the 2022 consolidated
financial statements following the adoption of IFRS 17 'Insurance
Contracts'. Other changes to the methodology have also been made to
exclude from adjusted operating profit the foreign exchange
movements on non-GBP denominated subordinated debt and the fair
value movement on strategic investments since these movements
reflect short-term fluctuations in investment return. Details of
the methodology are presented below:
Fee based business
For the Group's fee based business written by Asset Management
and Retail and Savings segments, 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.
Business written in the With-Profits Fund
For the Group's business written in the With-Profits Fund in the
Retail and Savings segment, adjusted operating profit before tax
includes the release of the risk adjustment and the expected
release of the CSM for the period. The expected CSM release for the
period is calculated as the CSM at the start of the period updated
to reflect long-term expected investment returns multiplied by the
expected amortisation factor for the period.
- The long-term expected investment returns are 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 to back the asset shares. In the calculation of the expected CSM
release for with-profits business, the long-term expected investment
returns for the six months ended 30 June 2023 were 8.5% p.a. (4.8% p.a.
for the six months ended 30 June 2022 and 4.8% p.a. for the year ended
31 December 2022).
- The expected amortisation factor for the period reflects the expected
pattern of release of the CSM for the with-profits business over the
life of the contracts. The expected amortisation factor used for the
six months ended 30 June 2023 was 12.7% p.a. (12.3% p.a. for the six
months ended 30 June 2022 and 11.9% p.a. for the year ended 31 December
2022).
Adjusted operating profit before tax for the Group's business
written in the With-Profits Fund also includes the expected
investment return for the shareholder's share of the IFRS value of
the excess assets in the Fund. For the six months ended 30 June
2023, the return was 6.0% p.a. (2.4% p.a. for the six months ended
30 June 2022 and 2.4% p.a. for the year ended 31 December
2022).
The application of IFRS 17 to non-profit contracts in the
with-profits funds results in a mismatch due to the difference
between their value under the IFRS 17 General Measurement Model
accounting for these contracts (primarily annuities) and how these
contracts are treated in determining their fair value when
assessing current and future with-profits contracts under the
Variable Fee Approach (VFA). Although the impact of this mismatch
balances over the life of the current and future with-profit
contracts as the CSM under the VFA is set up and released, results
for the period do not reflect the long-term economics of the
transaction. Therefore, the impact of the mismatch has been
excluded from adjusted operating profit before tax.
Shareholder annuity business
For the Group's shareholder annuity products written by the
Retail and Savings segment, adjusted operating profit before tax
includes the release of the CSM and the risk adjustment for the
period. Adjusted operating profit before tax also includes the
returns on surplus assets in excess of IFRS 17 liabilities based on
long-term expected investment returns, which are determined by
reference to the risk-free rate plus a risk premium based on the
mix of assets. For the six months ended 30 June 2023 the long term
expected investment returns for shareholder annuities were 6.6%
p.a. (2.2% p.a. for the six months ended 30 June 2022 and 2.2% p.a.
for the year ended 31 December 2022). The net effect of changes to
the valuation rate of interest due to asset trading and portfolio
rebalancing, and experience variances are also included in adjusted
operating profit before tax.
Adjusted operating profit before tax for shareholder annuities
excludes the impact of the mismatch resulting from the measurement
of fulfilment cash flows using current interest rates and any
changes to CSM being measured using locked-in rates.
Corporate Centre
For the Corporate Centre adjusted operating profit before tax is
the expense incurred to run the head office and the actual
investment return on treasury activities.
Key adjusting items between IFRS profit before tax and adjusted
operating profit before tax
Certain adjustments that are considered to be non-recurring or
strategic, or due to short-term movements not reflective of
longer-term performance are made to IFRS profit or loss before tax
to determine adjusted operating profit before tax. Adjustments are
in respect of short-term fluctuations in investment returns,
mismatches arising on the application of IFRS 17, impairment and
amortisation in respect of acquired intangibles, costs associated
with fundamental Group-wide restructuring and transformation,
profit or loss arising on corporate transactions and, profit or
loss before tax from any discontinued operations.
Short-term fluctuations
The adjustment for short-term fluctuations in investment returns
represents:
- Difference between actual CSM release for the period and expected CSM
release for the period for with-profit contracts.
- Movements in the fair value of instruments held to mitigate equity risk
in the future with-profits shareholder transfer and to optimise the
Group's capital position on a Solvency II basis.
- Difference between actual and long-term expected investment return on
surplus assets backing the shareholder annuity capital and excess assets
in the With-Profits Fund measured on an IFRS basis.
- Foreign exchange movements on the US dollar subordinated debt held in
the Corporate Centre.
- Fair value movements on strategic investments.
- Impact of short term credit risk provisioning and experience variances
on the measurement of best estimate liabilities, specifically:
- The impact of credit risk provisioning for short-term adverse credit
risk experience.
- The impact of credit risk provisioning for actual upgrade and downgrade
experience during the year. This is calculated by reference to current
interest rates.
- Credit experience variance relative to long-term assumptions, reflecting
the impact of defaults and other similar experience, such as asset
exchanges arising from debt restructuring.
- The impact of market movements on bond portfolio weightings and the
subsequent impact on credit provisions.
Mismatches arising on the application of IFRS 17
The application of IFRS 17 results in the following mismatches
in valuation basis being recognised in total profit/loss before
tax. For the purposes of calculating adjusted operating profit
before tax the impact of the mismatch has been excluded.
- Difference between the value under IFRS 17 General Measurement Model for non-profit
contracts (primarily annuities) written in the With-Profits Fund and how these contracts
are treated in determining their fair value when assessing current and future with-profits
contracts under the Variable Fee Approach.
- Mismatch resulting from measurement of fulfilment cashflows for shareholder non-profit
business (primarily annuities) using current interest rates while related changes
to the CSM are measured using locked-in rates.
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.
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.
3.3 Analysis of Group adjusted operating profit before tax by
segment
On 1 January 2023 we adopted the new accounting standard IFRS 17
Insurance Contracts which has led to changes to our adjusted
operating profit methodology. As a result, adjusted operating
profit before tax for the year ended 31 December 2022 and the six
months ended 30 June 2022 has been restated from that reported
previously. The restatement is driven by the change in profit
recognition profile of the annuities and with-profits business in
the Retail and Savings segment as a result of the new insurance
standard and also other changes to our adjusted operating profit
methodology, unrelated to the adoption of IFRS 17, which were
implemented at the same time. These unrelated changes to our
adjusted operating methodology are to classify foreign exchange
movements on non-GBP denominated subordinated debt and fair value
movements on strategic investments as non-operating items.
The overall impact of the restatement on adjusted operating
profit before tax is summarised in the tables that follow for both
the year ended 31 December 2022 and the six months ended 30 June
2022:
Changes Other
as a result AOP methodology
As previously of IFRS changes
reported 17 Restated
Adjusted operating profit before tax for the
year ended 31 December 2022 GBPm GBPm GBPm GBPm
Asset Management 264 - - 264
Retail and Savings 572 46 - 618
Corporate Centre (307) - 50 (257)
============================================= ============= ============ ================ ========
Adjusted operating profit before tax 529 46 50 625
============================================= ============= ============ ================ ========
Changes Other
as a result AOP methodology
As previously of IFRS changes
reported 17 Restated
Adjusted operating profit before tax for the
six months ended 30 June 2022 GBPm GBPm GBPm GBPm
Asset Management 124 - - 124
Retail and Savings 226 68 - 294
Corporate Centre (168) - 48 (120)
============================================= ============= ============ ================ ========
Adjusted operating profit before tax 182 68 48 298
============================================= ============= ============ ================ ========
For the six For the
months ended year ended
30 June 31 December
Restated Restated
2023 2022 2022
GBPm GBPm GBPm
Asset Management 118 124 264
Retail and Savings 374 294 618
Corporate Centre (102) (120) (257)
============================================================ ===== ======== ============
Total segmented adjusted operating profit before tax 390 298 625
============================================================ ===== ======== ============
Short-term fluctuations in investment returns(i) (177) (1,614) (2,858)
Mismatches arising on application of IFRS 17 (40) (50) (244)
Amortisation of intangible assets acquired in business
combinations (6) (3) (35)
Restructuring and other costs(ii) (74) (64) (147)
============================================================ ===== ======== ============
IFRS profit/(loss) before tax and non-controlling interests
attributable to equity holders 93 (1,433) (2,659)
============================================================ ===== ======== ============
IFRS profit attributable to non-controlling interests(iii) 8 8 19
============================================================ ===== ======== ============
IFRS profit/(loss) before tax attributable to equity
holders 101 (1,425) (2,640)
============================================================ ===== ======== ============
(i) Market conditions have led to lower losses from short-term
fluctuations in investment returns in the current period with the
impact of rising rates in the six months to 30 June 2023 not as
significant as the six months to 30 June 2022. The overall losses
primarily comprise of a GBP118m loss (30 June 2022: GBP602m, year
ended 31 December 2022: GBP989m) on interest rate swaps purchased
to protect PAC's Solvency II capital position against falls in
interest rates and GBP22m loss (30 June 2022: GBP817m loss, year
ended 31 December 2022: GBP1,301m loss) from the difference in
actual and long-term expected investment return on surplus assets
backing the annuity portfolio, both of which have significantly
reduced due to the smaller increase in yields in 2023 compared to
2022. These losses were partly offset by a gain on the foreign
exchange movement on US dollar denominated subordinated debt of
GBP23m (30 June 2022: GBP48m loss, year ended 31 December 2022:
GBP50m loss).
(ii) 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 incurred in the analysis of
administrative and other expenses in Note 6 which include costs
allocated to the Policyholder. In the six months to 30 June 2023
restructuring and other costs include GBP40m (30 June 2022: GBP33m,
year ended 31 December 2022: GBP48m) in relation to transformation
programmes, GBP15m (30 June 2022: GBP15m, year ended 31 December
2022: GBP36m) in respect of investment spend in building out
capability in our Asset Management business and GBP11m (30 June
2022: GBP16m, year ended 31 December 2022: GBP32m) in respect of
the development of the M&G Wealth platform business.
(iii) 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.
3.4 Analysis of Group revenue by segment
The following table shows revenue by segment for the Group:
For the six For the
months ended year ended
30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
Retail and Savings 1,815 1,783 3,587
================================== ======= ====== ============
Total segmented insurance revenue 1,815 1,783 3,587
================================== ======= ====== ============
Asset Management(i) 507 503 1,051
Retail and Savings 71 75 150
Total segmented fee income 578 578 1,201
================================== ======= ====== ============
Asset Management 3 - -
Retail and Savings 1,444 1,113 2,393
Corporate Centre 25 9 26
================================== ======= ====== ============
Total segmented interest revenue 1,472 1,122 2,419
================================== ======= ====== ============
(i) The Asset Management segmented fee income differs from the
fee income in Note 5 due to the netting of certain items that have
a nil profit impact in adjusted operating profit. Asset management
fee income includes net inter-segment fee income of GBP70m (30 June
2022: GBP72m, year ended 31 December 2022: GBP164m).
The Group has a widely diversified client base. There are no
clients whose revenue represents greater than 10% of fee
income.
4 Insurance revenue
The Group's exposure to risks arising from insurance assets and
liabilities is different for each component of the Group's
business. The Group's Insurance revenue is presented below for the
different components of business.
For the six months ended
30 June 2023
Annuity
and other
With-profits Unit-linked long-term
sub-funds liabilities business Total
GBPm GBPm GBPm GBPm
Amounts relating to the changes in the liability
for remaining coverage:
Expected incurred claims and other expenses after
loss component allocation 827 19 583 1,429
Change in the risk adjustment for non-financial
risk for the risk expired after loss component
allocation 8 - 14 22
CSM recognised in profit or loss for the services
provided 267 4 68 339
Insurance acquisition cash flows recovery 10 - 15 25
================================================== ============ ============ ========== =====
Total insurance revenue 1,112 23 680 1,815
================================================== ============ ============ ========== =====
For the six months ended
30 June 2022
Annuity
and other
With-profits Unit-linked long-term
sub-funds liabilities business Total
GBPm GBPm GBPm GBPm
Amounts relating to the changes in the liability
for remaining coverage:
Expected incurred claims and other expenses after
loss component allocation 842 18 581 1,441
Change in the risk adjustment for non-financial
risk for the risk expired after loss component
allocation 10 - 19 29
CSM recognised in profit or loss for the services
provided 240 3 56 299
Insurance acquisition cash flows recovery 2 - 12 14
================================================== ============ ============ ========== =====
Total insurance revenue 1,094 21 668 1,783
================================================== ============ ============ ========== =====
For the year ended 31 December
2022
Annuity
and other
With-profits Unit-linked long-term
sub-funds liabilities business Total
GBPm GBPm GBPm GBPm
Amounts relating to the changes in the liability
for remaining coverage:
Expected incurred claims and other expenses after
loss component allocation 1,623 37 1,166 2,826
Change in the risk adjustment for non-financial
risk for the risk expired after loss component
allocation 22 - 41 63
CSM recognised in profit or loss for the services
provided 526 11 127 664
Insurance acquisition cash flows recovery 9 - 25 34
================================================== ============ ============ ========== =====
Total insurance revenue 2,180 48 1,359 3,587
================================================== ============ ============ ========== =====
5 Fee income
The following table disaggregates management fee revenue by
segment:
For the six For the
months ended year ended
30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
Management fees 441 433 870
Rebates (10) (13) (24)
Performance fees and carried interest 6 11 41
====================================== ======= ====== ============
Total Asset Management fee income 437 431 887
====================================== ======= ====== ============
Investment contracts without DPF 18 22 42
Platform fees 15 17 31
Advice fees 38 36 77
====================================== ======= ====== ============
Total Retail and Savings fee income 71 75 150
====================================== ======= ====== ============
Total fee income 508 506 1,037
====================================== ======= ====== ============
6 Administrative and other expenses
For the six For the
months ended year ended
30 June 31 December
Restated(i) Restated(i)
2023 2022 2022
GBPm GBPm GBPm
Staff and employment costs 437 379 791
Acquisition costs incurred:
Investment contracts without DPF 7 9 9
Other contracts 69 64 138
Acquisition costs deferred:
Investment contracts without DPF - (1) -
Other contracts (1) (4) (6)
Amortisation of deferred acquisition costs:
Other contracts 2 2 10
Impairment of deferred acquisition costs - - 1
Depreciation of property, plant and equipment 68 71 142
Impairment of property, plant and equipment(ii) 14 45 3
Amortisation of intangible assets 17 15 34
Impairment of goodwill and intangible assets 6 - 25
Restructuring costs 108 113 228
Interest expense 84 57 136
Commission expense 79 94 193
Investment management fees 64 72 132
Property-related costs 91 106 192
Other expenses 416 581 1,064
========================================================= ===== =========== ============
Total expenses 1,461 1,603 3,092
Less amounts directly attributable to insurance results:
Expenses attributed to insurance acquisition cash flows
incurred during the year (70) (52) (147)
Other directly attributable expenses (338) (337) (690)
========================================================= ===== =========== ============
Total administrative and other expenses 1,053 1,214 2,255
========================================================= ===== =========== ============
(i) The comparative amounts have been restated for the first
time adoption of IFRS 17 and IFRS 9. See Note 1.3.1 for further
information. Additionally, following a review of the Group's
presentation of tax positions within consolidated investment funds,
comparative amounts have been restated from those previously
reported with the restatement having no impact on profit for the
year or net assets. See Note 1.2 for further information.
Furthermore, Staff and employment costs, Restructuring costs and
Other expenses have been restated to reflect corrected allocations
for the 30 June 2022 comparatives.
(ii) Includes impairment of certain property, plant and
equipment held by the Group's infrastructure capital private equity
vehicles of GBP3m (30 June 2022: GBP45m, year ended 31 December
2022: GBP11m).
In addition to the interest expense shown above of GBP84m (30
June 2022: GBP57m, 31 December 2022: GBP136m), the interest expense
incurred in respect of subordinated liabilities for the six months
ended 30 June 2023 was GBP79m (30 June 2022: GBP80m, year ended 31
December 2022: GBP162m). This is shown as finance costs in the
condensed consolidated income statement.
7 Tax
7.1 Tax charged/(credited) 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
with the restatement having no impact on profit for the year or net
assets. See Note 1.2 for further information. The comparative
amounts have also been restated for the first time adoption of IFRS
17 and IFRS 9 and restated throughout this tax note. See Note 1.3.1
for further information.
7.1.1 Income statement tax charge/(credit)
For the six For the
months ended year ended
30 June 31 December
Restated Restated
2023 2022 2022
GBPm GBPm GBPm
Total current tax 170 78 139
Total deferred tax (117) (702) (1,103)
========================== ===== ======== ============
Total tax charge/(credit) 53 (624) (964)
========================== ===== ======== ============
7.1.2 Allocation of profit/(loss) before tax and tax charge
between equity holders and policyholders
The profit before tax reflected in the condensed consolidated
income statement for the six months ended 30 June 2023 of GBP128m
(30 June 2022: GBP1,767m loss) comprises the pre-tax result
attributable to equity holders and an amount equal and opposite to
the tax charge attributable to policyholder returns. This is the
formal measure of profit or loss before tax under IFRS, but it is
not the result attributable to equity holders. This is principally
because the corporate taxes of the Group include taxes borne by
policyholders. These amounts are required to be included in the tax
charge of the company under IFRS.
The tax charge/(credit) attributable to policyholder returns is
removed from the Group's total profit/(loss) before tax in arriving
at the Group's profit/(loss) before tax attributable to equity
holders. As the net of tax profits attributable to policyholders is
zero, the Group's pre-tax profit attributable to policyholders is
an amount equal and opposite to the tax charge attributable to
policyholders included in the total tax charge .
For the year ended
For the six months ended 30 June 31 December
Restated Restated
2023 2022 2022
Equity Equity Equity
holders Policyholders Total holders Policyholders Total holders Policyholders Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Profit/(loss)
before
tax 101 27 128 (1,425) (342) (1,767) (2,640) (379) (3,019)
Tax
(charge)/credit (26) (27) (53) 282 342 624 585 379 964
================== ======== ============= ===== ======== ============= ======= ======== ============= =======
Profit/(loss) for
the period 75 - 75 (1,143) - (1,143) (2,055) - (2,055)
================== ======== ============= ===== ======== ============= ======= ======== ============= =======
7.1.3 Equity holders' effective tax rate
The equity holders tax charge for the six months ended 30 June
2023 was GBP26m (30 June 2022: tax benefit of GBP282m, 31 December
2022: tax benefit of GBP585m) representing an effective tax rate of
25.7% (30 June 2022: 19.8%, 31 December 2022: 22.2%). The equity
holders' effective tax rate of 25.7% was higher than the UK
statutory rate of 23.5% (30 June 2022: 19%, 31 December: 19%)
primarily due to the detrimental impact arising from non-deductible
expenses.
