Prudential PLC — Regulatory Filings 2015

Mar 10, 2015

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RNS Number : 9706G Prudential PLC 10 March 2015  European Embedded Value (EEV) basis results Post-tax operating profit based on longer-term investment returns Results analysis by business area 2014 £m 2013 £m Note note (iii) Asia operations New business 3 1,162 1,139 Business in force 4 739 753 Long-term business 1,901 1,892 Eastspring Investments 78 64 Development expenses (1) (1) Total 1,978 1,955 US operations New business 3 694 706 Business in force 4 834 820 Long-term business 1,528 1,526 Broker-dealer and asset management 6 39 Total 1,534 1,565 UK operations New business 3 270 237 Business in force 4 476 595 Long-term business 746 832 General insurance commission 19 22 Total UK insurance operations 765 854 M&G (including Prudential Capital) 386 346 Total 1,151 1,200 Other income and expenditurenote (i) (531) (482) Solvency II and restructuring costsnote (ii) (36) (34) Post-tax operating profit based on longer-term investment returns 4,096 4,204 Analysed as profits (losses) from: New business 3 2,126 2,082 Business in force 4 2,049 2,168 Long-term business 4,175 4,250 Asset management 470 449 Other results (549) (495) Total 4,096 4,204 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis. This approach has been adopted throughout this supplementary information. Notes: (i) EEV basis other income and expenditure represents the post-tax IFRS basis result, less the unwind of expected margins on the internal management of the assets of the covered business (as explained in note 16(a)(vii)). (ii) Solvency II and restructuring costs comprise the net of tax charge recognised on an IFRS basis and the additional amount recognised on the EEV basis for the shareholders' share incurred by the PAC with-profits fund. (iii) The comparative results have been prepared using previously reported average exchange rates for the year. For memorandum disclosure purposes note 2 presents the 2013 results on both actual exchange rates (AER) and constant exchange rates (CER) bases. Post-tax summarised consolidated income statement Note 2014 £m 2013 £m Post-tax operating profit based on longer-term investment returns Asia operations 1,978 1,955 US operations 1,534 1,565 UK operations 1,151 1,200 Other income and expenditure (531) (482) Solvency II and restructuring costs (36) (34) Post-tax operating profit based on longer-term investment returns 4,096 4,204 Short-term fluctuations in investment returns 5 763 (564) Effect of changes in economic assumptions 6 (369) 629 Mark to market value movements on core borrowings (187) 152 Gain on sale of PruHealth and PruProtect 7 44 - Loss attaching to held for sale Japan Life business 8 - (35) Costs of domestication of Hong Kong branch 9 (4) (28) Total post-tax non-operating profit 247 154 Profit for the year attributable to equity holders of the Company 4,343 4,358 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Movement in shareholders' equity Note 2014 £m 2013 £m Profit for the year attributable to equity shareholders 4,343 4,358 Items taken directly to equity: Exchange movements on foreign operations and net investment hedges 737 (1,077) Dividends (895) (781) New share capital subscribed 13 6 Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes (11) (53) Reserve movements in respect of share-based payments 106 98 Treasury shares: Movement in own shares in respect of share-based payment plans (48) (10) Movement in own shares purchased by unit trusts consolidated under IFRS (6) (31) Mark to market value movements on Jackson assets backing surplus and required capital 77 (97) Net increase in shareholders' equity 12 4,316 2,413 Shareholders' equity at beginning of year: As previously reported 12 24,856 22,443 Effect of the domestication of Hong Kong branch on 1 January 2014 9 (11) - 24,845 22,443 Shareholders' equity at end of year 12 29,161 24,856 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Comprising: 31 Dec 2014 £m 31 Dec 2013 £m Long-term business operations Asset management and other operations Total Long-term business operations Asset management and other operations Total note 12 note 12 Asia operations 12,545 274 12,819 10,536 255 10,791 US operations 8,379 157 8,536 6,966 134 7,100 UK insurance operations 8,433 19 8,452 7,342 22 7,364 M&G - 1,646 1,646 - 1,602 1,602 Other operations - (2,292) (2,292) - (2,001) (2,001) Shareholders' equity at end of year 29,357 (196) 29,161 24,844 12 24,856 Representing: Net assets excluding acquired goodwill and holding company net borrowings 29,124 1,542 30,666 24,613 1,155 25,768 Acquired goodwill 233 1,230 1,463 231 1,230 1,461 Holding company net borrowings at market value note10 - (2,968) (2,968) - (2,373) (2,373) 29,357 (196) 