TIDMPRU
RNS Number : 2369M
Prudential PLC
19 January 2016
19 January 2016
Prudential plc Solvency II capital position
On 7 December 2015 Prudential plc ("Prudential") announced that
it had received approval from the Prudential Regulation Authority
for the use of its internal model to calculate the Group Solvency
Capital Requirement under the European Union's Solvency II
Directive, which came into effect on 1 January 2016.
Based on this approval, we are pleased to announce that
Prudential's estimated Group Solvency II surplus at 30 June 2015
was GBP9.2 billion and the solvency ratio was 190 per cent, before
allowing for the 2015 interim dividend.
Mike Wells said: "Our Solvency II outcome confirms the strength
of the Group's capital position and cash generative nature of our
businesses. We remain confident that the Group will be able to
continue to deliver high-quality products and services to both new
and existing customers and strong, sustainable, profitable growth
for our shareholders."
Enquiries:
Media Investors/Analysts
+44 (0)20 +44 (0)20
Jonathan Oliver 7548 3719 Raghu Hariharan 7548 2871
+44 (0)20 +44 (0)20
Tom Willetts 7548 2776 Richard Gradidge 7548 3860
Notes to Editors:
About Prudential plc
Prudential plc, which is incorporated in England and Wales, and
its affiliated companies constitute one of the world's leading
financial services groups, serving around 25 million insurance
customers. It has GBP505 billion of assets under management (as at
30 June 2015). Prudential plc is listed on stock exchanges in
London, Hong Kong, Singapore and New York. Prudential plc is not
affiliated in any manner with Prudential Financial, Inc., a company
whose principal place of business is in the United States of
America.
Forward-Looking Statements
This document may contain 'forward-looking statements' with
respect to certain of Prudential's plans and its goals and
expectations relating to its future financial condition,
performance, results, strategy and objectives. Statements that are
not historical facts, including statements about Prudential's
beliefs and expectations and including, without limitation,
statements containing the words "may", "will", "should",
"continue", "aims", "estimates", "projects", "believes", "intends",
"expects", "plans", "seeks" 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 undue reliance should not be placed on them. By their
nature, all forward-looking statements involve risk and
uncertainty. A number of important factors could cause Prudential'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, future market conditions, including fluctuations in
interest rates and exchange rates, the potential for a sustained
low-interest rate environment, and the performance of financial
markets generally; the policies and actions of regulatory
authorities, including, for example, new government initiatives and
the effect of the European Union's 'Solvency II' requirements on
Prudential's capital maintenance requirements; the impact of
continuing designation as a Global Systemically Important Insurer,
or 'G-SII'; the impact of competition, economic uncertainty,
inflation, and deflation; experience in particular with regard to
mortality and morbidity trends, lapse rates and policy renewal
rates; the timing, impact and other uncertainties of future
acquisitions or combinations within relevant industries; 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 Prudential and its
affiliates operate; and the impact of legal actions 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. Further
discussion of these and other important factors that could cause
Prudential's actual future financial condition or performance or
other indicated results to differ, possibly materially, from those
anticipated in Prudential's forward-looking statements can be found
under the 'Risk factors' heading in its most recent Annual Report
and the 'Risk Factors' heading of Prudential's most recent annual
report on Form 20-F filed with the U.S. Securities and Exchange
Commission, as well as under the 'Risk Factors' heading of any
subsequent Prudential Half Year Financial Report. Prudential's most
recent Annual Report, Form 20-F and any subsequent Half Year
Financial Report are/will be available on its website at
www.prudential.co.uk.
Any forward-looking statements contained in this document speak
only as of the date on which they are made. Prudential 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, the Hong Kong Listing Rules, the SGX-ST listing
rules or other applicable laws and regulations.
Solvency II capital position at 30 June 2015
The estimated Group Solvency II surplus at 30 June 2015 was
GBP9.2 billion and the Group solvency ratio was 190 per cent,
before allowing for the 2015 interim dividend.
30 June 2015
Estimated Group Solvency II capital position (GBP billion)
--------------------------------------------- --------------
Own Funds 19.4
Solvency Capital Requirement 10.2
Surplus 9.2
Solvency ratio 190%
--------------------------------------------- --------------
These results allow for:
-- capital in Jackson in excess of 250 per cent of the US local
Risk Based Capital requirement. As agreed with the Prudential
Regulation Authority, this is incorporated in the result above as
follows:
o Own funds: represent Jackson's local US Risk Based available
capital less 100 per cent of the US Risk Based Capital requirement
(Company Action Level); and
o Solvency Capital Requirement: represent 150 per cent of
Jackson's local US Risk Based Capital requirement (Company Action
Level);
-- non-recognition of a portion of Solvency II surplus capital
relating to the Group's Asian life operations, reflecting
regulatory prudence;
-- matching adjustment for UK annuities, based on the
calibration published by the European Insurance and Occupational
Pensions Authority on 7 December 2015; and
-- transitional measures which have the effect of preserving the
Solvency II surplus for our UK business at the same level as under
Solvency I, for business written before 1 January 2016.