7.1.4 Factors that may impact the future tax rate
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 in relation to UK
capital losses of GBP477m, on which no deferred tax is recognised.
Should appropriate taxable profits arise in future periods in which
these losses may be utilised it will result in tax benefits thereby
reducing the future effective tax rate in the relevant periods.
Amendments to IAS 12 International Tax Reform - Pillar Two Model
Rules
On 23 May 2023, the IASB issued amendments to IAS 12
'International Tax Reform - Pillar Two Model Rules', which became
effective immediately and were approved for adoption by the UK
Endorsement Board on 19 July 2023. On 20 June 2023, legislation was
substantively enacted in the UK to introduce the OECD's Pillar Two
global minimum tax rules and a UK qualified domestic minimum top-up
tax, with effect from 1 January 2024. The Group has applied the IAS
12 exemption from recognising and disclosing information on
associated deferred tax assets and liabilities.
7.2 Current tax assets and liabilities
Current tax Current tax
assets liabilities
As at As at As at As at
30 June 31 December 30 June 31 December
Restated Restated
2023 2022 2023 2022
GBPm GBPm GBPm GBPm
Corporation tax 270 255 (64) (58)
================ ======== ============ ======== ============
One of the Group's subsidiaries, The Prudential Assurance
Company Limited (PAC), is the lead litigant in a combined group
action against HM Revenue and Customs (HMRC) concerning the correct
historical tax treatment applying to dividends received from
overseas portfolio investments of its With-Profits Fund.
In February 2018, the Supreme Court heard HMRC's appeal against
the earlier Court of Appeal decision in PAC's favour. The decision
of the Supreme Court, released in July 2018, upheld the main point
of dispute in PAC's favour but reversed the decisions of the lower
courts on some practical points of how to apply that principle. The
Supreme Court issued its order giving effect to its decision in
October 2019, stating any remaining issues of computation be
remitted back to the High Court. PAC and HMRC are working through
the mechanics of implementing the Supreme Court decisions. To date,
this work has led to a reduction in the estimate for policyholder
tax credit recoverable, and the associated estimate of interest
receivable.
As at 30 June 2023, PAC has recognised a total policyholder tax
credit of GBP114m (31 December 2022: GBP114m) in respect of its
claim against HMRC. Of this amount, GBP40m (31 December 2022:
GBP40m) has been paid by HMRC leaving a tax recoverable balance of
GBP74m (31 December 2022: GBP74m) recorded as an amount of tax due
from HMRC. PAC will be entitled to interest on the tax repaid. As a
result of the COVID pandemic the timing to finalise the issue has
been further delayed. It is now expected to be finalised during the
second half of 2023 at which point PAC should receive full and
final payment.
7.3 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.
The table below shows the closing deferred tax assets and
liabilities. The asset and liability balances are different from
those disclosed on the condensed consolidated statement of
financial position as the below amounts are presented before
offsetting asset and liability balances where there is a legal
right to set off and an intention to settle on a net basis.
For the
six months For the
ended year ended
30 June 31 December
Restated
2023 2022
GBPm GBPm
Unrealised gains on investments (693) (820)
Balance relating to insurance and investments contracts (238) (221)
Other short-term timing differences 130 126
Deferred acquisition costs 31 37
Defined benefit pensions (33) (39)
Capital allowances - 13
Tax losses carried forward 583 528
Share based payments and deferred compensation 14 26
======================================================== =========== ============
Net deferred tax liability (206) (350)
======================================================== =========== ============
Assets 1,052 1,037
Liabilities (1,258) (1,387)
======================================================== =========== ============
Net deferred tax liability (206) (350)
======================================================== =========== ============
The net deferred tax liability at 30 June 2023 of GBP206m has
reduced by GBP144m during the period from GBP350m at 31 December
2022 (30 June 2022: net deferred tax liability GBP980m). The
reduction is predominantly due to a reduction of deferred tax
liability arising on unrealised gains in the period together with
an increase to the deferred tax asset on losses. The losses carried
forward of GBP583m relate primarily to PAC and M&G plc. A
deferred tax asset has been recognised on the full excess losses,
trade losses and shareholder losses and a proportion of the capital
losses on the basis that the Group considers it is probable that
sufficient future taxable profits and UK capital gains will be
available against which these losses can be utilised. It is
estimated the losses on which deferred tax assets have been
recognised will be utilised in less than 15 years. The deferred tax
asset on losses is measured at the tax rates that are expected to
apply to the period when the asset is realised.
7.3.1 Unrecognised deferred tax
At the end of the reporting period, the Group has unused tax
losses of GBP486m (30 June 2022: GBP490m, 31 December 2022:
GBP481m) for which no deferred tax asset is being recognised. The
Group's unused tax losses primarily relate to capital losses in the
UK of GBP477m (31 December 2022: GBP472m). No deferred tax asset is
recognised on these losses 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 and trade losses can be carried forward
indefinitely.
8 Earnings per share
Basic earnings per share for the six months ended 30 June 2023
was 2.9p (30 June 2022: 45.2p loss per share, 31 December 2022:
83.6p loss per share) and diluted earnings per share was 2.9p (30
June 2022: 45.2p loss per share, 31 December 2022: 83.6p loss per
share). Basic earnings per share is based on the weighted average
ordinary shares in issue after deducting treasury shares and shares
held by the employee benefit trust. Diluted earnings per share is
based on the potential future shares in issue resulting from
exercise of options under the various share-based payment schemes
in addition to the weighted average ordinary shares in issue. The
weighted average ordinary shares in issue reflects the impact of
the share buy-back during 2022.
The following table shows details of basic and diluted earnings
per share:
For the six For the
months ended year ended
30 June 31 December
Restated(i) Restated(i)
2023 2022 2022
GBPm GBPm GBPm
Profit/(loss) attributable to equity holders of the
Company 68 (1,149) (2,068)
==================================================== ===== =========== ============
For the six For the
months ended year ended
30 June 31 December
2023 2022 2022
Millions Millions Millions
Weighted average number of ordinary shares outstanding 2,348 2,539 2,474
Dilutive effect of share options and awards 25 - -
======================================================= ======== ======== ============
Weighted average number of diluted ordinary shares
outstanding 2,373 2,539 2,474
======================================================= ======== ======== ============
For the
For the six year
months ended ended
30 June 31 December
Restated(i) Restated(i)
2023 2022 2022
Pence Pence Pence
per share per share per share
Basic earnings/(loss) per share 2.9 (45.2) (83.6)
================================== ========== =========== ============
Diluted earnings/(loss) per share 2.9 (45.2) (83.6)
================================== ========== =========== ============
(i) The comparative amounts have been restated for the first
time adoption of IFRS 17 and IFRS 9. See Note 1.3.1 for further
information.
As the Group has made a loss attributable to equity holders of
the Company for the year ended 31 December 2022 and the six months
ended 30 June 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.
9 Dividends
For the six months ended For the year
30 June ended 31 December
2023 2022 2022
Pence
Pence per Pence
per share GBPm share GBPm per share GBPm
Dividends relating to reporting
period:
First interim dividend - Ordinary 6.5 153 6.2 154 6.2 154
Second interim dividend - Ordinary - - - - 13.4 310
===================================== ========== ==== ====== ====== ============= =====
Total - 153 6.2 154 19.6 464
===================================== ========== ==== ====== ====== ============= =====
Dividends paid in reporting period:
Prior year's second interim dividend
- Ordinary 13.4 310 12.2 311 12.2 311
First interim dividend - Ordinary - - - - 6.2 154
===================================== ========== ==== ====== ====== ============= =====
Total 310 311 465
===================================== ========== ==== ====== ====== ============= =====
Subsequent to 30 June 2023, the Board has declared a first
interim dividend for 2023 of 6.5 pence per ordinary share, an
estimated GBP153m in total. The dividend is expected to be paid on
3 November 2023 and will be recorded as an appropriation of
retained earnings in the financial statements at the time that it
is paid.
10 Defined benefit pension schemes
The Group operates three defined benefit pension schemes. The
largest defined benefit scheme as at 30 June 2023 is the Prudential
Staff Pension Scheme (PSPS), which accounts for 82% (31 December
2022: 82%) of the present value of the defined benefit pension
obligation.
The Group also operates two smaller defined benefit pension
schemes that were originally established by the M&G
(M&GGPS) and Scottish Amicable (SASPS) businesses.
Under IAS 19: Employee Benefits and IFRIC 14: IAS 19 - The Limit
on a Defined Benefit Asset, Minimum Funding Requirements and their
Interaction, the Group can only recognise a surplus to the extent
that it is able to access the surplus either through an
unconditional right of refund or through reduced future
contributions relating to ongoing service of active members. The
Group has no unconditional right of refund to any surplus in PSPS.
Accordingly, PSPS's net economic pension surplus is restricted up
to the present value of the Group's economic benefit, which is
calculated as the difference between the estimated future cost of
service for active members and the estimated future ongoing
contributions. 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 30 June 2023 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 30 June 2023, investments in insurance
policies issued by Prudential Pensions Limited, (a subsidiary of
the Group, through which it invests in certain pooled funds), were
deducted from the M&GGPS surplus, on an IAS 19 basis. All
holdings had previously been divested during 2022 so no deduction
has been made to the comparative period.
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:
As at 30 June 2023
PSPS SASPS M&GGPS Total
GBPm GBPm GBPm GBPm
Fair value of plan assets 4,355 550 412 5,317
Present value of defined benefit obligation (3,815) (539) (298) (4,652)
Effect of restriction on surplus (531) - - (531)
============================================ ======= ===== ====== =======
Net economic pension surplus(i) 9 11 114 134
============================================ ======= ===== ====== =======
Eliminate group issued insurance policies - - (25) (25)
============================================ ======= ===== ====== =======
Net pension surplus 9 11 89 109
============================================ ======= ===== ====== =======
As at 30 June 2023
PSPS SASPS M&GGPS Total
GBPm GBPm GBPm GBPm
Attributable to:
Shareholder--backed business 3 7 89 99
With-Profits Fund 6 4 - 10
============================= ===== ===== ====== =====
Net pension surplus 9 11 89 109
============================= ===== ===== ====== =====
(i) The economic basis reflects the position of the defined
benefit schemes from the perspective of the pension schemes,
adjusted for the effect of IFRIC 14 for the derecognition of PSPS's
unrecognisable surplus and before adjusting for any non-qualifying
assets.
As at 31 December 2022
PSPS SASPS M&GGPS Total
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
============================================ ======= ===== ====== =======
As at 31 December 2022
PSPS SASPS M&GGPS Total
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
============================= ===== ====== ====== =====
11 Insurance contracts, investment contracts with DPF and
reinsurance contract assets and liabilities
11.1 Determination of insurance contracts, investment contracts
with DPF and reinsurance contract assets and liabilities for
different components of business
A description relating to the determination of the policyholder
liabilities and reinsurance contract assets/liabilities with 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 with-profits contracts are a combination of insurance
contracts, investment contracts with discretionary participation
features and investment contracts without discretionary
participation features. The insurance contracts and investment
contracts with discretionary participation features, which together
comprise the majority of the Group's with-profits business, are
within the scope of IFRS 17. The investment contracts without
discretionary participation features are within the scope of IFRS 9
and are presented in Note 12.
For the with-profits contracts the insurance contract liability
is the sum of the liability for incurred claims and the liability
for remaining coverage, which comprises:
- the fair value of the underlying items for in-force contracts, i.e.
the value of the asset shares and the expected future additions to
asset shares, plus the present value of future costs less charges;
- the allowance for "mutualisation" on in-force business;
- the risk adjustment for non-financial risk;
- the CSM; and
- the historical allowance for "mutualisation" (based on the underlying
items for the additional amounts expected to be paid to current or
future policyholders).
These items are described further below.
Future costs less charges
The future costs include a market-consistent valuation of the
costs of guarantees, options and smoothing and this amount is
determined using stochastic modelling techniques. The main
assumptions used to value the future costs less charges are listed
below:
- Assumptions relating to persistency and the take-up of options offered on 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 within 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. They reflect the costs incurred by the Group which may differ from the internal
charges to companies within the Group;
- 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. Mortality experience
over 2020 and 2021 was significantly higher than previous years as a result of the
COVID-19 pandemic. No weight has been given to 2020 or 2021 experience in calibrating
mortality assumptions; and
- Future investment return assumptions and discount rates are set at a risk-free yield
curve plus an illiquidity premium (as set out in Note 1.4.1). The illiquidity premium
has been determined at each reporting date by applying a weighting of 75% to the
illiquidity premium for the reference portfolio of fixed interest assets. 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.
Risk-free yield curve for with-profits contracts (excluding
illiquidity premium)
1 year 5 years 10 years 15 years 20 years
As at 30 June 2023 6.06% 5.03% 4.25% 4.03% 3.88%
======================= ====== ======= ======== ======== ========
As at 30 June 2022 2.49% 2.52% 2.36% 2.32% 2.27%
======================= ====== ======= ======== ======== ========
As at 31 December 2022 4.46% 4.06% 3.71% 3.62% 3.54%
======================= ====== ======= ======== ======== ========
Illiquidity premiums for with-profits contracts
As at
As at 30 June 31 December
2023 2022 2022
Illiquidity premium 50 bps 83 bps 55 bps
=================== ======= ====== ============
Allowances for mutualisation
The allowance for mutualisation on in-force business is the
policyholders' share, which is assumed to be 90% (consistent with
the division of profits permitted by the Articles of Association),
of the expected future surpluses arising from with-profits
contracts, which are determined as:
- 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; and
- less: the amount of any additional tax attributable to the above items.
The allowance for mutualisation on in-force business is included
in the liabilities of the groups of insurance contracts.
The historical allowance for mutualisation is the policyholders'
share of the surpluses that have arisen in the past, which are
determined as the policyholders' share of the fair value of the
underlying items for the additional amounts expected to be paid to
current or future policyholders less, if required, an allowance for
any further tax balances that should be apportioned between
policyholders and shareholders. The policyholders' share is
assessed on a prospective basis and is assumed to be 90%,
consistent with the division of profits permitted by the Articles
of Association. The fair value of the underlying items reflects
inter alia the fair value of the annuity contracts in the
With-Profits Fund.
The historical allowance for mutualisation is separate from the
liabilities of the groups of insurance contracts (in accordance
with IFRS 17 paragraph B71) and the Group has chosen to present
this as part of the liability for remaining coverage.
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; and
- 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.
Risk adjustment for non-financial risk
The table below shows the confidence level used to determine the
risk adjustment for with-profits contracts:
As at
As at 30 June 31 December
2023 2022 2022
Confidence level (percentile of the Group's one year 75th 75th 75th
risk distributions)
==================================================== ======= ====== ============
Contractual service margin
The Variable Fee Approach is used to measure the CSM for
with-profits business.
For contracts that provide both insurance coverage and
investment-related services the amount of the services provided in
any given period is measured as the greater of the asset shares and
the amounts payable on death during that period.
11.1.2 Unit-linked business
Only unit-linked contracts that transfer significant insurance
risk are within the scope of IFRS 17. For these contracts the
insurance contract liability is the sum of the liability for
incurred claims and the liability for remaining coverage, which
comprises:
- the fair value of the underlying items, i.e. the value of the unit funds,
plus the present value of future costs less charges;
- the risk adjustment for non-financial risk; and
- the CSM.
Future cash flows
The present value of future costs less charges is determined
using best estimate assumptions for the non-financial risks of
mortality, on a basis that is appropriate for the policyholder
profile, expenses and persistency. The assumed unit fund growth
rates are consistent with the discount rates applied to the cash
flows.
Risk-free yield curve for unit-linked contracts
1 year 5 years 10 years 15 years 20 years
As at 30 June 2023 6.06% 5.03% 4.25% 4.03% 3.88%
======================= ====== ======= ======== ======== ========
As at 30 June 2022 2.49% 2.52% 2.36% 2.32% 2.27%
======================= ====== ======= ======== ======== ========
As at 31 December 2022 4.46% 4.06% 3.71% 3.62% 3.54%
======================= ====== ======= ======== ======== ========
The unit-linked contracts are considered to be highly liquid as
they can be surrendered at any time by the policyholder for a
surrender value which is the value of the units less any surrender
charge. Therefore the cash flows are discounted using rates derived
from the risk-free yield curve without addition of an illiquidity
premium.
Certain parts of the unit-linked business are reinsured
externally by way of fund reinsurance. Where this is the case, the
fair value of the underlying asset and liability is equal to the
unit value obligation.
Risk adjustment for non-financial risk
The table below shows the confidence level used to determine the
risk adjustment for unit-linked contracts:
As at
As at 30 June 31 December
2023 2022 2022
Confidence level (percentile of the Group's one year 75th 75th 75th
risk distributions)
==================================================== ======= ====== ============
Contractual service margin
The Variable Fee Approach is used to measure the CSM for
unit-linked business.
The amount of the services provided in any given period is
measured as the greater of the unit funds and the amounts payable
on death during that period.
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 insurance contract liabilities are
calculated as the sum of the liability for incurred claims and the
liability for remaining coverage, which comprises:
- the expected value of future annuity payments and expenses;
- the risk adjustment for non-financial risk; and
- the CSM.
Future cash flows
The key assumptions used to value the future cash flows for
annuity contracts, both insurance contracts issued and reinsurance
contracts held, are described below.
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 insurance liabilities.
The assumptions used reference recent England & Wales
population mortality data, consistent with the CMI mortality
projections 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.
No changes have been made to best-estimate assumptions for
current mortality or mortality improvements in the six months ended
30 June 2023. The mortality improvement assumptions used are
summarised in the table below, with all other assumptions
reflecting the core CMI projection:
Period ended Model version(i,ii) Long-term improvement Smoothing parameter
rate (Sk)(iii)
30 June 2023 CMI 2020 For males: 1.60% For males: 7.25
pa For females: 7.75
For females: 1.60%
pa
================ =================== ===================== ===================
30 June 2022 CMI 2019 For males: 1.75% For males: 7.50
pa For females: 8.00
For females: 1.50%
pa
================ =================== ===================== ===================
31 December 2022 CMI 2020 For males: 1.60% For males: 7.25
pa For females: 7.75
For females: 1.60%
pa
================ =================== ===================== ===================
(i) A parameter in the model to reflect socio-economic
differences between the portfolio and population experience is also
utilised. This adjusts initial mortality improvement rates, varying
by age and gender. This is unchanged at all ages relative to 31
December 2022. At 30 June 2022 this was 0.45% at all ages.