29,161 24,844 12 24,856 Summary statement of financial position Note 31 Dec 2014 £m 31 Dec 2013 £m Total assets less liabilities, before deduction for insurance funds 326,633 288,826 Less insurance funds: Policyholder liabilities (net of reinsurers' share) and unallocated surplus of with-profits funds (314,822) (279,176) Less shareholders' accrued interest in the long-term business 17,350 15,206 (297,472) (263,970) Total net assets 12 29,161 24,856 Share capital 128 128 Share premium 1,908 1,895 IFRS basis shareholders' reserves 9,775 7,627 Total IFRS basis shareholders' equity 12 11,811 9,650 Additional EEV basis retained profit 12 17,350 15,206 Total EEV basis shareholders' equity (excluding non-controlling interests) 12 29,161 24,856 * Including liabilities in respect of insurance products classified as investment contracts under IFRS 4. Net asset value per share 31 Dec 2014 31 Dec 2013 Based on EEV basis shareholders' equity of £29,161 million (2013: £24,856 million) (in pence) 1,136p 971p Number of issued shares at year end (millions) 2,568 2,560 Annualised return on embedded value 16% 19% * Annualised return on embedded value is based on EEV post-tax operating profit, as a percentage of opening EEV basis shareholders' equity. Notes on the EEV basis results 1 Basis of preparation The EEV basis results have been prepared in accordance with the EEV Principles issued by the European Insurance CFO Forum in May 2004 and subsequently supplemented by Additional Guidance on EEV Disclosure issued in October 2005. Where appropriate, the EEV basis results include the effects of adoption of International Financial Reporting Standards (IFRS). The EEV results are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis. The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles. The auditors have reported on the 2014 EEV basis results supplement to the Company's statutory accounts for 2014. Their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006. Except for the change in presentation of EEV results from pre-tax to post-tax, as described in the additional unaudited financial information for the 2013 annual report, the 2013 results have been derived from the EEV basis results supplement to the Company's statutory accounts for 2013. The supplement included an unqualified audit report from the auditors. A detailed description of the EEV methodology and accounting presentation is provided in note 16. 2 Results analysis by business area The 2013 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2013 CER comparative results are translated at 2014 average exchange rates. Annual premium and contribution equivalents (APE) (note16(a)(ii)) 2014 £m 2013 £m % change Note AER CER AER CER Asia operations 2,237 2,125 1,946 5% 15% US operations 1,556 1,573 1,494 (1%) 4% UK operations 857 725 725 18% 18% Total 3 4,650 4,423 4,165 5% 12% Post-tax operating profit 2014 £m 2013 £m % change Note AER CER AER CER Asia operations New business 3 1,162 1,139 1,032 2% 13% Business in force 4 739 753 673 (2)% 10% Long-term business 1,901 1,892 1,705 0% 11% Eastspring investments 78 64 59 22% 32% Development costs (1) (1) (1) 0% 0% Total 1,978 1,955 1,763 1% 12% US operations New business 3 694 706 670 (2)% 4% Business in force 4 834 820 779 2% 7% Long-term business 1,528 1,526 1,449 0% 5% Broker-dealer and asset management 6 39 37 (85)% (84)% Total 1,534 1,565 1,486 (2)% 3% UK operations New business 3 270 237 237 14% 14% Business in force 4 476 595 595 (20)% (20)% Long-term business 746 832 832 (10)% (10)% General insurance commission 19 22 22 (14)% (14)% Total UK insurance operations 765 854 854 (10)% (10)% M&G (including Prudential Capital) 386 346 346 12% 12% Total 1,151 1,200 1,200 (4)% (4)% Other income and expenditure (531) (482) (482) (10)% (10)% Solvency II and restructuring costs (36) (34) (34) (6)% (6)% Post-tax operating profit based on longer-term investment returns 4,096 4,204 3,933 (3)% 4% Analysed as profits from: New business 3 2,126 2,082 1,939 2% 10% Business in force 4 2,049 2,168 2,047 (5)% 0% Total long-term business 4,175 4,250 3,986 (2)% 5% Asset management 470 449 442 5% 6% Other results (549) (495) (495) (11)% (11)% Post-tax operating profit based on longer-term investment returns 4,096 4,204 3,933 (3)% 4% Post-tax profit 2014 £m 2013 £m % change Note AER CER AER CER Post-tax operating profit based on longer-term investment returns 4,096 4,204 3,933 (3)% 4% Short-term fluctuations in investment returns 5 763 (564) (529) 235% 244% Effect of changes in economic assumptions 6 (369) 629 623 (159)% (159)% Other non-operating profit (147) 89 94 (265)% (256)% Total post-tax non-operating profit 247 154 188 60% 31% Profit for the year attributable to shareholders 4,343 4,358 4,121 0% 5% Basic earnings per share (in pence) 2014 2013 % change AER CER AER CER Based on post-tax operating profit including longer-term investment returns 160.7 p 165.0 p 154.4 p (3%) 4% Based on post-tax profit 170.4 p 171.0 p 161.7 p 0% 5% Average number of shares (millions) 2,549 2,548 2,548 3 Analysis of new business contribution (i) Group Summary 2014 Annual premium and contribution equivalents (APE) Present value of new business premiums (PVNBP) New business contribution New business margin APE PVNBP note 18 note 18 (note) £m £m £m % % Asia operations(note ii) 2,237 12,331 1,162 52 9.4 US operations 1,556 15,555 694 45 4.5 UK insurance operations 857 7,471 270 32 3.6 Total 4,650 35,357 2,126 46 6.0 2013 Annual premium and contribution equivalents (APE) Present value of new business premiums (PVNBP) New business contribution New business margin APE PVNBP note 18 note 18 (note) £m £m £m % % Asia operations(note ii) 2,125 11,375 1,139 54 10.0 US operations 1,573 15,723 706 45 4.5 UK insurance operations 725 5,978 237 33 4.0 Total 4,423 33,076 2,082 47 6.3 Note: The increase in new business contribution of £44 million from £2,082 million for 2013 to £2,126 million in 2014 comprises an increase on a CER basis of £187 million, offset by foreign exchange effects of £(143) million. The increase of £187 million on the CER basis comprises a contribution of £277 million reflecting higher sales volumes and the impact of pricing and product actions, offset by a £(90) million adverse effect of reductions in long-term interest rates in the year (analysed as Asia negative £(17) million, US negative £(63) million and UK negative £(10) million). (ii) Asia operations 2014 £m 2013 £m AER CER China 27 28 26 Hong Kong 405 283 269 India 12 15 14 Indonesia 296 359 301 Korea 11 25 25 Taiwan 29 31 29 Other 382 398 368 Total Asia operations 1,162 1,139 1,032 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. 4 Operating profit from business in force (i) Group Summary 2014 £m Asia operations US operations UK insurance operations Total note (ii) note (iii) note (iv) (note) Unwind of discount and other expected returns 648 382 410 1,440 Effect of changes in operating assumptions 52 86 - 138 Experience variances and other items 39 366 66 471 Total 739 834 476 2,049 2013 £m Asia operations US operations UK insurance operations Total note (ii) note (iii) note (iv) (note) Unwind of discount and other expected returns 668 395 437 1,500 Effect of changes in operating assumptions 5 76 98 179 Experience variances and other items 80 349 60 489 Total 753 820 595 2,168 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Note: The movements in operating profit from business in force of £(119) million from £2,168 million in 2013 to £2,049 million for 2014 comprises: 2014 £m Reduction in unwind of discount and other expected returns: Foreign exchange effects (80) Effect of changes in interest rates (187) Effect of growth in opening value and other items 207 (60) Non-recurrent benefit in 2013 of reduction in UK corporate tax rates (98) Year on year change in effects of other operating assumptions, experience variances and other items 39 Net decrease in operating profit from business in force (119) (ii) Asia operations 2014 £m 2013 £m Unwind of discount and other expected returnsnote (a) 648 668 Effect of changes in operating assumptions: Mortality and morbiditynote (b) 27 19 Persistency and withdrawalsnote (c) (17) (23) Expense (5) (6) Othernote (d) 47 15 52 5 Experience variances and other items: Mortality and morbiditynote (e) 23 33 Persistency and withdrawalsnote (f) 44 36 Expensenote (g) (27) (17) Other (1) 28 39 80 Total Asia operations 739 753 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Notes: (a) The decrease in unwind of discount and other expected returns of £(20) million from £668 million for 2013 to £648 million for 2014 is impacted by the effect of lower interest rates of £(55) million, and a £(61) million adverse foreign currency translation effect, partially offset by £96 million mainly for the increase in the opening in-force value. (b) In 2014 the credit of £27 million for mortality and morbidity assumption changes reflects a number of offsetting items, including the effect of reduced projected mortality rates for Hong Kong. In 2013 the credit of £19 million mainly reflected the beneficial effect arising from the renegotiation of a reinsurance agreement in Indonesia. (c) In 2014 the charge of £(17) million for persistency assumptions mainly reflects increased partial withdrawal assumptions on unit-linked business in Korea. For 2013 the charge of £(23) million reflected a number of offsetting items including the effect of strengthening lapse and premium holiday assumptions in Korea. (d) In 2014 the credit of £47 million for other assumption changes reflects a number of offsetting