In line with Solvency II requirements, the Group's Solvency II
capital surplus excludes:
-- diversification benefits between Jackson and the rest of the Group;
-- surplus in ring-fenced with-profits funds including the
shareholder's share of the estate of with-profits funds; and
-- surplus in pension funds.
Analysis of movement in capital position
We previously reported our economic capital results at year end
2013 and year end 2014 before there was certainty in the final
outcome of Solvency II and before we received internal model
approval. The Solvency II results now reflect the output from our
approved internal model under the final Solvency II rules. Allowing
for this change in basis, the movement from the previously reported
economic capital basis solvency surplus at 31 December 2014 to the
Solvency II approved internal model surplus at 30 June 2015 is set
out in the table below:
Analysis of movement in Group surplus GBP billion
------------------------------------------------------------------------------------------------------- -----------
Economic capital surplus as at 1 January 2015 9.7
Operating experience 0.8
Non-operating experience (including market movements) 0.5
Other capital movements
Subordinated debt issuance 0.6
Foreign currency translation impacts (0.1)
Final 2014 dividend (0.7)
Methodology and calibration changes
Changes to Own Funds (net of transitionals) and Solvency Capital Requirement calibration strengthening (0.2)
Effect of partial derecognition of Asia Solvency II surplus (1.4)
US Risk Based Capital treatment 0.0
Estimated solvency II surplus as at 30 June 2015 9.2
------------------------------------------------------------------------------------------------------- -----------
The movement in Group surplus over the first half of 2015 is
driven by:
-- Operating experience of GBP0.8 billion: generated by in-force
business and new business written in the first half of 2015;
(MORE TO FOLLOW) Dow Jones Newswires
January 19, 2016 02:00 ET (07:00 GMT)
-- Non-operating experience of GBP0.5 billion: mainly arising
from positive market experience during the first half of 2015;
and
-- Other capital movements: comprising an increase in capital
from subordinated debt issuance, offset by negative foreign
currency translation effects and a reduction in surplus from
payment of the 2014 final dividend.
In addition, the methodology and calibration changes arising
from Solvency II relate to:
-- a GBP0.2 billion reduction in surplus due to an increase in
the Solvency Capital Requirement from strengthening of internal
model calibrations, mainly relating to longevity risk, operational
risk, credit risk and correlations, and a corresponding increase in
the risk margin, which is partially offset by UK transitionals;
and
-- a GBP1.4 billion reduction in surplus due to the negative
impact of Solvency II rules for "contract boundaries" and a
reduction in the capital surplus of the Group's Asian life
operations, as agreed with the Prudential Regulation Authority.
The change in US treatment from including 150 per cent, rather
than 250 per cent of US Risk Based Capital (Company Action Level)
in the Group Solvency Capital Requirement, is offset by a
corresponding reduction in the Group Own Funds and therefore has no
impact on surplus despite the positive impact on the solvency
ratio.
The GBP0.5 billion reduction in Group surplus due to the net
impacts above, including the impact of the change in basis from
economic capital to Solvency II, represents an overall reduction in
the Group solvency ratio from 218 per cent to 190 per cent.