(ii) The tapering of improvements to zero is set to occur
between ages 90-110 at 30 June 2023, which is unchanged from 31
December 2022. This occurred between ages 85-110 at 30 June
2022.
(iii) The smoothing parameter controls the amount of smoothing
by calendar year when determining the level of initial mortality
improvements.
The mortality assumptions for in-force vested annuities also
cover annuities in deferment.
Valuation interest rates
Valuation interest rates used to discount the cash flows are
derived from an appropriate risk-free yield curve plus an
illiquidity premium, derived using a top-down approach, that
reflects the illiquidity characteristics of the cash flows. Using
the top-down approach the illiquidity premium is derived from the
yield of a reference portfolio of assets which is adjusted to
eliminate any factors that are not relevant to the annuity
contracts. However, it is not required to adjust the yield curve
for differences in the liquidity characteristics of the insurance
contracts and the reference portfolio.
The discount rate used to value annuity contracts is as
follows:
1 year 5 years 10 years 15 years 20 years
As at 30 June 2023 7.80% 6.77% 5.99% 5.77% 5.62%
======================= ====== ======= ======== ======== ========
As at 30 June 2022 4.05% 4.08% 3.92% 3.88% 3.83%
======================= ====== ======= ======== ======== ========
As at 31 December 2022 6.16% 5.76% 5.41% 5.32% 5.24%
======================= ====== ======= ======== ======== ========
The reference portfolios chosen for annuities are the Assigned
Portfolios used for the SII Matching Adjustment. These are
considered to be suitable as reference portfolios for IFRS 17
reporting because their objective is to closely match the liability
cash flows and there is strong governance around their
management.
The largest adjustment made to reference portfolio yield is in
relation to credit risk. IFRS 17 is not prescriptive as to how the
adjustment for credit risk should be determined other than that it
should reflect market risk premiums for credit risk. The Group
continues to calculate the credit risk adjustment using the same
approach previously used for IFRS 4 reporting. This methodology is
considered appropriate for IFRS 17 reporting as it incorporates
allowances for expected and unexpected credit events, including
internal and external views on the outlook for credit risk, and
considers the relationship between credit risk and yield spreads.
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 the prospective outlook for experience over the coming
period, including uncertainty in the outlook. The allowance for
credit risk within the discount rate for shareholder annuities as
at 30 June 2023 was 55bps (30 June 2022: 45bps, 31 December 2022:
50bps). The short-term allowance has been increased as at 30 June
2023 following adverse downgrade experience over the first half of
2023, and a deteriorating future outlook for the UK economy.
The approach outlined above is also used to derive the discount
rates applied to reinsurance cash flows.
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. They reflect the costs
incurred by the Group which may differ from the internal charges to
companies within the Group. 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.
Risk adjustment for non-financial risk
The table below shows the confidence level used to determine the
risk adjustment for annuities and other long-term business:
As at
As at 30 June 31 December
2023 2022 2022
Confidence level (percentile of the Group's one year 75th 75th 75th
risk distributions)
==================================================== ======= ====== ============
Contractual service margin
The General Measurement Model is used to measure the CSM for
annuities and other long-term business.
11.2 Movements in insurance, investment with DPF and reinsurance
contract balances
The breakdown of groups of insurance, investment with DPF and
reinsurance contracts issued, and reinsurance contracts held, that
are in an asset position and those in a liability position is set
out in the table below:
2023
Shareholder-backed funds
and subsidiaries
Annuity
and other
With-profits Unit-linked long-term
sub-funds(i) liabilities business Total
As at 30 June GBPm GBPm GBPm GBPm
Insurance contract liabilities
Insurance contract balances 30,945 4,520 13,193 48,658
Investment with DPF contract liabilities 91,109 - 233 91,342
========================================= ============= ============ ========== =======
122,054 4,520 13,426 140,000
========================================= ============= ============ ========== =======
Insurance contract assets
Insurance contract balances - - 47 47
Reinsurance contracts
Reinsurance contract assets 10 4 1,072 1,086
Reinsurance contract liabilities 1 19 313 333
========================================= ============= ============ ========== =======
(i) Includes the With-Profits Sub-Fund (WPSF) and the Defined
Charge Participating Sub-Fund (DCPSF), including the non-profit
business written within these funds.
2022
Shareholder-backed funds
and subsidiaries
Annuity
and other
With-profits Unit-linked long-term
sub-funds(i) liabilities business Total
As at 31 December GBPm GBPm GBPm GBPm
Insurance contract liabilities
Insurance contract balances 31,911 4,598 13,967 50,476
Investment with DPF contract liabilities 91,266 - 234 91,500
123,177 4,598 14,201 141,976
========================================= ============= ============ ========== =======
Insurance contract assets
Insurance contract balances - - 39 39
Reinsurance contracts
Reinsurance contract assets 8 5 1,069 1,082
Reinsurance contract liabilities 1 22 325 348
========================================= ============= ============ ========== =======
The following reconciliations show how the net carrying amounts
of insurance contracts, investment contracts with DPF and
reinsurance contracts, changed during the year as a result of cash
flows and amounts recognised in the statement of profit or
loss.
For insurance contracts issued, and reinsurance contracts held,
the Group presents a table that separately analyses changes in the
estimates of the present value of future cash flows, the risk
adjustment for non-financial risk and the CSM.
Insurance contracts
Analysis by measurement component
For the six months ended 30 June 2023
Contractual service
margin
=======================================
Contracts Contracts
Estimates under under
of present Risk modified the fair
value adjustment retrospective value
of future for non-financial transition transition Other Total
cash flows risk approach approach contracts CSM Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening insurance contract
liabilities 135,373 624 2,041 3,694 244 5,979 141,976
Opening insurance contract
assets (76) 3 - 11 23 34 (39)
============================ =========== ================== ============== =========== ========== ===== =======
Net opening balance 135,297 627 2,041 3,705 267 6,013 141,937
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to
current
services
CSM recognised in profit or
loss for the services
provided - - (120) (202) (17) (339) (339)
Change in the risk
adjustment
for non-financial risk for
the risk expired - (22) - - - - (22)
Experience adjustments 45 - - - - - 45
============================ =========== ================== ============== =========== ========== ===== =======
45 (22) (120) (202) (17) (339) (316)
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to
future
services
Contracts initially
recognised
in the period (92) 3 - - 88 88 (1)
Changes in estimates
reflected
in the CSM (140) (8) 39 132 (23) 148 -
Changes in estimates that
result in onerous contract
losses or reversal of those
losses (6) 1 - - - - (5)
============================ =========== ================== ============== =========== ========== ===== =======
(238) (4) 39 132 65 236 (6)
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to past
services
Adjustments to liabilities
for incurred claims 2 - - - - - 2
============================ =========== ================== ============== =========== ========== ===== =======
2 - - - - - 2
============================ =========== ================== ============== =========== ========== ===== =======
Insurance service result
excluding reinsurance
contracts (191) (26) (81) (70) 48 (103) (320)
============================ =========== ================== ============== =========== ========== ===== =======
Net finance expenses from
insurance contracts 500 (13) 58 97 12 167 654
============================ =========== ================== ============== =========== ========== ===== =======
Total changes in the income
statement 309 (39) (23) 27 60 64 334
============================ =========== ================== ============== =========== ========== ===== =======
Cash flows
Premiums received 4,023 - - - - - 4,023
Incurred claims paid and
other
insurance service expenses
paid including investment
component (6,260) - - - - - (6,260)
Insurance acquisition cash
flows (81) - - - - - (81)
============================ =========== ================== ============== =========== ========== ===== =======
Total cash flows (2,318) - - - - - (2,318)
Net closing balance 133,288 588 2,018 3,732 327 6,077 139,953
============================ =========== ================== ============== =========== ========== ===== =======
Closing insurance contract
liabilities 133,375 585 2,018 3,722 300 6,040 140,000
Closing insurance contract
assets (87) 3 - 10 27 37 (47)
============================ =========== ================== ============== =========== ========== ===== =======
Net closing balance 133,288 588 2,018 3,732 327 6,077 139,953
============================ =========== ================== ============== =========== ========== ===== =======
For the six months ended 30 June 2022
Contractual service
margin
=======================================
Contracts Contracts
Estimates under under
of present modified the fair
value Risk adjustment retrospective value
of future for non-financial transition transition Other Total
cash flows risk approach approach contracts CSM Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening insurance contract
liabilities 154,698 980 1,696 3,337 110 5,143 160,821
Opening insurance contract
assets (58) 3 - 10 17 27 (28)
============================ =========== ================== ============== =========== ========== ===== =======
Net opening balance 154,640 983 1,696 3,347 127 5,170 160,793
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to
current
services
CSM recognised in profit or
loss for the services
provided - - (104) (186) (9) (299) (299)
Change in the risk
adjustment
for non-financial risk for
the risk expired - (29) - - - - (29)
Experience adjustments 37 - - - - - 37
============================ =========== ================== ============== =========== ========== ===== =======
37 (29) (104) (186) (9) (299) (291)
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to
future
services
Contracts initially
recognised
in the period (32) 2 - - 36 36 6
Changes in estimates
reflected
in the CSM (591) 22 303 244 20 567 (2)
Changes in estimates that
result in onerous contract
losses or reversal of those
losses 25 3 - - - - 28
============================ =========== ================== ============== =========== ========== ===== =======
(598) 27 303 244 56 603 32
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to past
services
Adjustments to liabilities
for incurred claims 1 - - - - - 1
============================ =========== ================== ============== =========== ========== ===== =======
1 - - - - - 1
============================ =========== ================== ============== =========== ========== ===== =======
Insurance service result
excluding reinsurance
contracts (560) (2) 199 58 47 304 (258)
============================ =========== ================== ============== =========== ========== ===== =======
Net finance expenses from
insurance contracts (8,906) (255) 11 37 - 48 (9,113)
============================ =========== ================== ============== =========== ========== ===== =======
Total changes in the income
statement (9,466) (257) 210 95 47 352 (9,371)
============================ =========== ================== ============== =========== ========== ===== =======
Cash flows
Premiums received 3,196 - - - - - 3,196
Incurred claims paid and
other
insurance service expenses
paid including investment
component (6,649) - - - - - (6,649)
Insurance acquisition cash
flows (76) - - - - - (76)
============================ =========== ================== ============== =========== ========== ===== =======
Total cash flows (3,529) - - - - - (3,529)
Net closing balance 141,645 726 1,906 3,442 174 5,522 147,893
============================ =========== ================== ============== =========== ========== ===== =======
Closing insurance contract
liabilities 141,706 722 1,906 3,433 155 5,494 147,922
Closing insurance contract
assets (61) 4 - 9 19 28 (29)
============================ =========== ================== ============== =========== ========== ===== =======
Net closing balance 141,645 726 1,906 3,442 174 5,522 147,893
============================ =========== ================== ============== =========== ========== ===== =======
For the year ended 31 December 2022
Contractual service
margin
=======================================
Contracts Contracts
Estimates under under
of present modified the fair
value Risk adjustment retrospective value
of future for non-financial transition transition Other Total
cash flows risk approach approach contracts CSM Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening insurance contract
liabilities 154,698 980 1,696 3,337 110 5,143 160,821
Opening insurance contract
assets (58) 3 - 10 17 27 (28)
=========================== =========== ================== ============== =========== ========== ===== ========
Net opening balance 154,640 983 1,696 3,347 127 5,170 160,793
=========================== =========== ================== ============== =========== ========== ===== ========
Changes that relate to
current
services
CSM recognised in profit or
loss for the services
provided - - (229) (411) (24) (664) (664)
Change in the risk
adjustment
for non-financial risk for
the risk expired - (63) - - - - (63)
Experience adjustments 63 - - - - - 63
=========================== =========== ================== ============== =========== ========== ===== ========
63 (63) (229) (411) (24) (664) (664)
=========================== =========== ================== ============== =========== ========== ===== ========
Changes that relate to
future
services
Contracts initially
recognised
in the period (80) 3 - - 78 78 1
Changes in estimates
reflected
in the CSM (1,425) 93 556 694 83 1,333 1
Changes in estimates that
result in onerous contract
losses or reversal of
those
losses 16 (1) - - - - 15
=========================== =========== ================== ============== =========== ========== ===== ========
(1,489) 95 556 694 161 1,411 17
=========================== =========== ================== ============== =========== ========== ===== ========
Changes that relate to past
services
Adjustments to liabilities
for incurred claims 9 - - - - - 9
=========================== =========== ================== ============== =========== ========== ===== ========
9 - - - - - 9
=========================== =========== ================== ============== =========== ========== ===== ========
Insurance service result
excluding reinsurance
contracts (1,417) 32 327 283 137 747 (638)
=========================== =========== ================== ============== =========== ========== ===== ========
Net finance expenses from
insurance contracts (11,269) (388) 18 75 3 96 (11,561)
=========================== =========== ================== ============== =========== ========== ===== ========
Total changes in the income
statement (12,686) (356) 345 358 140 843 (12,199)
=========================== =========== ================== ============== =========== ========== ===== ========
Cash flows
Premiums received 6,622 - - - - - 6,622
Incurred claims paid and
other
insurance service expenses
paid including investment
component (13,117) - - - - - (13,117)
Insurance acquisition cash
flows (162) - - - - - (162)
=========================== =========== ================== ============== =========== ========== ===== ========
Total cash flows (6,657) - - - - - (6,657)
Net closing balance 135,297 627 2,041 3,705 267 6,013 141,937
=========================== =========== ================== ============== =========== ========== ===== ========
Closing insurance contract
liabilities 135,373 624 2,041 3,694 244 5,979 141,976
Closing insurance contract
assets (76) 3 - 11 23 34 (39)
=========================== =========== ================== ============== =========== ========== ===== ========
Net closing balance 135,297 627 2,041 3,705 267 6,013 141,937
=========================== =========== ================== ============== =========== ========== ===== ========
Reinsurance contracts
Analysis by measurement component
For the six months ended 30 June 2023
Contractual service
margin
=======================================
Contracts Contracts
Estimates under under
of present Risk modified the fair
value adjustment retrospective value
of future for non-financial transition transition Other Total
cash flows risk approach approach Contracts CSM Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening reinsurance contract
liabilities 567 (95) - (123) (1) (124) 348
Opening reinsurance contract
assets (855) (54) (6) (5) (162) (173) (1,082)
============================ =========== ================== ============== =========== ========== ===== =======
Net opening balance (288) (149) (6) (128) (163) (297) (734)
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to
current
services
CSM recognised in profit or - - - 5 1 6 6
loss for the services
received
Change in the risk - 5 - - - - 5
adjustment
for non-financial risk for
the risk expired
Experience adjustments (4) - - - - - (4)
============================ =========== ================== ============== =========== ========== ===== =======
(4) 5 - 5 1 6 7
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to
future
services
Contracts initially 1 - - - - - 1
recognised
in the period
Changes in estimates
reflected
in the contractual service
margin 19 - - (9) (10) (19) -
Changes in the fulfilment
cash flows that do not
adjust
the CSM for the group of
underlying
contracts (2) - - - - - (2)
============================ =========== ================== ============== =========== ========== ===== =======
18 - - (9) (10) (19) (1)
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to past
services
Asset for incurred claims (2) - - - - - (2)
(2) - - - - - (2)
============================ =========== ================== ============== =========== ========== ===== =======
Insurance service result 12 5 - (4) (9) (13) 4
============================ =========== ================== ============== =========== ========== ===== =======
Net finance expenses from
reinsurance contracts 17 5 - (1) (2) (3) 19
============================ =========== ================== ============== =========== ========== ===== =======
Total changes in the income
statement 29 10 - (5) (11) (16) 23
============================ =========== ================== ============== =========== ========== ===== =======
Cash flows
Premiums and similar
expenses
paid (273) - - - - - (273)
Amounts recovered 231 - - - - - 231
============================ =========== ================== ============== =========== ========== ===== =======
Total cash flows (42) - - - - - (42)
============================ =========== ================== ============== =========== ========== ===== =======
Net closing balance (301) (139) (6) (133) (174) (313) (753)
============================ =========== ================== ============== =========== ========== ===== =======
Closing reinsurance contract
liabilities 545 (88) - (124) - (124) 333
Closing reinsurance contract
assets (846) (51) (6) (9) (174) (189) (1,086)
============================ =========== ================== ============== =========== ========== ===== =======
Net closing balance (301) (139) (6) (133) (174) (313) (753)
============================ =========== ================== ============== =========== ========== ===== =======
For the six months ended 30 June 2022
Contractual service
margin
=======================================
Contracts Contracts
Estimates under under
of present modified the fair
value Risk adjustment retrospective value
of future for non-financial transition transition Other Total
cash flows risk approach approach contracts CSM Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening reinsurance contract
liabilities 748 (161) - (41) - (41) 546
Opening reinsurance contract
assets (1,488) (132) (4) (3) (88) (95) (1,715)
============================ =========== ================== ============== =========== ========== ===== =======
Net opening balance (740) (293) (4) (44) (88) (136) (1,169)
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to
current
services
CSM recognised in profit or
loss for the services
received - - - 2 - 2 2
Change in the risk
adjustment
for non-financial risk for
the risk expired - 8 - - - - 8
Experience adjustments (16) - - - - - (16)
============================ =========== ================== ============== =========== ========== ===== =======
(16) 8 - 2 - 2 (6)
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to
future
services
Changes in estimates
reflected
in the contractual service
margin 60 (3) (2) (16) (39) (57) -
Changes in the fulfilment
cash flows that do not
adjust
the CSM for the group of
underlying
contracts (15) - - - - - (15)
============================ =========== ================== ============== =========== ========== ===== =======
45 (3) (2) (16) (39) (57) (15)
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to past
services
Asset for incurred claims (2) - - - - - (2)
(2) - - - - - (2)
============================ =========== ================== ============== =========== ========== ===== =======
Insurance service result 27 5 (2) (14) (39) (55) (23)
============================ =========== ================== ============== =========== ========== ===== =======
Net finance income from
reinsurance
contracts 248 95 - - - - 343
============================ =========== ================== ============== =========== ========== ===== =======
Total changes in the income
statement 275 100 (2) (14) (39) (55) 320
============================ =========== ================== ============== =========== ========== ===== =======
Cash flows
Premiums and similar
expenses
paid (250) - - - - - (250)
Amounts recovered 234 - - - - - 234
============================ =========== ================== ============== =========== ========== ===== =======
Total cash flows (16) - - - - - (16)
============================ =========== ================== ============== =========== ========== ===== =======
Net closing balance (481) (193) (6) (58) (127) (191) (865)
============================ =========== ================== ============== =========== ========== ===== =======
Closing reinsurance contract
liabilities 604 (113) - (52) (1) (53) 438
Closing reinsurance contract
assets (1,085) (80) (6) (6) (126) (138) (1,303)
============================ =========== ================== ============== =========== ========== ===== =======
Net closing balance (481) (193) (6) (58) (127) (191) (865)
============================ =========== ================== ============== =========== ========== ===== =======
For the year ended 31 December 2022
Contractual service
margin
=======================================
Contracts Contracts
Estimates under under
of present modified the fair
value Risk adjustment retrospective value
of future for non-financial transition transition Other Total
cash flows risk approach approach contracts CSM Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Opening reinsurance contract
liabilities 748 (161) - (41) - (41) 546
Opening reinsurance contract
assets (1,488) (132) (4) (3) (88) (95) (1,715)
============================ =========== ================== ============== =========== ========== ===== =======
Net opening balance (740) (293) (4) (44) (88) (136) (1,169)
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to
current
services
CSM recognised in profit or
loss for the services
received - - 2 10 2 14 14
Change in the risk
adjustment
for non-financial risk for
the risk expired - 16 - - - - 16
Experience adjustments (17) - - - - - (17)
============================ =========== ================== ============== =========== ========== ===== =======
(17) 16 2 10 2 14 13
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to
future
services
Changes in estimates
reflected
in the contractual service
margin 185 (12) (4) (92) (77) (173) -
Changes in the fulfilment
cash flows that do not
adjust
the CSM for the group of
underlying
contracts 6 - - - - - 6
============================ =========== ================== ============== =========== ========== ===== =======
191 (12) (4) (92) (77) (173) 6
============================ =========== ================== ============== =========== ========== ===== =======
Changes that relate to past
services
Asset for incurred claims (4) - - - - - (4)
(4) - - - - - (4)
============================ =========== ================== ============== =========== ========== ===== =======
Insurance service result 170 4 (2) (82) (75) (159) 15
============================ =========== ================== ============== =========== ========== ===== =======
Net finance income from
reinsurance
contracts 333 140 - (2) - (2) 471
============================ =========== ================== ============== =========== ========== ===== =======
Total changes in the income
statement 503 144 (2) (84) (75) (161) 486
============================ =========== ================== ============== =========== ========== ===== =======
Cash flows
Premiums and similar
expenses
paid (542) - - - - - (542)
Amounts recovered 491 - - - - - 491
============================ =========== ================== ============== =========== ========== ===== =======
Total cash flows (51) - - - - - (51)
============================ =========== ================== ============== =========== ========== ===== =======
Net closing balance (288) (149) (6) (128) (163) (297) (734)
============================ =========== ================== ============== =========== ========== ===== =======
Closing reinsurance contract
liabilities 567 (95) - (123) (1) (124) 348
Closing reinsurance contract
assets (855) (54) (6) (5) (162) (173) (1,082)
============================ =========== ================== ============== =========== ========== ===== =======
Net closing balance (288) (149) (6) (128) (163) (297) (734)
============================ =========== ================== ============== =========== ========== ===== =======
11.3 Expected recognition of the contractual service margin
Insurance Reinsurance
contracts contracts
issued held(i)
Number of years until expected to be recognised Total Total Net Result
As at 30 June 2023 GBPm GBPm GBPm
0 to 1 year 579 (10) 569
1 to 2 years 520 (10) 510
2 to 3 years 478 (10) 468
3 to 4 years 438 (10) 428
4 to 5 years 400 (10) 390
5 to 10 years 1,533 (54) 1,479
10 to 15 years 946 (52) 894
15 to 20 years 554 (45) 509
20 to 25 years 306 (36) 270
Over 25 years 323 (76) 247
================================================ ========== =========== ==========
Total 6,077 (313) 5,764
================================================ ========== =========== ==========
Insurance Reinsurance
contracts contracts
issued held(i)
Number of years until expected to be recognised Total Total Net Result
As at 31 December 2022 GBPm GBPm GBPm
0 to 1 year 573 (8) 565
1 to 2 years 514 (8) 506
2 to 3 years 473 (9) 464
3 to 4 years 433 (9) 424
4 to 5 years 396 (9) 387
5 to 10 years 1,514 (50) 1,464
10 to 15 years 935 (50) 885
15 to 20 years 549 (44) 505
20 to 25 years 303 (35) 268
Over 25 years 323 (75) 248
================================================ ========== =========== ==========
Total 6,013 (297) 5,716
================================================ ========== =========== ==========
(i) The net reinsurance contracts held represents the run off of
the net of reinsurance asset CSM and reinsurance liabilities
CSM.