items, including the effects of modelling improvements and those arising from asset allocation changes in Hong Kong. (e) The favourable effect of mortality and morbidity experience in 2014 of £23 million (2013: £33 million) reflects better than expected experience in Indonesia and Hong Kong, offset by higher claims in Malaysia on medical reimbursement products. (f) The positive persistency and withdrawals experience variance in 2014 of £44 million (2013: £36 million) reflects favourable experience principally in Hong Kong across all product groups. (g) The expense experience variance at 2014 is negative £(27) million (2013: negative £(17) million). The variance arises in operations which are currently sub-scale (China, Malaysia Takaful and Taiwan), and from short-term overruns in India and Korea. (iii) US operations 2014 £m 2013 £m Unwind of discount and other expected returnsnote (a) 382 395 Effect of changes in operating assumptions: Persistencynote (b) 55 47 Othernote (c) 31 29 86 76 Experience variances and other items: Spread experience variancenote (d) 192 217 Amortisation of interest-related realised gains and lossesnote (e) 56 58 Othernote (f) 118 74 366 349 Total US operations 834 820 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Notes: (a) The decrease in unwind of discount and other expected returns of £(13) million from £395 million for 2013 to £382 million for 2014 reflects a £(73) million adverse effect of the 90 basis points reduction in the US 10-year Treasury rate and a £(19) million adverse foreign currency effect, partially offset by a £79 million effect mainly for the underlying growth in the in-force book. (b) The credit in 2014 of £55 million (2013: £47 million) for persistency assumption changes principally relates to revised assumptions for variable annuity business to more closely reflect recent experience. (c) The effect of other changes in operating assumptions of £31 million reflects a number of offsetting items and includes the capitalised effect of changes in projected policyholder variable annuity fees of £46 million (2013: £33 million) which vary depending on the size and mix of variable annuity funds. (d) The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults (see note 17 (ii)). The spread experience variance in 2014 of £192 million (2013: £217 million) includes the positive effect of transactions undertaken to more closely match the overall asset and liability duration. (e) The amortisation of interest-related gains and losses reflects the fact that when bonds that are neither impaired nor deteriorating are sold and reinvested there will be a consequent change in the investment yield. The realised gain or loss is amortised into the result over the year when the bonds would have otherwise matured to better reflect the long-term returns included in operating profits. (f) The effect of £118 million in 2014 for other experience variances and other items includes the effect of favourable persistency, mortality and tax experience variances, the most significant item arising from the continued positive persistency experience for annuity business of £59 million (2013: £40 million). (iv) UK insurance operations 2014 £m 2013 £m Unwind of discount and other expected returnsnote (a) 410 437 Effect of change in UK corporate tax ratenote (b) - 98 Other itemsnote (c) 66 60 Total UK insurance operations 476 595 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Notes: (a) The decrease in unwind of discount and other expected returns of £(27) million from £437 million for 2013 to £410 million for 2014 reflects a £(59) million adverse impact of the 130 basis point reduction in gilt yields partially offset by £32 million mainly for the underlying growth in the in-force book. (b) For 2013, the positive contribution from the change in UK corporate tax rates of £98 million reflected the combined effect of the reductions in corporate rates from 23 per cent to 21 per cent from April 2014 and 21 per cent to 20 per cent from April 2015. (c) Other items of £66 million for 2014 (2013: £60 million) principally reflect the positive effects of rebalancing the investment portfolio backing annuity business (see note 16(b)(ii)). 