Analysis of movement in Group solvency Own Funds Solvency Capital Requirement Surplus Solvency ratio
position (GBP billion)
---------------------------------------------- ---------- ----------------------------- -------- ---------------
Economic capital position at 1 January 2015 17.9 8.2 9.7 218%
Capital generation and other movements in the
first-half of 2015 1.2 0.1 1.1 12%
Methodology and calibration changes
Changes to Own Funds (net of transitionals)
and Solvency Capital Requirement calibration
strengthening 2.3 2.5 (0.2) (32%)
Effect of partial derecognition of Asia
Solvency II surplus (1.3) 0.1 (1.4) (15%)
US Risk Based Capital treatment (0.7) (0.7) 0.0 7%
Estimated solvency II position at 30 June 2015 19.4 10.2 9.2 190%
---------------------------------------------- ---------- ----------------------------- -------- ---------------
Analysis of Group Solvency Capital Requirements
The split of the Group's estimated Solvency Capital Requirement
by risk type including the capital requirements in respect of
Jackson's risk exposures based on 150 per cent of US Risk Based
Capital requirements (Company Action Level) but with no
diversification between Jackson and the rest of the Group, is as
follows:
30 June 2015 30 June 2015
--------------------------- ---------------------------
Split of the Group's % of undiversified % of diversified
estimated Solvency Capital Solvency Capital Solvency Capital
Requirements Requirement Requirement
--------------------------- ---------------------------
Market 52% 66%
Equity 12% 16%
Credit 26% 44%
Yields (interest rates) 11% 4%
Other 3% 2%
Insurance 31% 24%
Mortality/morbidity 5% 2%
Lapse 15% 17%
Longevity 11% 5%
Operational/expense 11% 7%
FX translation 6% 3%
---------------------------- --------------------------- ---------------------------
Reconciliation of IFRS equity to Group Solvency II Own Funds
30 June 2015
Reconciliation of IFRS equity to Group Solvency II (GBP billion)
Own Funds
--------------------------------------------------- ---------------
IFRS shareholders' equity 12.1
Restate US insurance entities from IFRS onto local
US statutory basis (1.8)
Remove DAC, goodwill & intangibles (3.6)
Add subordinated-debt 4.3
Impact of risk margin (net of transitionals) (2.8)
Add value of shareholder-transfers 3.4
Liability valuation differences 9.0
Increase in value of net deferred tax liabilities
(resulting from valuation differences above) (1.1)
Other (0.1)
---------------
Estimated Solvency II Own Funds 19.4
--------------------------------------------------- ---------------
The key items of the reconciliation are:
-- GBP1.8 billion represents the adjustment required to the
Group's shareholders' funds in order to convert Jackson's
contribution from an IFRS basis to the local statutory valuation
basis. This item also reflects a derecognition of Own Funds of
GBP0.7 billion, equivalent to the value of 100 per cent of Risk
Based Capital requirements (Company Action Level), as agreed with
the Prudential Regulation Authority;
-- GBP3.6 billion due to the removal of DAC, goodwill and
intangibles from the IFRS balance sheet;
-- GBP4.3 billion due to the addition of subordinated debt which
is treated as available capital under Solvency II but as a
liability under IFRS;
-- GBP2.8 billion due to the inclusion of a risk margin for UK
and Asia non-hedgeable risks, net of transitionals, all of which
are not applicable under IFRS;
-- GBP3.4 billion due to the inclusion of the value of future
shareholder transfers from with-profits business (excluding the
shareholder's share of the with-profits estate, for which no credit
is given under Solvency II), which is excluded from the
determination of the Group's IFRS shareholders' funds;
-- GBP9.0 billion due to differences in insurance valuation
requirements between Solvency II and IFRS, with Solvency II Own
Funds partially capturing the value of in-force business which is
excluded from IFRS; and
-- GBP1.1 billion due to the impact on the valuation of deferred
tax assets and liabilities resulting from the other valuation
differences noted above.
Sensitivity analysis
At 30 June 2015, the estimated sensitivity of the Group Solvency
II surplus to significant changes in market conditions is as
follows:
-- an instantaneous 20 per cent fall in equity markets would
reduce surplus by GBP0.3 billion and reduce the solvency ratio to
189 per cent;
-- an instantaneous 40 per cent fall in equity markets would
reduce surplus by GBP1.9 billion and reduce the solvency ratio to
175 per cent;
-- a 50 basis points reduction in interest rates (subject to a
floor of zero) would reduce surplus by GBP1.0 billion and reduce
the solvency ratio to 177 per cent;
-- a 100 basis points increase in interest rates would increase
surplus by GBP1.1 billion and increase the solvency ratio to 206
per cent; and
-- a 100 basis points increase in credit spreads (with credit
defaults of 10 times the expected level in Jackson) would reduce
surplus by GBP1.2 billion and reduce the solvency ratio to 181 per
cent.
UK Solvency II capital position at 30 June 2015 (1,) (2)
On the same basis as above, the estimated UK Solvency II surplus
at 30 June 2015 was GBP3.4 billion and the solvency ratio was 152
per cent. This relates to shareholder-backed business including the
shareholders' share of future with-profits transfers, but excludes
the shareholders' share of the estate in line with Solvency II
requirements.
The surplus position of the UK with-profits funds remains strong
on a Solvency II basis, but since this surplus is ring-fenced from
the shareholder balance sheet, it is excluded from both the Group
and the UK shareholder Solvency II surplus results. The estimated
UK with-profits funds Solvency II surplus at 30 June 2015 was
GBP3.7 billion, equivalent to a solvency ratio of 210 per cent.
UK shareholder UK
Estimated solvency II capital position (GBP billion) with-profits
30 June 2015 (GBP billion)
--------------------------------------- --------------- ---------------
Own Funds 10.1 7.2
Solvency Capital Requirement 6.7 3.5
Surplus 3.4 3.7
Solvency ratio 152% 210%
----------------------------------------- --------------- ---------------
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