12 Investment contract liabilities without DPF
The table below presents the analysis of change in investment
contract liabilities without DPF:
GBPm
As at 1 January 2022 14,884
================================================ =======
Net Flows:
Premiums 741
Surrenders (1,941)
Maturities/deaths (47)
================================================ =======
Net flows (1,247)
================================================ =======
Switches -
Changes in reserving basis(i) 30
Investment-related items and other movements(i) (1,758)
Foreign exchange differences(i) 28
================================================ =======
As at 31 December 2022/As at 1 January 2023 11,937
================================================ =======
Net Flows:
Premiums 419
Surrenders (537)
Maturities/deaths (60)
================================================ =======
Net flows (178)
================================================ =======
Switches 8
Changes in reserving basis(i) -
Investment-related items and other movements(i) 340
Foreign exchange differences(i) (92)
================================================ =======
As at 30 June 2023 12,015
================================================ =======
(i) Investment-related items and other movements, foreign
exchange differences and change in reserving basis closely align to
the net change in investment contract liabilities without DPF
income statement amount. The difference between the values relates
to policyholder tax, reclassifications and annual management
charges.
For those contracts where the level of insurance risk or
discretionary participation feature is insignificant, the assets
and liabilities arising under the contracts are distinguished
between those that relate to the financial instrument liability,
and the deferred acquisition costs and deferred income that relate
to the component of the contract that relates to investment
management. Deferred acquisition costs and deferred income are
recognised 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
fair value of the underlying asset and liability is equal to the
unit value obligation.
13 Subordinated liabilities and other borrowings
As at As at
30 June 31 December
2023 2022
GBPm GBPm
Subordinated liabilities 3,692 3,729
Operational borrowings 77 50
Borrowings attributable to With-Profits Fund 4,030 3,758
==================================================== ======== ============
Total subordinated liabilities and other borrowings 7,799 7,537
==================================================== ======== ============
13.1 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.
For the year
As at 30 June ended 31 December
2023 2022
Principal Carrying Principal Carrying
amount amount amount amount
GBPm GBPm
5.625% Sterling fixed rate due on 20 October
2051 GBP750m 835 GBP750m 839
6.25% Sterling fixed rate due 20 October 2068 GBP500m 603 GBP500m 604
6.5% US Dollar fixed rate due on 20 October 2048 $500m 439 $500m 466
6.34% Sterling fixed rate due on 19 December
2063 GBP700m 843 GBP700m 845
5.56% Sterling fixed rate due on 20 July 2055 GBP600m 670 GBP600m 672
3.875% Sterling fixed rate due on 20 July 2049 GBP300m 302 GBP300m 303
================================================= ========= ======== ========== ========
Total subordinated liabilities 3,692 3,729
================================================= ========= ======== ========== ========
Subordinated notes issued by the Company rank below its senior
obligations and ahead of its preference shares and ordinary share
capital.
A description of the key features of each of the Group's
subordinated notes as at 30 June 2023 is as follows:
5.625% Sterling 6.25% Sterling 6.50% US 6.34% Sterling 5.56% Sterling 3.875% Sterling
fixed rate fixed rate Dollar fixed fixed rate fixed rate fixed rate
rate
Principal GBP750m GBP500m $500m GBP700m GBP600m GBP300m
amount
=============== =============== =============== =============== =============== =============== ================
Issue date (i) 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 each each each each each July 2029
the Company semi-annual semi-annual semi-annual semi-annual semi-annual (and each
from interest interest interest interest interest semi-annual
payment date payment date payment date payment payment interest
thereafter) thereafter) thereafter) date date payment
thereafter) thereafter) date thereafter)
=============== =============== =============== =============== =============== =============== ================
Solvency II own Tier 2 Tier 2 Tier 2 Tier 2 Tier 2 Tier 2
funds treatment
=============== =============== =============== =============== =============== =============== ================
(i) The subordinated notes were issued by Prudential plc rather
than by the Company.
As at 30 June 2023, the principal amount of all subordinated
liabilities is expected to be settled after more than 12 months and
accrued interest of GBP42m (31 December 2022: GBP43m) is expected
to be settled within 12 months.
The following table reconciles the movement in subordinated
liabilities in the period:
For the six For the
months ended year ended
30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
At 1 January 3,729 3,707 3,706
Amortisation (14) (14) (28)
Foreign exchange movements (23) 48 51
=========================== ======= ====== ============
At end of period 3,692 3,741 3,729
=========================== ======= ====== ============
There were no repayments of principal on these loans during the
year. The amortisation of premium on the loans based on an
effective interest rate and the foreign exchange movement on the
translation of the subordinated liabilities denominated in US
dollar are both non-cash items.
14 Fair value methodology
The comparative amounts have been restated for the first time
adoption of IFRS 17 and IFRS 9 and are updated throughout this fair
value methodology note. See Note 1.3.1 for further information.
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 loans and 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 Valuation approach for level 2 assets and liabilities
A significant proportion of the Group's level 2 assets are
corporate bonds, structured securities and other national and
non-national government debt securities. These assets, in line with
market practice, are generally valued using independent pricing
services or quotes from third party brokers. These valuations are
subject to a number of monitoring controls, such as monthly price
variances, stale price reviews and variance analysis on prices
achieved on subsequent trades.
Pricing services, where available, are used to obtain third
party broker quotes. When prices are not available from pricing
services, quotes are sourced directly from brokers. The Group seeks
to obtain a number of quotes from different brokers so as to obtain
the most comprehensive information available on their
executability.
Where quotes are sourced directly from brokers, the price used
in the valuation is normally selected from one of the quotes based
on a number of factors, including the timeliness and regularity of
the quotes and the accuracy of the quotes considering the spreads
provided. The selected quote is the one which best represents an
executable quote for the security at the measurement date.
14.3 Level 3 assets and liabilities
14.3.1 Valuation approach for level 3
Investments valued using valuation techniques include financial
investments which by nature do not have an externally quoted price
based on regular trades, and financial investments for which
markets are no longer active as a result of market conditions e.g.
market illiquidity. The valuation techniques used include
comparison to recent arm's length transactions, reference to other
instruments that are substantially the same, discounted cash flow
analysis, option-adjusted spread models and, if applicable,
enterprise valuation. These techniques may include a number of
assumptions relating to variables such as credit risk and interest
rates. Changes in assumptions relating to these variables could
positively or negatively impact the reported fair value of these
instruments. When determining the inputs into the valuation
techniques used priority is given to publicly available prices from
independent sources when available, but overall the source of
pricing is chosen with the objective of arriving at a fair value
measurement that reflects the price at which an orderly transaction
would take place between market participants on the measurement
date.
Where certain debt securities are valued using broker quotes,
adjustments may be required in limited circumstances. This is
generally where it is determined that the third party valuations
obtained do not reflect fair value (e.g. either because the value
is stale and/or the values are extremely diverse in range). These
are usually securities which are distressed or that could be
subject to a debt restructure or where reliable market prices are
no longer available due to an inactive market or market
dislocation. In these instances, prices are derived using internal
valuation techniques including those described below with the
objective of arriving at a fair value measurement that reflects the
price at which an orderly transaction would take place between
market participants on the measurement date. The techniques used
require a number of assumptions relating to variables such as
credit risk and interest rates. Examples of such variables include
an average credit spread based on the corporate bond universe and
the relevant duration of the asset being valued. The input
assumptions are determined based on the best available information
at the measurement dates. Securities valued in such manner are
classified as level 3 where these significant inputs are not based
on observable market data.
Certain debt securities and loans were valued using matrix
pricing, which is based on assessing the credit quality of the
underlying borrower and allocating an internal credit rating which
is unobservable. The internal credit rating implicitly incorporates
environmental, social and governance (ESG) considerations through
the analysts views of the industry and issuer. Under matrix
pricing, these debt securities are priced by taking the credit
spreads on comparable quoted public debt securities and applying
these to the equivalent debt securities, factoring in a specified
liquidity premium. The selection of comparable quoted public debt
securities used to determine the credit spread is based on a credit
spread matrix that takes into account the internal credit rating,
maturity and currency of the debt security.
The fair value estimates are made at a specific point in time,
based upon any available market information and judgements about
the financial instruments, including estimates of the timing and
amount of expected future cash flows and the credit standing of
counterparties. Such estimates do not reflect any premium or
discount that could result from offering for sale at one time a
significant volume of a particular financial instrument, nor do
they consider the tax impact of the realisation of unrealised gains
or losses from selling the financial instrument being fair valued.
In some cases, the disclosed value cannot be realised in immediate
settlement of the financial instrument. In accordance with the
Group Risk Framework, the estimated fair value of derivative
financial instruments valued internally using standard market
practices are subject to assessment against external
counterparties' valuations.
The investment properties of the Group are externally valued by
professionally qualified external valuers using the RICS valuation
standards. The Group's investment properties are predominantly
valued using an income capitalisation technique. This technique
calculates the value through the yield and rental value depending
on factors such as the lease length, building quality, covenants
and location. Typically these variables used are compared to recent
transactions with similar features to those being valued.
The valuation of investment property inherently captures the
impact of climate change if it were located in an area subject to
climate change events. The key inputs of yield and rental value are
proxies for a range of factors which will include climate change.
The trend is towards greener buildings achieving better rents and
yields than comparable buildings, all other factors being
equal.
As the comparisons are not with properties that are virtually
identical to the Group's investment properties, adjustments are
made by the valuers where appropriate to the variables used.
The way that climate-related factors may influence key inputs
for level 3 instruments can be nuanced and complex to identify. The
inclusion of other climate-related factors into fair value is
expected to evolve over the coming years as valuation tool sets
progress to allow more accurate measurement of climate impact.
14.3.2 Analysis of internally valued level 3 financial
instruments
Level 3 financial assets, net of financial liabilities, which
were internally valued as at 30 June 2023 were GBP8,795m (31
December 2022: GBP8,630m), representing 6.8% of the total
fair-valued financial assets net of financial liabilities (31
December 2022: 6.7%).
Internal valuations are inherently more subjective than external
valuations. These internally valued net assets and liabilities
primarily consist of the following items:
- Debt securities of GBP7,339m as at 30 June 2023 (31 December 2022:
GBP7,083m), of which GBP5,497m (31 December 2022: GBP5,885m) were valued
using discounted cash flow models with an internally developed discount
rate. The remaining debt securities were valued using other valuation
methodologies such as enterprise valuation and estimated recovery (such
as liquidators' reports).
- Infrastructure fund investments in both debt and equity securities
of GBP315m as at 30 June 2023 (31 December 2022: GBP497m) were valued
internally using a discounted cash flow model. The most significant
inputs to the valuation are the forecast cash flows of the underlying
business, discount rate, and terminal value assumption, all of which
involve significant judgement. The valuation is performed in accordance
with International Private Equity and Venture Capital Association valuation
guidelines. These investments are held by the Group's consolidated
private equity infrastructure funds.
- Equity release mortgage loans of GBP872m as at 30 June 2023 (31 December
2022: GBP934m) and a corresponding liability of GBP242m (31 December
2022: GBP246m), which were valued internally using discounted cash
flow models. The inputs that are most significant to the valuation
of these loans are the discount rate (consisting of an observable risk
free rate and an unobservable illiquidity premium), the current property
value, the assumed future property growth and the assumed future annual
property rental yields.
- Liabilities of GBP1,718m as at 30 June 2023 (31 December 2022: GBP1,688m),
for the third-party interest in consolidated funds in respect of the
consolidated investment funds, which are non-recourse to the Group.
These liabilities were valued by reference to the underlying assets.
14.3.3 Governance of level 3
The Group's valuation policies, procedures and analyses for
instruments categorised as level 3 are overseen by business unit
committees as part of the Group's wider financial reporting
governance processes. The procedures undertaken include approval of
valuation methodologies, verification processes, and resolution of
significant or complex valuation issues. In undertaking these
activities, the Group makes use of the extensive expertise of its
Asset Management business. In addition, the Group has minimum
standards for independent price verification to ensure valuation
accuracy is regularly independently verified. Adherence to this
policy is monitored across the business units.
14.4 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:
As at 30 June 2023
Level Level Level Total
1 2 3
GBPm GBPm GBPm GBPm
With-profits:
Investment property - - 14,525 14,525
Equity securities and pooled investment funds 40,050 1,448 13,595 55,093
Loans - 569 1,441 2,010
Debt securities 12,103 31,200 4,180 47,483
Derivative assets 96 2,690 1 2,787
============================================== ====== ====== ====== =======
Total with-profits 52,249 35,907 33,742 121,898
============================================== ====== ====== ====== =======
Unit-linked:
Investment property - - 433 433
Equity securities and pooled investment funds 10,514 540 39 11,093
Debt securities 1,687 2,655 14 4,356
Derivative assets 1 7 - 8
============================================== ====== ====== ====== =======
Total unit-linked 12,202 3,202 486 15,890
============================================== ====== ====== ====== =======
Annuity and other long-term business:
Investment property - - 848 848
Equity securities and pooled investment funds 256 - 2 258
Loans - - 1,267 1,267
Debt securities 2,230 5,439 4,098 11,767
Derivative assets - 205 24 229
============================================== ====== ====== ====== =======
Total annuity and other long-term business 2,486 5,644 6,239 14,369
============================================== ====== ====== ====== =======
Other:
Equity securities and pooled investment funds 187 - 63 250
Debt securities 699 406 7 1,112
Derivative assets - 144 - 144
============================================== ====== ====== ====== =======
Total other 886 550 70 1,506
============================================== ====== ====== ====== =======
Group:
Investment property - - 15,806 15,806
Equity securities and pooled investment funds 51,007 1,988 13,699 66,694
Loans - 569 2,708 3,277
Debt securities 16,719 39,700 8,299 64,718
Derivative assets 97 3,046 25 3,168
============================================== ====== ====== ====== =======
Total assets at fair value 67,823 45,303 40,537 153,663
============================================== ====== ====== ====== =======
Restated
As at 31 December 2022
Level Level Level Total
1 2 3
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 - 507 1,366 1,873
Debt securities 13,685 26,380 4,725 44,790
Derivative assets 52 2,350 1 2,403
============================================== ====== ====== ====== =======
Total with-profits 53,892 34,559 34,311 122,762
============================================== ====== ====== ====== =======
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 - - 1,361 1,361
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 6,430 14,933
============================================== ====== ====== ====== =======
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 - 507 2,727 3,234
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 45,616 41,388 155,537
============================================== ====== ====== ====== =======
14.5 Fair value hierarchy for liabilities measured at fair value
in the consolidated statement of financial position
The table below presents the Group's liabilities measured at
fair value by level of the fair value hierarchy:
As at 30 June 2023
Level Level Level Total
1 2 3
GBPm GBPm GBPm GBPm
Investment contract liabilities without discretionary
participation features - 12,015 - 12,015
Third party interest in consolidated funds 5,963 1,304 1,718 8,985
Derivative liabilities 41 3,963 17 4,021
Accruals, deferred income and other liabilities - - 242 242
====================================================== ===== ====== ===== ======
Total liabilities at fair value 6,004 17,282 1,977 25,263
====================================================== ===== ====== ===== ======
Restated
As at 31 December 2022
Level Level Level Total
1 2 3
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
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
====================================================== ====== ====== ===== ======
14.6 Transfers between levels
The Group's policy is to recognise transfers into and transfers
out of levels as at the end of each half-year reporting period,
except for material transfers, which are recognised as of the date
of the event or change in circumstances that caused the
transfer.
Transfers are deemed to have occurred when there is a material
change in the observed valuation inputs or a change in the level of
trading activities of the securities.
For the six months ended 30 June
2023
Financial Assets and Liabilities
- Transfers between levels
Equity
securities
and pooled Debt
investments Loans securities Derivatives Total
GBPm GBPm GBPm GBPm GBPm
From level 1 to level 2 33 - 3,511 - 3,544
From level 1 to level 3(i) 37 - - - 37
From level 2 to level 1 7 - 3,783 - 3,790
From level 2 to level 3(i) 632 - 195 - 827
From level 3 to level 1 - - - - -
From level 3 to level 2 - 22 390 - 412
(i) During the period additional information has been identified
in relation to a number of collective investment holdings with the
value of GBP658m now reflected within level 3.
Restated
For the year ended 31 December
2022
Financial Assets and Liabilities
- Transfers between levels
Equity
securities
and pooled
investments Loans Debt securities Derivatives Total
GBPm GBPm GBPm GBPm GBPm
From level 1 to level 2(i) 7 - 14,099 - 14,106
From level 1 to level 3 1 - 4 - 5
From level 2 to level 1 17 - 220 - 237
From level 2 to level 3 - 2 582 - 584
From level 3 to level 1 9 - - - 9
From level 3 to level 2 137 42 555 - 734
(i) Movements arising from refinements made to the Group's
levelling policy during the year ended 31 December 2022.
14.7 Reconciliation of movements in level 3 assets and
liabilities
The movements during the year of level 3 assets and liabilities
held at fair value, excluding assets and liabilities held for sale,
are analysed in the tables below:
For the six months ended 30 June 2023
Total Transfer Transfers Transfers
gains/(losses) Purchases Sales to held into out At
At in income Foreign and and for level of level 30
1 Jan statement exchange other other sale Settled Issued 3 3 June
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Level 3
assets:
Investment
property 16,505 (574) (448) 440 (92) (25) - - - - 15,806
Equity
securities
and pooled
investment
funds 13,180 (459) (87) 1,245 (696) (153) - - 669 - 13,699
Loans 2,727 (79) (10) 275 (183) - - - - (22) 2,708
Debt
securities 8,950 (259) (20) 336 (443) (70) - - 195 (390) 8,299
Derivative
assets 26 (1) - - - - - - - - 25
============= ====== ============== ======== ========= ======= ======== ======= ====== ========= ========= ======
Total level
3 assets 41,388 (1,372) (565) 2,296 (1,414) (248) - - 864 (412) 40,537
============= ====== ============== ======== ========= ======= ======== ======= ====== ========= ========= ======
Level 3
liabilities:
Third-party
interest
in
consolidated
funds 1,688 (65) (8) - - - (23) 126 - - 1,718
Other
liabilities 246 1 - - - - (5) - - - 242
Derivative
Liabilities 9 8 - - - - - - - - 17
============= ====== ============== ======== ========= ======= ======== ======= ====== ========= ========= ======
Total level
3
liabilities 1,943 (56) (8) - - - (28) 126 - - 1,977
============= ====== ============== ======== ========= ======= ======== ======= ====== ========= ========= ======
Restated
For the year ended 31 December 2022
Total Transfer Transfers Transfers
gains/(losses) Sales to held into out
At 1 in income Foreign Purchasesand and for level of level At 31
Jan statement exchange other(i) other(ii) sale Settled(iii) Issued 3 3 December
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Level 3
assets:
Investment
property 19,698 (1,477) 204 2,699 (4,643) 24 - - - - 16,505
Equity
securities
and pooled
investment
funds 10,968 419 128 3,683 (1,873) - - - 1 (146) 13,180
Loans 5,227 (901) 4 579 (786) - (1,356) - 2 (42) 2,727
Debt
securities 12,370 (3,401) 8 760 (818) - - - 586 (555) 8,950
Derivative
assets 58 (31) - 2 (3) - - - - - 26
============= ====== ============== ======== ============ ========= ======== ============ ====== ========= ========= ========
Total level
3 assets 48,321 (5,391) 344 7,723 (8,123) 24 (1,356) - 589 (743) 41,388
============= ====== ============== ======== ============ ========= ======== ============ ====== ========= ========= ========
Level 3
liabilities:
Third party
interest
in
consolidated
funds 1,241 (22) 16 - - - (89) 542 - - 1,688
Borrowings
and
subordinated
liabilities 1,159 - - - - - (1,159) - - - -
Other
liabilities 403 (148) - - - - (9) - - - 246
Derivative
liabilities 4 - - 5 - - - - - - 9
============= ====== ============== ======== ============ ========= ======== ============ ====== ========= ========= ========
Total level
3
liabilities 2,807 (170) 16 5 - - (1,257) 542 - - 1,943
============= ====== ============== ======== ============ ========= ======== ============ ====== ========= ========= ========
(i) Included within purchases and other of GBP3,683m for Equity
securities and pooled investment funds for the year ended 31
December 2022 is GBP1,216m associated with the deconsolidation of
the M&G European Property Fund in the period.
(ii) Included within sales and other of GBP4,643m for Investment
property for the year ended 31 December 2022 is GBP3,955m
associated with the deconsolidation of the M&G European
Property Fund in the period.
(iii) Included within settled for Loans and Borrowings and
subordinated liabilities for the year ended 31 December 2022 is the
impact from the deconsolidation of the buy-to-let mortgages held by
a securitisation vehicle as a result of the change in control
during the period.
14.8 Unrealised gains and losses in respect of level 3 assets
and liabilities
Unrealised gains and losses recognised in the condensed
consolidated income statement in relation to assets and liabilities
classified as level 3 are analysed as follows:
For the six For the
months ended year ended
30 June 31 December
Restated Restated
2023 2022 2022
GBPm GBPm GBPm
Investment property (575) 703 (1,538)
Equity Securities & pooled investment funds (301) 486 452
Loans (80) (431) (899)
Debt securities (303) (2,291) (3,350)
Third party interest in consolidated funds (65) 35 (9)
Derivatives 6 - -
Other financial liabilities 1 (88) (148)
============================================ ======= ======== ============
Total (1,317) (1,586) (5,492)
============================================ ======= ======== ============
14.9 Sensitivity of the fair value of level 3 instruments to
changes in significant inputs
14.9.1 Level 3 asset inputs
Where possible, the Group assesses the sensitivity of the fair
value of level 3 assets to reasonably possible changes in the most
significant unobservable inputs.
The most significant unobservable inputs in determining the fair
value of level 3 assets are presented within the tables below.
Real estate:
Average estimated Average equivalent
rental value(i) yield
Property Geographical 30 June 31 December 30 June 31 December
type location 2023 2022 2023 2022
Investment property Industrial UK GBP11 GBP9 6.40% 6.31%
==================== ============
Asia/Pacific $117 $96 5.56% 6.31%
=================================================== ======= =========== ======= ===========
Office UK GBP39 GBP39 6.86% 6.18%
============
Asia/Pacific $423 $442 5.41% 5.48%
North America $48 $45 6.50% 5.75%
=================================================== ======= =========== ======= ===========
Residential UK GBP39 GBP37 4.07% 3.96%
============
Europe EUR322 EUR330 4.06% 3.62%
Asia/Pacific $237 $258 4.56% 5.32%
=================================================== ======= =========== ======= ===========
Retail UK GBP18 GBP27 7.79% 6.51%
============
Asia/Pacific(ii) $744 $755 7.08% 6.92%
=================================================== ======= =========== ======= ===========
Other UK GBP52 GBP38 5.26% 5.77%
============
Europe EUR112 EUR110 6.45% 6.45%
Asia/Pacific $192 $195 8.50% 8.50%
=================================================== ======= =========== ======= ===========
(i) The average estimated rental value for the UK and North
America is quoted per square foot, whilst the average estimated
rental value for Europe and Asia/Pacific is quoted per square metre
in line with local practice.
(ii) The 31 December 2022 average estimated rental value for
Retail - Asia/Pacific has been restated following a review of the
assets included within the calculation of the average.
Other assets:
31 December
Unobservable input 30 June 2023 2022
Retail income strips Discount rate 2.14% to 6.86% 1.06% to 5.00%
========================= ========================= ============== ==============
Equity release mortgages Illiquidity premium 1.82% 2.07%
=========================
Total portfolio property
value c. GBP3.1bn c. GBP3.4bn
=========================
Assumed property growth
rate 2.65% 2.65%
Property rental yield 2.00% 2.00%
=================================================== ============== ==============
Other commercial loans Credit risk premium:
=========================
AAA to A 0.50% to 1.65% 0.60% to 1.81%
=========================
BBB to BB 1.39% to 4.97% 1.45% to 5.86%
========================= ========================= ============== ==============
Private placement loans Credit risk premium:
=========================
AAA to A 0.50% to 1.65% 0.60% to 1.81%
=========================
BBB to BB 1.39% to 4.97% 1.45% to 5.86%
========================= ========================= ============== ==============
Infrastructure fund
investments Discount rate 7.75% to 12% 7.75% to 12%
========================= ========================= ============== ==============
14.10 Sensitivity of the fair value of level 3 instruments to
changes in significant inputs
The Group assesses the sensitivity of the fair value of level 3
assets to reasonably possible changes in the most significant
unobservable inputs. The table below provides a breakdown of assets
within the level 3 fair value hierarchy by investment type, the
sensitivity of the most significant unobservable inputs on their
fair value, and the impact on IFRS profit after tax and
shareholders' equity for those held within the shareholder
backed-funds.
As at 30 June 2023
Impact
on IFRS
profit
after
Held tax and
in Change shareholders'
Fair shareholder-backed Most significant in fair equity
value funds Valuation unobservable value (vi)
GBPm GBPm technique input Sensitivity GBPm GBPm
Investment
property
Income Equivalent Decrease by
Property in use 14,841 1,276 capitalisation yield 50bps 1,606 103
===============
Increase by
50bps (1,346) (85)
===============
Estimated Decrease by
rental value 10% (1,272) (65)
Increase by
10% 1,296 66
Property under Development Increase by
development 965 5 cost 10% 97 -
================ ====== ================== ================
Decrease by (97) -
10%
================ ====== ================== =============== ================ =========== ======== ==============
Loans:
Equity release Discounted Illiquidity Increase by
mortgages(i) 872 872 cash flow(ii) premium 50bps (64) (48)
Decrease by
50bps 70 52
Current
property Increase by
value 10% 47 35
Decrease by
10% (56) (42)
Assumed
annual property Increase by
growth rate 100bps 132 98
Decrease by
100bps (181) (135)
Assumed
annual property Increase by
rental yield 100bps (81) (60)
Decrease by
100bps 79 59
Other mortgage
and retail Broker Increase by
loans 618 - quotes(iii) Broker quotes 10% 62 -
Decrease by (62) -
10%
Other commercial Broker Increase by
loans 1,218 395 quotes(iii) Broker quotes 10% 122 29
================ ====== ================== =============== ================
Decrease by
10% (122) (29)
================ ====== ================== =============== ================ =========== ======== ==============
Equity
securities
and pooled
investment Net asset Net asset Increase by
funds (iv) 13,596 104 statements value 10% 1,360 5
Decrease by
10% (1,360) (5)
Infrastructure
fund Discounted Discount Increase by
investments 316 - cash flow(iv) rate 10% (60) -
================ ====== ================== =============== ================
Decrease by 70 -
10%
================ ====== ================== =============== ================ =========== ======== ==============
Debt securities
(iv)
Private
placement Discounted Discount Increase by
loans 5,283 3,071 cash flow(v) rate 40bps (220) (104)
Decrease by
40bps 258 123
Retail income Discounted Discount Increase by
strips 213 178 cash flow(v) rate 50bps (14) (9)
Decrease by
50bps 16 10
Broker quotes,
enterprise
Unquoted valuation,
corporate estimated Increase by
bonds 2,590 870 recovery Broker quotes 10% 259 63
================ ====== ================== =============== ================
Decrease by
10% (259) (63)
================ ====== ================== =============== ================ =========== ======== ==============
Derivative Discounted Discount Increase by
assets 25 24 cash flow(v) rate 50bps (1) (1)
================ ====== ================== =============== ================
Decrease by 1 1
50bps
================ ====== ================== =============== ================ =========== ======== ==============
Total level 3 40,537 6,795
================ ====== ================== =============== ================ =========== ======== ==============
(i) The equity-release mortgages have a no-negative equity
guarantee (NNEG) that caps the loan repayment in the event of
death, or entry into long-term care, to be no greater than the
proceeds from the sale of the property that the loans are secured
against.
(ii) Future cashflows are estimated based on assumptions,
including prepayment, death and entry into long-term care, and
discounted using an appropriate discount rate. The NNEG is based on
a Black-Scholes option pricing valuation utilising a real world
approach and using assumptions including the current property
value, future property growth and property rental yields, and is
recognised as a deduction to the value of the loan.
(iii) Quotes received from an external pricing service.
(iv) Infrastructure fund investments comprises GBP103m (31
December 2022: GBP213m) of equity securities and pooled investment
funds and GBP213m (31 December 2022: GBP284m) of debt securities.
These investments are valued in accordance with the International
Private Equity and Venture Association valuation guidelines (latest
edition December 2022). Valuations are also benchmarked against
comparable infrastructure fund transactions. The discount rate is
made up of cash flows from dividends due in respect of the equity
investments and principal and interest from loan notes in respect
of debt investments.
(v) The discount rate is made up of a risk-free rate and a
credit spread. The risk-free rate is taken from an appropriate gilt
of comparable duration and the spread is taken from a basket of
comparable securities.
(vi) Of the GBP6,795m (31 December 2022: GBP7,077m) of level 3
assets held in shareholder-backed funds, GBP486m (31 December 2022:
GBP549m) is held by unit-linked business. These assets are included
in the analysis presented however, as the investment risk is borne
by the unit-linked policyholders, there is no impact on IFRS profit
after tax and shareholder's equity.
Restated
As at 31 December 2022
Impact
on IFRS
profit
after
Held in Most Change tax and
shareholder-backed significant in fair shareholders'
Fair value funds Valuation unobservable value equity(vi)
GBPm GBPm technique input Sensitivity GBPm GBPm
Investment
property
Income Equivalent Decrease by
Property in use 15,371 1,368 capitalisation yield 50bps 1,715 125
==============
Increase by
50bps (1,419) (102)
==============
Estimated Decrease by
rental value 10% (1,260) (69)
Increase by
10% 1,316 70
Property under Development Increase by
development 1,134 5 cost 10% 113 -
=============== ========== ================== ==============
Decrease by
10% (113) -
=============== ========== ================== ============== ============== =========== ======== ==============
Loans
Equity release Discounted Illiquidity Increase by
mortgages(i) 934 934 cash flow(ii) premium 50bps (67) (83)
Decrease by
50bps 73 90
Current
property Increase by
value 10% 44 54
Decrease by
10% (53) (65)
Assumed
annual
property Increase by
growth rate 100bps 127 157
Decrease by
100bps (177) (219)
Assumed
annual
property Increase by
rental yield 100bps (81) (100)
Decrease by
100bps 77 96
Other mortgage
and retail Broker Increase by
loans 680 - quotes(iii) Broker quotes 10% 68 -
Decrease by
10% (68) -
Other
commercial Broker Increase by
loans 1,113 427 quotes(iii) Broker quotes 10% 111 42
=============== ========== ================== ============== ==============
Decrease by
10% (111) (42)
=============== ========== ================== ============== ============== =========== ======== ==============
Equity
securities
and pooled
investment Net asset Net asset Increase by
funds(iv) 12,967 93 statements value 10% 1,297 7
Decrease by
10% (1,297) (7)
Infrastructure
fund Discounted Discount Increase by
investments 497 - cash flow(iv) rate 10% (75) -
=============== ========== ================== ============== ==============
Decrease by
10% 88 -
=============== ========== ================== ============== ============== =========== ======== ==============
Debt
securities(iv)
Private
placement Discounted Discount Increase by
loans 5,649 3,225 cash flow(v) rate 40bps (278) (223)
Decrease by
40bps 268 184
Retail income Discounted Discount Increase by
strips 236 199 cash flow(v) rate 50bps (15) (16)
Decrease by
50bps 17 18
Broker quotes,
enterprise
Unquoted valuation,
corporate estimated Increase by
bonds 2,781 800 recovery Broker quotes 10% 278 97
=============== ========== ================== ============== ==============
Decrease by
10% (278) (97)
=============== ========== ================== ============== ============== =========== ======== ==============
Derivative Discounted Discount Increase by
assets 26 26 cash flow(v) rate 50bps (1) (1)
=============== ========== ================== ============== ==============
Decrease by
50bps 1 1
=============== ========== ================== ============== ============== =========== ======== ==============
Total level 3 41,388 7,077
=============== ========== ================== ============== ============== =========== ======== ==============
14.11 Fair value of assets and liabilities at amortised cost
The tables below show the assets and liabilities carried at
amortised cost on the condensed consolidated statement of financial
position for which fair value is disclosed. The assets(i) and
liabilities that are carried at amortised cost, where the carrying
value approximates the fair value, are excluded from the analysis
below:
As at 30 June 2023
Total
Level Level Level Total carrying
1 2 3 fair value value
GBPm GBPm GBPm GBPm GBPm
Liabilities:
Subordinated liabilities and other borrowings - 6,334 249 6,583 7,799
============================================== ====== ===== ===== =========== =========
(i) As of period end, the only financial assets not held at fair
value are deposits and elements of other debtors. For these the
carrying value approximates their fair value.
Restated
As at 31 December 2022
Total
Level Level Level Total carrying
1 2 3 fair value value
GBPm GBPm GBPm GBPm GBPm
Liabilities:
Subordinated liabilities and other borrowings - 6,416 6 6,422 7,537
============================================== ===== ===== ===== =========== =========
The estimated fair value of subordinated liabilities are based
on the quoted market offer price. The fair value of the other
assets and liabilities in the tables above have been estimated from
the discounted cash flows expected to be received or paid. Where
appropriate, an observable market interest rate has been used and
the assets and liabilities are classified within level 2.
Otherwise, they are included as level 3 assets or liabilities.
15 Contingencies and related obligations
15.1 Litigation, tax and regulatory matters
In addition to the matters set out in Note 7.2 regarding the
portfolio dividend tax litigation, 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.
The Group has also received guarantees in respect of subleasing
arrangements, entered into in the normal course of business.
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.
On acquisition of 49.9% holding in My Continuum Financial
Limited (MCFL) Limited, the holding company Continuum (Financial
Services) LLP (CFSL) and My Continuum Wealth (MCW), M&G
Regulated Entity Holding Company (M&G REH) provided a guarantee
in respect of the obligations under the Sale and Purchase agreement
up to a maximum value of GBP33m.
M&G REH is 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 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 policyholders
share of the impact is included in the insurance contract liabilities
for the with-profits fund, with changes in value recognised in finance
income or expenses from insurance contracts issued 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 policyholders share of the impact
is included in the insurance contract liabilities for the with-profits
fund, with changes in value recognised in finance income or expenses
from insurance contracts issued 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 GBP182m as at 30 June 2023 (31 December 2022: GBP226m)
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; and
- 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 As at
30 June 31 December
2023 2022
Assumption Change in assumption GBPm GBPm
Average cost of redress Increase/decrease by 10% +/-10 +/-10
============================= ========================= ======== ============
Reserve rate for soft closed
cases Increase/decrease by 10% +/-31 +/-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 insurance
liabilities. Please refer to note 11.1.1 for further details on
these options and guarantees.
16 Related party transactions
The nature of the related party transactions of the Group has
not changed from those described in the Group's consolidated
financial statements as at 31 December 2022.
There have been no related party transactions in the six months
to 30 June 2023 which have had a material effect on the results or
financial position of the Group.
17 Post balance sheet events
There have been no significant events after the reporting
period.
Supplementary information
Alternative performance measures
Overview of the Group's key performance measures
The Group measures its financial performance using a number of
key performance measures (KPM). 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.
All information included in this section does not form part of
the independent review performed by the external auditors.
The Group's KPMs are summarised below, along with which of these
measures are considered APMs by the Group.
Key performance measure Type Definition
IFRS result after KPM The IFRS result after tax demonstrates to our
tax shareholders the financial performance of the
Group during the relevant period on an IFRS basis.
======================== ==== ==========================================================
Adjusted operating APM, Adjusted operating profit before tax is the Group's
profit before tax KPM non-GAAP alternative performance measure, which
complements the IFRS GAAP measures and is useful
as it allows a deeper understanding of the 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 the IFRS result before tax to determine
adjusted operating profit before tax. Adjustments
are in respect of short-term fluctuations in investment
returns, mismatches arising on the application
of IFRS 17, costs associated with fundamental
Group-wide restructuring and transformation, profits
or losses arising on corporate transactions, impairment
and amortisation in respect of acquired intangible
assets, and, where relevant, profit/(loss) from
discontinued operations.
The adjusted operating profit methodology is described
in Note 3.2, along with a reconciliation of adjusted
operating profit before tax to the IFRS result
after tax.
Net client flows APM, Net client flows represent gross inflows less
(excluding Heritage) KPM gross outflows and provides useful insight into
the growth 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.
======================== ==== ==========================================================
Assets under management APM, Closing AUMA represents the total market value
and administration KPM of all assets managed, administered or advised
(AUMA) on behalf of clients at the end of each financial
period and is 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 include 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.
======================== ==== ==========================================================
Shareholder Solvency APM, Management focuses on a shareholder view of the
II coverage ratio KPM Solvency II coverage ratio, which is considered
to provide a more useful reflection of the capital
strength of the Group. The shareholder view includes
future with-profits shareholder transfers, but
excludes the shareholders' share of the 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. Both the shareholder view and
the regulatory view reflect eligible Own Funds,
in line with the thresholds set by the regulator
that set out how much capital of each tier can
be used to demonstrate solvency.
======================== ==== ==========================================================
Underlying capital APM For insurance entities and their underlying subsidiaries,
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.
======================== ==== ==========================================================
Operating capital APM, Operating capital generation is the total capital
generation KPM 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. Management use this as an indicator
on the longer-term components of the movements
in the Group's surplus capital as it is less affected
by short-term market volatility and non-recurring
items as total capital generation.
======================== ==== ==========================================================
Total capital generation APM, Total capital generation measures the change in
KPM surplus 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 eligible
own funds exceed SCR under Solvency II. Total
capital generation is the total change in Solvency
II surplus capital before dividends and capital
movements.
======================== ==== ==========================================================
Adjusted operating profit before tax
(i) Reconciliation of adjusted operating profit before tax by
segment to IFRS profit before tax
For the six For the
months ended year ended
30 June 31 December
Restated(i) Restated(i)
2023 2022 2022
GBPm GBPm GBPm
Asset Management 118 124 264
Retail and Savings 374 294 618
Corporate Centre (102) (120) (257)
============================================================ ===== =========== ============
Total segmented adjusted operating profit before tax 390 298 625
============================================================ ===== =========== ============
Short-term fluctuations in investment returns (177) (1,614) (2,858)
Mismatches arising on application of IFRS 17 (40) (50) (244)
Amortisation of intangible assets acquired in business
combinations (6) (3) (35)
Restructuring and other costs (74) (64) (147)
============================================================ ===== =========== ============
IFRS profit/(loss) before tax and non-controlling interests
attributable to equity holders 93 (1,433) (2,659)
============================================================ ===== =========== ============
IFRS profit attributable to non-controlling interests 8 8 19
============================================================ ===== =========== ============
IFRS profit/(loss) before tax attributable to equity
holders 101 (1,425) (2,640)
============================================================ ===== =========== ============
(i) The comparative amounts have been restated for the first
time adoption of IFRS 17 and IFRS 9. See Note 1.3.1 for further
information.
(ii) Adjusted operating profit/(loss) before tax by segment and
source
For the six For the
months ended year ended
30 June 31 December
Restated(i) Restated(i)
2023 2022 2022
GBPm GBPm GBPm
Core Asset Management 94 117 218
Performance fees (including carried interest) and investment
return 24 7 46
============================================================= ===== =========== ============
Asset Management 118 124 264
============================================================= ===== =========== ============
Wealth 91 93 158
- With-profits 119 103 190
- Platform and advice (19) (8) (23)
- Other (9) (2) (9)
Heritage 279 201 441
- With-profits 129 99 200
- Shareholder annuities and other 150 102 241
Other Retail and Savings 4 - 19
============================================================= ===== =========== ============
Retail and Savings 374 294 618
============================================================= ===== =========== ============
Corporate Centre (102) (120) (257)
============================================================= ===== =========== ============
Adjusted operating profit before tax 390 298 625
============================================================= ===== =========== ============
(i) The comparative amounts have been restated for the first
time adoption of IFRS 17 and IFRS 9. See Note 1.3.1 for further
information.
Adjusted operating profit before tax arising from the Asset
Management segment is further analysed in the table below:
For the six For the
months ended year ended
30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
Fee-based revenue 507 503 1,051
Asset Management operating expenses (394) (367) (763)
Investment return 13 (4) (5)
Adjusted operating profit attributable to non-controlling
interests (8) (8) (19)
========================================================== ======= ====== ============
Adjusted operating profit before tax 118 124 264
========================================================== ======= ====== ============
Adjusted operating profit before tax arising from with-profits
business is further analysed in the table below:
For the six months ended For the year
30 June ended 31 December
Restated(i) Restated(i)
2023 2022 2022
Wealth Heritage Wealth Heritage Wealth Heritage
GBPm GBPm GBPm GBPm GBPm GBPm
CSM release(ii) 101 111 79 89 154 186
Expected return on excess assets 21 17 10 9 21 19
Other (3) 1 14 1 15 (5)
================================= ====== ======== ====== ======== ======== ==========
With-profits 119 129 103 99 190 200
================================= ====== ======== ====== ======== ======== ==========
(i) The comparative amounts have been restated for the first
time adoption of IFRS 17 and IFRS 9. See Note 1.3.1 for further
information.
(ii) The CSM release is included above on an expected basis,
calculated as the CSM at start of the period updated to reflect
long-term expected investment returns multiplied by the expected
amortisation factor for the period.
Adjusted operating profit before tax arising from shareholder
annuities is further analysed in the table below:
For the six For the
months ended year ended
30 June 31 December
Restated(i) Restated(i)
2023 2022 2022
Breakdown of contribution from annuity margin GBPm GBPm GBPm
Expected return on excess assets 101 57 113
CSM release 47 42 89
Risk adjustment unwind 9 11 24
Asset trading and portfolio management actions 12 6 41
Experience variances (16) (10) -
Other provisions and reserves (2) - (28)
=============================================== ===== =========== ============
Shareholder annuities 151 106 239
=============================================== ===== =========== ============
(i) The comparative amounts have been restated for the first
time adoption of IFRS 17 and IFRS 9. See Note 1.3.1 for further
information.
Assets under management and administration (AUMA) and net client
flows
(i) Detailed AUMA and net client flows
As at Market/ As at
1 January Gross Gross Net client Other 30 June
2023 inflows outflows flows movements 2023
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Institutional Asset Management 99.2 7.4 (8.8) (1.4) (3.8) 94.0
Wholesale Asset Management 53.9 9.2 (7.9) 1.3 (2.9) 52.3
Other 1.1 - - - - 1.1
==================================== ========== ======== ========= ========== ========== ========
Total Asset Management(i) 154.2 16.6 (16.7) (0.1) (6.7) 147.4
==================================== ========== ======== ========= ========== ========== ========
Wealth 83.4 4.6 (4.0) 0.6 0.6 84.6
- of which PruFund 52.3 3.3 (2.4) 0.9 0.3 53.5
Heritage 94.1 0.3 (3.5) (3.2) (0.6) 90.3
- of which shareholder annuities 15.4 - (0.5) (0.5) (0.3) 14.6
- of which traditional with-profits 67.5 0.1 (2.4) (2.3) 0.7 65.9
Other Retail and Savings 8.9 0.6 (0.4) 0.2 - 9.1
- of which PruFund 6.0 0.5 (0.3) 0.2 0.1 6.3
==================================== ========== ======== ========= ========== ========== ========
Total Retail and Savings 186.4 5.5 (7.9) (2.4) - 184.0
==================================== ========== ======== ========= ========== ========== ========
Corporate assets 1.4 - - - - 1.4
==================================== ========== ======== ========= ========== ========== ========
Group Total 342.0 22.1 (24.6) (2.5) (6.7) 332.8
==================================== ========== ======== ========= ========== ========== ========
(i) Included in total AUMA of GBP332.8 billion (year ended 31
December 2022: GBP342 billion) is GBP13.2 billion (year ended 31
December 2022: GBP12.7 billion) of assets under advice.
As at Market
1 January Gross Gross Net client / Other At 30
2022 inflows outflows flows movements June 2022
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Institutional Asset Management 103.1 5.2 (4.9) 0.3 (1.2) 102.2
Wholesale Asset Management 52.7 9.2 (8.4) 0.8 (2.9) 50.6
Other 0.9 - - - 0.1 1.0
==================================== ========== ======== ========= ========== ========== ==========
Total Asset Management(i) 156.7 14.4 (13.3) 1.1 (4.0) 153.8
==================================== ========== ======== ========= ========== ========== ==========
Wealth 84.2 4.0 (4.0) - (1.5) 82.7
- of which PruFund 52.4 2.5 (2.5) - (1.0) 51.4
Heritage 117.8 0.2 (3.3) (3.1) (12.8) 101.9
- of which shareholder annuities 22.2 - (0.6) (0.6) (3.7) 17.9
- of which traditional with-profits 81.4 0.2 (2.7) (2.5) (6.7) 72.2
Other Retail and Savings 9.1 0.5 (0.4) 0.1 (0.5) 8.7
- of which PruFund 6.0 0.4 (0.3) 0.1 (0.2) 5.9
==================================== ========== ======== ========= ========== ========== ==========
Total Retail and Savings 211.1 4.7 (7.7) (3.0) (14.8) 193.3
==================================== ========== ======== ========= ========== ========== ==========
Corporate assets 2.2 - - - (0.4) 1.8
==================================== ========== ======== ========= ========== ========== ==========
Group Total 370.0 19.1 (21.0) (1.9) (19.2) 348.9
==================================== ========== ======== ========= ========== ========== ==========
As at Market
1 January Gross Gross Net client / Other At 31
2022 inflows outflows flows movements Dec 2022
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(i) 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 370.0 38.2 (43.9) (5.7) (22.3) 342.0
==================================== ========== ======== ========= ========== ========== =========
(ii) AUMA by asset class
As at 30 June 2023
On-balance sheet AUMA External AUMA Total
Shareholder
backed
annuities
& other Total
Unit long-term Corporate on-balance Total Total
With-Profits linked business assets sheet Wealth Wholesale Institutional external AUMA
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Investment
property 8.9 - 0.8 - 9.7 - 0.1 15.4 15.5 25.2
Reinsurance
contract
assets - - 1.0 - 1.0 - - - - 1.0
Equity
securities
and pooled
investment
funds 69.7 9.5 - 0.2 79.4 4.4 24.0 9.7 38.1 117.5
Loans 1.0 - 1.3 - 2.3 - - 9.5 9.5 11.8
Debt securities 34.4 1.9 11.8 1.1 49.2 1.1 26.9 56.6 84.6 133.8
- of which
Corporate 23.4 1.8 8.4 1.1 34.7 1.1 17.4 35.0 53.5 88.2
- of which
Government 9.9 - 2.9 - 12.8 - 8.7 7.8 16.5 29.3
- of which ABS 1.1 0.1 0.5 - 1.7 - 0.8 13.8 14.6 16.3
Derivatives(i) 0.7 - (1.6) (0.1) (1.0) - 0.1 (0.4) (0.3) (1.3)
Deposits(ii) 11.4 0.8 1.3 - 13.5 - - - - 13.5
Cash and Cash
equivalents 1.4 0.5 0.6 0.9 3.4 0.1 1.2 3.1 4.4 7.8
Other 1.2 0.1 0.1 0.4 1.8 - - - - 1.8
=============== ============ ====== =========== ========= ========== ====== ========= ============= ======== =====
Other AUMA - - - - - - - - - 21.7
=============== ============ ====== =========== ========= ========== ====== ========= ============= ======== =====
Total(iii) 128.7 12.8 15.3 2.5 159.3 5.6 52.3 93.9 151.8 332.8
=============== ============ ====== =========== ========= ========== ====== ========= ============= ======== =====
(i) Derivative assets are shown net of derivative
liabilities.
ii Deposits are shown net of unsettled reverse repos.
(iii) Included in total AUMA of GBP332.8 billion (year ended 31
December 2022: GBP342.0 billion) is GBP13.2 billion (year ended 31
December 2022: GBP12.7 billion) of assets under advice.
As at 31 December 2022
On-balance sheet AUMA External AUMA Total
Shareholder
backed
annuities
& other Total
Unit long-term Corporate on-balance Total Total
With-Profits linked business assets sheet Wealth Wholesale Institutional external AUMA
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Investment
property 9.1 - 0.9 - 10.0 - 0.8 16.0 16.8 26.8
Reinsurance
contract
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
=============== ============ ====== =========== ========= ========== ====== ========= ============= ======== =====
(iii) AUMA by geography
As at
As at 30 June 31 December
2023 2022 2022
GBPbn GBPbn GBPbn
UK 255.9 274.9 264.1
Rest of Europe 53.6 50.5 52.7
Asia-Pacific 10.7 10.4 11.1
Middle East and Africa 10.6 11.5 12.7
Americas 2.0 1.6 1.4
======================= ======= ====== ============
Total AUMA(i) 332.8 348.9 342.0
======================= ======= ====== ============
(i) Included in total AUMA of GBP332.8 billion (year ended 31
December 2022: GBP342.0 billion) is GBP13.2 billion (year ended 31
December 2022: GBP12.7 billion) of assets under advice.
Solvency II capital position
Solvency II overview
The Group is supervised as an insurance group by the Prudential
Regulation Authority. Individual insurance undertakings within the
Group are also subject to the supervision of the Prudential
Regulation Authority (or other EU competent authorities) on a solo
basis under the Solvency II regime.
The Solvency II surplus represents the aggregated capital (own
funds) held by the Group less the Solvency Capital Requirement
(SCR). Own funds is the Solvency II measure of capital available to
meet losses, and is based on the assets less liabilities of the
Group, subject to certain restrictions and adjustments. Available
own funds reflect all capital available to the Group and eligible
own funds are net of restrictions applied in line with the
thresholds set by the regulator that limit the amount of each tier
of capital that can be used to demonstrate solvency. The SCR is
calculated using the Group's Internal Model, which calculates the
SCR as the 99.5th percentile (or 1-in-200) worst outcome over the
coming year, out of 100,000 equally likely scenarios, allowing for
the dependency between the risks the business is exposed to.
Estimated reconciliation of IFRS shareholders' equity to Group
Solvency II own funds
As at As at As at
30 June 30 June 31 December
Restated Restated
2023 2022 2022
GBPbn GBPbn GBPbn
IFRS shareholders' equity 4.0 5.7 4.3
======================================================== ======== ======== ============
Deduct goodwill and intangible assets (1.5) (1.6) (1.6)
Net impact of policyholder liabilities and reinsurance
assets valued on Solvency II basis 12.5 13.0 12.8
Impact of introducing Solvency II risk margin (net of
transitional measures) (1.0) (0.9) (1.0)
Impact of measuring assets and liabilities in line with
Solvency II principles 0.8 0.5 0.9
Recognise own shares 0.1 0.1 0.1
Other - (0.2) -
======================================================== ======== ======== ============
Solvency II excess of assets over liabilities 14.9 16.6 15.5
======================================================== ======== ======== ============
Subordinated debt capital 2.9 3.3 3.0
Ring-fenced fund restrictions (6.6) (6.9) (6.6)
Deduct own shares (0.1) (0.1) (0.1)
Deduct foreseeable dividends - (0.4) -
Eligible Own Funds restriction (0.3) - -
======================================================== ======== ======== ============
Solvency II eligible own funds 10.8 12.5 11.8
======================================================== ======== ======== ============
The key items in the reconciliation are explained below:
- 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 17 and Solvency II. One of the key drivers of the increase
in equity moving from IFRS 17 to Solvency II is the requirement to hold
a CSM and risk adjustment under IFRS 17; these are removed under Solvency
II. In addition, IFRS 17 captures the shareholder share of surplus assets
on the with-profits fund in shareholder equity whereas 100% of with-profits
surplus assets are captured in Solvency II excess of assets over liabilities,
however this is subsequently restricted by the ring-fenced fund restrictions.
This increase in equity is partially offset by differences in the liability
discount rate; the IFRS17 discount rate includes an illiquidity premium
which is slightly higher than the Solvency II matching adjustment on
annuity business, resulting in slightly higher annuity liabilities under
IFRS 17.
- 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.
- There are limits, prescribed by the regulator, on the amount of different
types of Own Funds that can be used to demonstrate solvency. As at 30
June 2023, the sum of capital classed as Tier 2 and Tier 3 exceeds 50%
of the regulatory Group Solvency Capital Requirement by GBP280 million.
While this capital remains available to the Group, as it is above this
regulatory threshold Own Funds must be restricted by this amount to determine
eligible Own Funds.
Composition of own funds
The Group's total estimated own funds are analysed by Tier as
follows:
As at As at As at
30 June 30 June 31 December
2023 2022 2022
GBPbn GBPbn GBPbn
Tier 1 (unrestricted) 7.6 8.9 8.2
Tier 2 2.9 3.3 3.0
Tier 3 0.6 0.3 0.6
Eligible Own Funds restriction (0.3) - -
===================================== ======== ======== ============
Total Solvency II eligible own funds 10.8 12.5 11.8
===================================== ======== ======== ============
The Group's Tier 2 capital consists of subordinated debt
instruments. The terms of these instruments allow them to be
treated as capital for the purposes of Solvency II. The instruments
were originally issued by Prudential plc, and subsequently
substituted to the parent company, as permitted under the terms and
conditions of each applicable instrument, prior to demerger. The
details of the Group's subordinated liabilities are shown in Note
13. 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 (31 December 2022: GBP0.6
billion) relates to deferred tax asset balances.
As stated above, the eligible Own Funds restriction reflects the
fact that the sum of Tier 2 and Tier 3 capital exceeds the
threshold set by the regulator for the purpose of demonstrating
solvency, although the capital above this threshold remains
available to the Group.
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 shareholder Solvency II capital position for the
Group as at 30 June 2023 and 31 December 2022 is shown below:
As at As at As at
30 June 30 June 31 December
2023 2022 2022
GBPbn GBPbn GBPbn
Shareholder Solvency II eligible own funds 8.8 9.7 9.3
Shareholder Solvency II SCR (4.4) (4.5) (4.7)
=========================================== ======== ======== ============
Shareholder Solvency II surplus 4.4 5.2 4.6
=========================================== ======== ======== ============
Shareholder Solvency II coverage ratio(i) 199% 214% 199%
=========================================== ======== ======== ============
(i) Shareholder Solvency II coverage ratio has been calculated
using unrounded figures.
The Group's shareholder Solvency II capital position excludes
the contribution to own funds and SCR from the ring-fenced
With-Profits Fund. Further information on the ring-fenced
With-Profits Fund's capital position is provided in the 'Estimated
With-Profits Fund view of the Solvency II capital position'
section.
In accordance with the Solvency II requirements, these results
include:
- A Solvency Capital Requirement which has been calculated using the Group's
internal model.
- Transitional measures, which are presented after assuming a recalculation
at the valuation date, using management's estimate of the impact of operating
and market conditions.
- A matching adjustment for non-profit annuities, based on approval from
the Prudential Regulation Authority.
- M&G Group Limited and other undertakings carrying out financial activities
consolidated under local sectoral or notional sectoral capital requirements.
Breakdown of the shareholder Solvency II SCR by risk type
As at As at As at
30 June 30 June 31 December
2023 2022 2022
GBPbn GBPbn GBPbn
Equity 1.6 1.6 1.7
Property 0.8 0.9 0.9
Interest rate 0.6 0.2 0.6
Credit 1.6 2.1 1.6
Currency 1.1 1.0 1.1
Longevity 0.8 1.1 0.9
Lapse 0.5 0.3 0.5
Operational & expense 1.2 1.4 1.3
Sectoral(i) 0.6 0.6 0.7
========================================= ======== ======== ============
Total undiversified 8.8 9.2 9.3
========================================= ======== ======== ============
Diversification, deferred tax, and other (4.4) (4.7) (4.6)
========================================= ======== ======== ============
Shareholder SCR 4.4 4.5 4.7
========================================= ======== ======== ============
(i) Includes entities included within the Group's Solvency II
capital position on a sectoral or notional sectoral basis, the most
material of which is M&G Group Limited.
Sensitivity analysis of the shareholder Solvency II coverage
ratio
The estimated sensitivity of the Group's shareholder Solvency II
coverage ratio to significant changes in market conditions are
shown below. All sensitivities are presented after an assumed
recalculation of transitional measures on technical provisions and
recalculation of the eligible Own Funds restriction.
As at 30 June As at 30 June As at 31 December
2023 2022 2022
Shareholder Shareholder Shareholder
coverage coverage coverage
Surplus ratio Surplus ratio Surplus ratio
GBPbn % GBPbn % GBPbn %
Base (as reported) 4.4 199% 5.2 214% 4.6 199%
20% instantaneous fall in equity
markets 3.8 186% 4.5 202% 0.4 187%
20% instantaneous fall in property
markets 3.9 189% 4.7 204% 4.2 190%
50bp reduction in interest rates(i) 4.2 192% 5.1 206% 4.4 191%
100bp widening in credit spreads 4.1 196% 5.0 213% 4.3 196%
20% credit asset downgrade(ii) 4.2 194% 4.9 208% 4.4 194%
==================================== ======= =========== ======= =========== ======= ===========
(i) Future residential house price growth rates are assumed to
move in line with interest rates; there may be economic reasons why
this is not borne out in practice.
(ii) Average impact of one full letter downgrade across 20% of
assets exposed to credit risk.
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 Solvency II capital position for the Group under
the With-Profits Fund view as at 30 June 2023, 30 June 2022 and 31
December 2022 is shown below:
As at As at As at
30 June 30 June 31 December
2023 2022 2022
GBPbn GBPbn GBPbn
With-Profits Fund Solvency II Own funds 8.6 9.7 9.1
With-Profits Fund Solvency II SCR (2.0) (2.8) (2.5)
================================================ ======== ======== ============
With-Profits Fund Solvency II surplus 6.6 6.9 6.6
================================================ ======== ======== ============
With-Profits Fund Solvency II coverage ratio(i) 429% 347% 362%
================================================ ======== ======== ============
(i) With-Profits Fund Solvency II coverage ratio has been
calculated using unrounded figures.
Estimated regulatory view of the Solvency II capital
position
The estimated Solvency II capital position for the Group under
the regulatory view is shown below:
As at As at As at
30 June 30 June 31 December
2023 2022 2022
GBPbn GBPbn GBPbn
Solvency II Eligible Own funds 10.8 12.5 11.8
Solvency Capital Requirement (6.4) (7.3) (7.2)
=============================== ======== ======== ============
Solvency II surplus 4.4 5.2 4.6
=============================== ======== ======== ============
Solvency II coverage ratio(i) 168% 171% 164%
=============================== ======== ======== ============
(i) Solvency II coverage ratio has been calculated using
unrounded figures. On a regulatory approved transitional measures
on technical provisions basis, the surplus is GBP4.7bn (30 June
2022: GBP5.6bn, 31 December 2022: GBP4.8bn) and the solvency
coverage ratio is 174% (30 June 2022: 177%, 31 December 2022:
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 30 June 2023 and 31 December 2022, the
recalculated transitional measures do not align to the latest
approved regulatory position and therefore the estimated Solvency
II capital position differs from the position disclosed in the
formal regulatory Quantitative Reporting Templates of the same date
and, for the figures as at 31 December 2022, the 2022 Group
Solvency and Financial Condition Report.
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. As set out in the overview
of the Solvency II capital position, as at 30 June 2023 eligible
Own Funds has been restricted by GBP280m as the sum of tier 2 and
tier 3 capital is above the threshold set by the regulator,
although the capital remains available to the Group.
Operating capital generation is the total capital generation
before tax, adjusted to exclude market movements relative to those
expected under long-term assumptions and to remove other
non-recurring items, including shareholder restructuring and other
costs as defined under adjusted operating profit before tax. It has
two components:
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 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, the impact of the share buy-back
programme and changes to the capital structure of the Group, such
as issuing or repaying debt instruments. Also included within
capital movements are the Solvency II impact of the Group's
share-based payment awards over and above the amount expensed in
respect of those awards, and the surplus utilised or generated from
transactions relating to the acquisition of business as defined by
IFRS.
The expected surplus capital from the in-force life insurance
business is calculated on the assumption of real-world investment
returns, which are determined by reference to the risk-free rate
plus a risk premium based on the mix of assets held for the
relevant business. For with-profits business, the assumed average
return was 4.0% for the six months ended 30 June 2023, 4.1% for the
six months ended 30 June 2022 and 4.1% for the year ended 31
December 2022. For annuity business, the assumed average return on
assets backing capital was 6.6% for the six months ended 30 June
2023, 2.2% for the six months ended 30 June 2022 and 2.2% for the
year ended 31 December 2022.
The Group's capital generation results in respect of the six
months ended 30 June 2023 and 30 June 2022, and year ended 31
December 2022 are shown below, alongside a reconciliation of the
total movement in the Group's Solvency II surplus. The
reconciliation is presented showing the impact on the shareholder
Solvency II own funds and SCR, which excludes the contribution to
own funds and SCR from the Group's ring-fenced With-Profits Fund.
The shareholder Solvency II capital position, and how this
reconciles to the regulatory capital position, is described in
detail in the previous section of this supplementary
information.
Asset Management Retail and Savings Corporate Centre Total
For the For the For the For the
For the year For the year For the year For the year
six months ended six months ended six months ended six months ended
ended 30 31 ended 30 31 ended 30 31 ended 30 31
June December June December June December June December
2023 2022 2022 2023 2022 2022 2023 2022 2022 2023 2022 2022
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Underlying
capital
generation 119 142 246 344 370 641 (111) (126) (259) 352 386 628
Other
operating
capital
generation (5) (6) (33) 163 58 194 (5) (5) 32 153 47 193
============== ====== ===== ========== ====== ===== ======== ====== ===== ========= ====== ===== =========
Operating
capital
generation 114 136 213 507 428 835 (116) (131) (227) 505 433 821
============== ====== ===== ========== ====== ===== ======== ====== ===== ========= ====== ===== =========
Market
movements (141) (482) (1,225)
Restructuring
& other (61) (71) (166)
Tax 50 144 173
Eligible Own
Funds
restriction (280) - -
============== ====== ===== ========== ====== ===== ======== ====== ===== ========= ====== ===== =========
Total capital generation 73 24 (397)
============================================================================================ ====== ===== =========
For the six months For the six months For the year ended
ended 30 June ended 30 June 31 December
2023 2022 2022
Own Own Own
Funds(i) SCR(i) Surplus Funds(i) SCR(i) Surplus Funds(i) SCR(i) Surplus
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Underlying capital generation
================================== ========= ====== ======= ========= ====== ======= ========= ====== =======
Asset Management Asset management 101 18 119 129 13 142 268 (22) 246
================ ================ ========= ====== ======= ========= ====== ======= ========= ====== =======
Asset management
underlying capital
generation 101 18 119 129 13 142 268 (22) 246
================================= ========= ====== ======= ========= ====== ======= ========= ====== =======
Retail and
Savings Wealth 128 (53) 75 124 (36) 88 214 (59) 155
- of which
with-profits 155 (53) 102 127 (31) 96 233 (53) 180
- In-force 115 3 118 95 11 106 187 29 216
- New business 40 (56) (16) 32 (42) (10) 46 (82) (36)
- of which
platform & advice (19) 2 (17) (5) (4) (9) (21) (4) (25)
- of which
other (8) (2) (10) 2 (1) 1 2 (2) -
Heritage 233 36 269 180 86 266 339 164 503
- of which
with-profits 87 9 96 70 30 100 138 54 192
- of which
annuity and
other 146 27 173 110 56 166 201 110 311
Other Retail
and Savings 28 (28) - 19 (3) 16 43 (60) (17)
================================= ========= ====== ======= ========= ====== ======= ========= ====== =======
Retail and
Savings underlying
capital generation 389 (45) 344 323 47 370 596 45 641
================================= ========= ====== ======= ========= ====== ======= ========= ====== =======
Interest & Head
Corporate Office cost (120) 9 (111) (124) (2) (126) (267) 8 (259)
================ ================ ========= ====== ======= ========= ====== ======= ========= ====== =======
Underlying capital generation 370 (18) 352 328 58 386 597 31 628
================================== ========= ====== ======= ========= ====== ======= ========= ====== =======
Other operating capital
generation 40 113 153 (29) 76 47 194 (1) 193
- of which
Asset Management - (5) (5) (6) - (6) 7 (40) (33)
- of which
Retail and Savings 47 116 163 (15) 73 58 188 6 194
- of which
Corporate centre (7) 2 (5) (8) 3 (5) (1) 33 32
================================= ========= ====== ======= ========= ====== ======= ========= ====== =======
Operating capital generation 410 95 505 299 134 433 791 30 821
================================== ========= ====== ======= ========= ====== ======= ========= ====== =======
Market movements (233) 92 (141) (1,266) 784 (482) (2,259) 1,034 (1,225)
Restructuring
& other (70) 9 (61) (90) 19 (71) (173) 7 (166)
Tax 10 40 50 369 (225) 144 652 (479) 173
Eligible Own
Funds Restriction (280) - (280) - - - - - -
================================= ========= ====== ======= ========= ====== ======= ========= ====== =======
Total Capital Generation (163) 236 73 (688) 712 24 (989) 592 (397)
================================== ========= ====== ======= ========= ====== ======= ========= ====== =======
Dividends and capital movements (298) (1) (299) (1,010) (15) (1,025) (1,151) (15) (1,166)
================================== ========= ====== ======= ========= ====== ======= ========= ====== =======
Total (decrease) / increase
in Solvency II surplus (461) 235 (226) (1,698) 697 (1,001) (2,140) 577 (1,563)
================================== ========= ====== ======= ========= ====== ======= ========= ====== =======
(i) Own funds and SCR movements shown as per the shareholder
Solvency II capital position, and do not include the own funds and
SCR in respect of the ring-fenced With-Profits Fund.
Financial ratios
Included in this section are details of how some of the
financial ratios used to help analyse the performance of the Asset
Management business are calculated.
(i) Cost/income ratio
Cost/income ratio is a measure of cost efficiency which analyses
costs as a percentage of revenue.
For the six For the
months ended year ended
30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
Total Asset Management operating expenses 394 367 763
Adjustment for revaluations(i) (1) 4 2
==================================================== ======= ====== ============
Total Asset Management adjusted costs 393 371 765
==================================================== ======= ====== ============
Total Asset Management fee based revenue 507 503 1,051
Less: performance fees and carried interest (11) (11) (56)
==================================================== ======= ====== ============
Total Asset Management underlying fee-based revenue 496 492 995
==================================================== ======= ====== ============
Cost/Income ratio (%) 79% 75% 77%
==================================================== ======= ====== ============
(i) Reflects the revaluation of provisions relating to
performance based awards that are linked to underlying fund
performance. M&G Group hold units in the underlying funds to
hedge the exposure on these awards.
(ii) Average 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.
For the six months ended 30 June For the year ended
31 December
2023 2022 2022
Average Revenue Average Revenue Average Revenue
AUMA(i) Revenue(ii) margin(ii) AUMA(i) Revenue(ii) margin(ii) AUMA(i) Revenue(ii) margin(ii)
GBPbn GBPm bps GBPbn GBPm bps GBPbn GBPm Bps
Wholesale
Asset
Management 54 155 58 52 150 57 52 299 58
Institutional
Asset
Management 97 189 39 104 181 35 102 390 38
Internal 152 152 20 164 161 20 157 306 19
============== ======= =========== ========== ======== =========== ========== ======== =========== ==========
Total Asset
Management 303 496 33 320 492 31 311 995 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 and
7-point average of monthly closing AUMA for half-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.
Credit risk
The Group's exposure to credit risk primarily arises from the
annuity funds, which hold substantial volumes of public and private
fixed income 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 of business. However, the shareholder is
indirectly exposed to credit risk from these components of business
in relation to the future value of shareholder transfers from
with-profits business and charges levied on unit-linked and asset
management business. 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.
Credit risk is managed through a robust credit and counterparty
framework which includes: policies, standards, appetite statements,
limits and triggers (including relevant governance and controls);
investment constraints and limits on the asset portfolios, in
relation to credit rating, seniority, sector and issuer, and
counterparties in particular for derivatives, reinsurance and cash;
and a robust credit rating process.
The credit ratings, information or data contained in this report
which are attributed and specifically provided by Standard &
Poor's, Moody's and Fitch and their respective affiliates and
suppliers (Content Providers) is referred to here as the Content.
Reproduction of any content in any form is prohibited except with
the prior written permission of the relevant party. The Content
Providers do not guarantee the accuracy, adequacy, completeness,
timeliness or availability of any Content and are not responsible
for any errors or omissions (negligent or otherwise), regardless of
the cause, or for the results obtained from the use of such
Content. The Content Providers expressly disclaim liability for any
damages, costs, expenses, legal fees, or losses (including lost
income or lost profit and opportunity costs) in connection with any
use of the Content. A reference to a particular investment or
security, a rating or any observation concerning an investment that
is part of the Content is not a recommendation to buy, sell or hold
any such investment or security, nor does it address the
suitability of an investment or security and should not be relied
on as investment advice.
Debt securities
The table below presents the Group's debt securities by asset
class and external credit rating issued for each component of
business.
AA+ to A+ to BBB+ Below
AAA AA- A- to BBB- BBB- Other Total
As at 30 June 2023 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Government Sovereign debt 4,283 9,598 1,574 1,924 1,155 222 18,756
With-profits 2,862 7,163 1,537 1,847 1,153 124 14,686
Unit-linked 99 1,114 15 48 - 98 1,374
Annuity and other long-term
business 768 1,269 19 26 - - 2,082
Other 554 52 3 3 2 - 614
Quasi-sovereign and Public
sector debt 314 1,646 226 363 920 288 3,757
With-profits 252 874 152 360 920 229 2,787
Unit-linked 23 78 12 3 - 1 117
Annuity and other long-term
business 39 694 62 - - 58 853
Other - - - - - - -
Corporate debt 1,307 2,977 10,127 13,268 3,143 8,397 39,219
With-profits 750 1,846 7,806 10,230 2,729 4,354 27,715
Unit-linked 82 162 755 1,412 317 49 2,777
Annuity and other long-term
business 273 871 1,520 1,588 76 3,976 8,304
Other 202 98 46 38 21 18 423
Asset-backed securities 497 208 424 221 61 1,575 2,986
With-profits 313 146 203 128 48 1,457 2,295
Unit-linked 24 4 17 21 13 9 88
Annuity and other long-term
business 85 58 204 72 - 109 528
Other 75 - - - - - 75
Structured notes - - - - - - -
With-profits - - - - - - -
============================== ===== ====== ====== ======== ===== ====== ======
Total debt securities 6,401 14,429 12,351 15,776 5,279 10,482 64,718
With-profits 4,177 10,029 9,698 12,565 4,850 6,164 47,483
Unit-linked 228 1,358 799 1,484 330 157 4,356
Annuity and other long-term
business 1,165 2,892 1,805 1,686 76 4,143 11,767
Other 831 150 49 41 23 18 1,112
============================== ===== ====== ====== ======== ===== ====== ======
AA+ to A+ to BBB+ to Below
AAA AA- A- BBB- BBB- Other Total
As at 31 December 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Government Sovereign debt 4,325 7,641 1,379 2,194 1,062 187 16,788
With-profits 3,382 4,633 1,297 2,106 1,058 187 12,663
Unit -linked 211 923 81 58 - - 1,273
Annuity and other long-term
business 671 1,497 - 26 - - 2,194
Other 61 588 1 4 4 - 658
Quasi-sovereign and Public
sector debt 329 1,800 328 175 21 305 2,958
With-profits 257 942 250 172 21 261 1,903
Unit-linked 34 83 15 3 - 2 137
Annuity and other long-term
business 38 775 63 - - 42 918
Other - - - - - - -
Corporate debt 1,368 2,952 9,623 13,527 3,250 9,235 39,955
With-profits 760 1,812 7,251 10,333 2,695 5,032 27,883
Unit-linked 87 180 772 1,473 382 53 2,947
Annuity and other long-term
business 326 870 1,542 1,687 148 4,150 8,723
Other 195 90 58 34 25 - 402
Asset-backed securities 629 239 444 251 44 1,513 3,120
With-profits 398 158 208 144 44 1,389 2,341
Unit-linked 30 21 18 31 - 9 109
Annuity and other long-term
business 95 60 218 76 - 115 564
Other 106 - - - - - 106
Structured notes - - - - - - -
With-profits - - - - - - -
============================== ===== ====== ====== ======= ===== ====== ======
Total Debt Securities 6,651 12,632 11,774 16,147 4,377 11,240 62,821
With-profits 4,797 7,545 9,006 12,755 3,818 6,869 44,790
Unit-linked 362 1,207 886 1,565 382 64 4,466
Annuity and other long-term
business 1,130 3,202 1,823 1,789 148 4,307 12,399
Other 362 678 59 38 29 - 1,166
============================== ===== ====== ====== ======= ===== ====== ======
The Group has holdings in asset-backed securities (ABS) which
are presented within debt securities on the consolidated statement
of financial position. The Group's holdings in ABS, which comprise
residential mortgage-backed securities (RMBS), commercial
mortgage-backed securities (CMBS), collateralised debt obligations
(CDO) funds and other asset-backed securities are shown within the
table above.
Debt securities with no external credit rating are classified as
other. The following table shows the majority of debt securities
shown as "other" are allocated an internal rating and are
considered to be of investment grade quality:
As at As at
30 June 31 December
2023 2022
GBPm GBPm
AAA 152 43
AA+ to AA- 1,502 1,548
A+ to A- 3,789 3,844
BBB+ to BBB- 1,936 1,845
Below BBB- 1,141 786
Unrated 1,961 3,174
============= ======== ============
Total 10,482 11,240
============= ======== ============
In the table above, AAA is the highest possible rating.
Investment grade financial assets are classified within the range
of AAA to BBB ratings. Financial assets which fall outside this
range are classified as below BBB- and are non-investment
grade.
The Group's exposure to sovereign debt is analysed by issuer as
follows:
Annuity
and other
long-term
With-profits Unit-linked business Other Total
As at 30 June 2023 GBPm GBPm GBPm GBPm GBPm
Sovereign debt securities by country:
United Kingdom 3,845 1,096 1,180 554 6,675
Germany 724 13 199 - 936
Other European countries 1,236 47 551 - 1,834
====================================== ============ =========== ========== ===== ======
Total Europe 5,805 1,156 1,930 554 9,445
====================================== ============ =========== ========== ===== ======
United States 1,972 6 - 4 1,982
South Africa 931 98 - - 1,029
Indonesia 756 9 - - 765
South Korea 752 12 - - 764
Malaysia 710 9 - - 719
Singapore 581 7 - - 588
Other 3,179 77 152 56 3,464
====================================== ============ =========== ========== ===== ======
Total 14,686 1,374 2,082 614 18,756
====================================== ============ =========== ========== ===== ======
Annuity
and other
long-term
With-profits Unit-linked business Other Total
As at 31 December 2022 GBPm GBPm GBPm GBPm GBPm
Sovereign debt securities by country:
United Kingdom 2,290 947 1,239 578 5,054
Germany 503 39 201 - 743
Other European countries 1,223 57 586 4 1,870
====================================== ============ =========== ========== ===== ======
Total Europe 4,016 1,043 2,026 582 7,667
====================================== ============ =========== ========== ===== ======
United States 1,990 6 - 23 2,019
South Africa 90 98 - 1 189
Indonesia 891 12 - - 903
South Korea 760 12 - - 772
Malaysia 566 8 - - 574
Singapore 460 5 - - 465
Other 3,890 89 168 52 4,199
====================================== ============ =========== ========== ===== ======
Total 12,663 1,273 2,194 658 16,788
====================================== ============ =========== ========== ===== ======
As at 30 June 2023 Other European Countries included GBP1,302m
(year ended 31 December 2022: GBP1,403m) and Other included
GBP1,181m (year ended 31 December 2022: GBP1,226m) of Supranational
Government bonds.
Exposure of debt securities by sector
The exposure of annuities and other long term business to debt
securities is analysed below by sector:
As at As at
30 June 31 December
2023 Restated(i)
2022
GBPm GBPm
Financial 2,684 2,759
Government 2,888 3,098
Real Estate 2,727 2,860
- of which residential 1,882 1,845
- of which commercial 845 1,015
Utilities 1,683 1,794
Consumer 396 424
Industrial 396 424
Communications 294 313
Other 699 727
======================= ======== ============
Total 11,767 12,399
======================= ======== ============
(i) The sector information used has been amended to utilise that
of the group issuing the debt rather than the individual entity as
this provides a clearer view of the industry exposure.
Glossary
Term Definition Term Definition
Adjusted operating Is one of the Group's Chief Operating The Group Executive
profit before key alternative performance Decision Maker Committee.
tax measures. It is defined
in the alternative performance
measure section on page
85.
==================== ============================================================= ======================= ============================
Alternative Is a financial measure Company/Parent M&G plc, a public limited
performance of historic or future Company company incorporated
measure (APM) financial performance, in England and Wales
financial position or with registered number
cash flows, other than 11444019 whose registered
a financial measure defined office is 10 Fenchurch
under IFRS or under Solvency Avenue, London EC3M 5AG,
II regulations. United Kingdom.
==================== ============================================================= ======================= ============================
Asset-backed A security whose value Contractual Represents unearned profit
securities (ABS) and income payments are Service Margin on insurance contracts,
derived from and collateralised (CSM) recognised in profit
(or backed) by a specified or loss as the service
pool of underlying assets. is provided over the
The pool of assets is life of the contracts.
typically a group of
small and illiquid assets
that are unable to be
sold individually.
==================== ============================================================= ======================= ============================
Asset management Represents total operating Demerger The demerger from Prudential
cost/income expenses, excluding revaluation plc in October 2019.
ratio of provisions for employee
performance awards divided
by total fee-based revenues,
excluding performance
fees.
==================== ============================================================= ======================= ============================
Assets under Represents the total Director A Director of the Company.
management and market value of all financial
administration assets managed, administered
(AUMA) or advised on behalf
of customers and clients.
==================== ============================================================= ======================= ============================
Average fee Is calculated from fee-based Earnings per Is a commonly used financial
margin revenues earned in the share (EPS) metric which can be used
period, excluding performance to measure the profitability
fees, divided by average and strength of a company
AUMA for the period. over time. EPS is calculated
It demonstrates the revenue by dividing profit after
margin that was earned tax by the number of
on the assets we manage ordinary shares. Basic
and administer. EPS uses the weighted
average number of ordinary
shares outstanding during
the year. Diluted EPS
adjusts the weighted
average number of ordinary
shares outstanding to
assume conversion of
all dilutive potential
ordinary shares, such
as share options awarded
to employees.
==================== ============================================================= ======================= ============================
Board The Board of directors Employee benefit Is a trust set up to
of the Company. trust (EBT) enable its Trustees to
purchase and hold shares
to satisfy employee
share-based
incentive plan awards.
==================== ============================================================= ======================= ============================
Bonuses Bonuses refer to the ESG ESG stands for
non-guaranteed benefit Environmental,
added to participating Social, and Governance.
life insurance policies ESG is a framework that
and are the way in which helps stakeholders
policyholders receive understand
their share of the profits how an organisation is
of the policies. There managing risks and
are normally two types opportunities
of bonus: related to environmental,
social, and governance
* Regular bonus: expected to be added every year during criteria.
the term of the policy. It is not guaranteed that a
regular bonus will be added each year, but once it is
added, it cannot be reversed, also known as annual or
reversionary bonus; and
* Final bonus: an additional bonus expected to be paid
when policyholders take money from the policies. If
investment return has been low over the lifetime of
the policy, a final bonus may not be paid. Final
bonuses may vary and are not guaranteed.
==================== ============================================================= ======================= ============================
Expected credit Expected credit loss
loss (ECL) (ECL) impairment loss
being the present value
of the difference between
contractual cashflows
due and expected to be
received, based on the
lifetime probability
of default. It applies
to all credit exposures
not measured at fair
value through profit
or loss.
==================== =========================================================== ======================= ============================
Fair value Is an IFRS measurement M&G Group Limited MGG is a private limited
through profit basis permitted for assets (MGG) company incorporated
or loss (FVTPL) and liabilities managed in England and Wales
on a fair value basis with registered number
or which meet certain 00633480 whose registered
criteria. Gains or losses office is 10 Fenchurch
on assets or liabilities Avenue, London EC3M 5AG,
measured at FVTPL are United Kingdom.
recognised directly in MGG is the holding company
the condensed consolidated of the Group's asset
income statement. management business,
M&G Investments.
==================== ============================================================= ======================= ============================
Financial Conduct The body responsible MandG Investments On 4 July 2021, M&G FA
Authority (FCA) for supervising the conduct Southern Africa Limited, a wholly-owned
of all financial services (Pty) Ltd (MGSA) subsidiary of M&G plc,
firms and for the prudential acquired a controlling
regulation of those financial stake in Prudential
services firms not supervised Portfolio
by the Prudential Regulation Managers (South Africa)
Authority (PRA), such (Pty) Ltd (PPMSA). We
as asset managers and previously accounted
independent financial for the investment as
advisers. an associate using the
equity method. As we
now have a controlling
interest, the acquisition
has been accounted for
using the acquisition
accounting method. Rebranded
as MandG Investments
Southern Africa (MGSA).
==================== ============================================================= ======================= ============================
Group The Company and its subsidiaries. Net client Represent gross inflows
flows less gross outflows.
Gross inflows are new
funds from clients. Gross
outflows are money withdrawn
by clients during the
period.
==================== ============================================================= ======================= ============================
Group Executive Is composed of board Non-profit Contracts where the
Committee officers and senior-level business policyholders
executive management. are not entitled to a
It is the Group's most share of the company's
senior executive decision-making profit and surplus, but
forum. are entitled to other
contractual benefits.
Examples include pure
risk policies (such as
fixed annuities) and
unit-linked policies.
==================== ============================================================= ======================= ============================
International Are accounting standards Operating capital Is the total capital
Financial Reporting issued by the International generation generation before tax,
Standards (IFRS) Accounting Standards adjusted to exclude market
Board (IASB). The Group's movements relative to
consolidated financial those expected under
statements are prepared long-term assumptions
in accordance with UK and to remove other
adopted International non-operating
Accounting Standards items, including shareholder
(IAS). Any reference restructuring costs.
to IFRS refers to those
which have been adopted
for use in the UK unless
specified otherwise.
==================== ============================================================= ======================= ============================
Key performance The Group measures its Own funds Refers to the Solvency
measure (KPM) financial performance II measure of capital
using the following key available to meet losses,
performance measures: and is based on the assets
IFRS result after tax, less liabilities of the
adjusted operating profit Group, subject to certain
before tax, net client restrictions and
flows (excluding Heritage), adjustments.
AUMA, shareholder Solvency Available Own Funds reflect
II coverage ratio, total all capital available
capital generation and to the Group. Eligible
operating capital generation. Own Funds are net of
restrictions applied
in line with the thresholds
set by the regulator
that limit the amount
of each tier of capital
that can be used to
demonstrate
solvency.
==================== ============================================================= ======================= ============================
Prudential Is the body responsible
Regulation Authority for the prudential
(PRA) regulation
and supervision of banks,
building societies, credit
unions, insurers and
major investment firms.
==================== =========================================================== ======================= ============================
Leverage ratio Is calculated as the Prudential Is a private limited
nominal value of debt Assurance Company company incorporated
as a percentage of the (PAC) in England and Wales
shareholder view of the with registered number
Group's Solvency II available 00015454 whose registered
own funds. office is 10 Fenchurch
Avenue, London, EC3M
5AG, United Kingdom.
==================== ============================================================= ======================= ============================
Long term incentive The part of an executive's PruFund Our PruFund proposition
plan (LTIP) remuneration designed provides our retail
to incentivise long-term customers
value for shareholders with access to smoothed
through an award of shares savings contracts with
with vesting contingent a wide choice of investment
on employment and the profiles.
satisfaction of stretching
performance conditions
linked to the Group's
strategy.
==================== ============================================================= ======================= ============================
Scottish Amicable Was a ring-fenced sub-fund Total capital Is the total change in
Insurance Fund of the With-Profits generation Solvency II surplus capital,
(SAIF) Fund following the acquisition on an eligible Own Funds
of the mutually owned basis, before dividends
Scottish Amicable Life and capital movements
Assurance Society in and capital generated
1997. The fund was solely from discontinued operations.
for the benefit of policyholders
of SAIF. On 1 April
2021 SAIF merged with
PAC's main with-profits
sub-fund and the assets
and liabilities of SAIF
combined with those
of the with-profits
sub-fund.
==================== =========================================================== ===================== ================================
Shareholder Is the ratio of eligible Transitional Transitional measures
Solvency II own funds to solvency measures on technical provisions
coverage ratio capital requirement are an adjustment to Solvency
(SCR), excluding the II technical provisions,
contribution to own to smooth the impact of
funds and SCR from the the change in the regulatory
Group's ring-fenced regime on 1 January 2016.
With-Profits Fund. This decreases linearly
over 16 years following
the implementation of
Solvency II, but may be
recalculated in certain
cases, subject to agreement
with the PRA.
==================== =========================================================== ===================== ================================
SICAV A SICAV (Société Unallocated Represented the excess
d'investissement à surplus of the of assets over policyholder
Capital Variable) is With-Profits liabilities that have
an open-ended investment Fund yet to be appropriated
fund offered by European between policyholders
financial companies, and shareholders. There
similar to the UK's is no Unallocated surplus
unit trust. SICAVs are of the With-Profits Fund
effectively share companies under IFRS 17.
aimed at collectively
investing the assets
collected through the
public offering of shares,
whose value amounts
to the net worth of
capital account divided
by their number.
==================== =========================================================== ===================== ================================
Solvency capital SCR represents the 99.5th Unit-linked A policy where the benefits
requirement percentile (or 1-in-200) policy are determined by the
(SCR) worst outcome over the investment performance
coming year, out of of the underlying assets
100,000 equally likely in the unit--linked fund.
scenarios, allowing
for the dependency between
the risks the business
is exposed to. The SCR
is calculated using
our Solvency II Internal
Model.
==================== =========================================================== ===================== ================================
Solvency II A regime for the prudential With-profits Contracts where the
regulation of insurance business policyholders
companies that was introduced have a contractual right
by the EU on 1 January to receive, at the discretion
2016. of the company, additional
benefits based on the
profits of the fund, as
a supplement to any guaranteed
benefits.
==================== =========================================================== ===================== ================================
Solvency II Represents the eligible With-Profits The Prudential Assurance
surplus own funds held by the Fund Company Limited's fund
Group less the solvency where policyholders are
capital requirement. entitled to a share of
the profits of the fund.
Normally, policyholders
receive their share of
the profits through bonuses.
It is also known as a
participating fund as
policyholders have a
participating
interest in the With-Profits
Fund and any declared
bonuses.
==================== =========================================================== ===================== ================================
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END
IR MZGMLFLRGFZZ
(END) Dow Jones Newswires
September 20, 2023 02:00 ET (06:00 GMT)
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