5 Short-term fluctuations in investment returns Short-term fluctuations in investment returns included in profit for the year arise as follows: (i) Group Summary 2014 £m 2013 £m Insurance operations: Asianote (ii) 439 (308) USnote (iii) (166) (280) UKnote (iv) 583 28 856 (560) Other operationsnote (v) (93) (4) Total 763 (564) * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. (ii) Asia operations The short-term fluctuations in investment returns for Asia operations comprise amounts in respect of: 2014 £m 2013 £m Hong Kong 178 (178) Indonesia 35 (44) Singapore 92 (80) Other 134 (6) Total Asia operations 439 (308) * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. These fluctuations mainly arise from decreases (2014) and increases (2013) in long-term interest rates as they affect the value of bonds in the portfolios backing liabilities and related capital. The £134 million credit for other operations in 2014 principally arises in Taiwan of £23 million and in Thailand of £49 million for unrealised gains on bonds. (iii) US operations The short-term fluctuations in investment returns for US operations comprise: 2014 £m 2013 £m Investment return related experience on fixed income securitiesnote (a) 31 13 Investment return related impact due to changed expectation of profits on in-force variable annuity business in future periods based on current period separate account return, net of related hedging activitynote (b) (187) (377) Other items including actual less long-term return on equity based investmentsnote (c) (10) 84 Total US operations (166) (280) * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Notes: (a) The credit relating to fixed income securities comprises the following elements: - the excess of actual realised gains and losses over the amortisation of interest related realised gains and losses recorded in the profit and loss account; - credit loss experience (versus the longer-term assumption); and - the impact of changes in the asset portfolio. (b) This item reflects the net impact of: - variances in projected future fees and future benefit costs arising from the effect of market fluctuations on the growth in separate account asset values in the current reporting period; and - related hedging activity arising from realised and unrealised gains and losses on equity related hedges and interest rate options. (c) For 2013, other items of £84 million primarily reflected a beneficial impact of the excess of actual over assumed return from investments in limited partnerships. (iv) UK insurance operations The short-term fluctuations in investment returns for UK insurance operations comprise: 2014 £m 2013 £m Shareholder-backed annuitynote (a) 310 (58) With-profits, Unit-linked and othernote (b) 273 86 583 28 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Notes: (a) Short-term fluctuations in investment returns for shareholder-backed annuity business comprise: - gains/(losses) on surplus assets compared to the expected long-term rate of return reflecting reductions/(increases) in corporate bond and gilt yields; - the difference between actual and expected default experience; and - the effect of mismatching for assets and liabilities of different durations and other short-term fluctuations in investment returns. (b) The short-term fluctuations in investment returns for with-profits, unit-linked and other business primarily arise from the excess of actual over expected returns for with-profits business, reflecting a total pre-tax return on the fund (including unallocated surplus) in 2014 of 9.5 per cent compared to an assumed rate of return of 5.0 per cent (2013: 8.0 per cent total return compared to assumed rate of 6.0 per cent). In addition, the amount includes the effect of a partial hedge of future shareholder transfers expected to emerge from the UK's with-profits sub-fund taken out during 2013. This hedge reduces the risks arising from equity market declines. (v) Other operations Short-term fluctuations in investment returns of other operations were negative £(93) million (2013: negative £(4) million) representing unrealised value movements on investments and foreign exchange items. 6 Effect of changes in economic assumptions The effects of changes in economic assumptions for in-force business included in profit for the year, arise as follows: (i) Group Summary 2014 £m 2013 £m Asia operationsnote (ii) (269) 255 US operationsnote (iii) (77) 242 UK insurance operationsnote (iv) (23) 132 Total (369) 629 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. (ii) Asia operations The effect of changes in economic assumptions for Asia operations comprises: 2014 £m 2013 £m Hong Kong (121) 289 Malaysia 11 (62) Indonesia 25 (176) Singapore (42) 90 Taiwan (21) 92 Other (121) 22 Total Asia operations (269) 255 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. The negative effect of £(269) million in 2014 principally reflected the overall impact of the reduction in fund earned rates for participating business in Hong Kong, Singapore and Taiwan, driven by the decrease in long-term interest rates. A negative effect has been reported on non-participating business in Korea (adverse £(38) million) and Thailand (adverse £(34) million) for similar reasons. These amounts were partially offset by the positive effect of valuing future health and protection profits at lower discount rates in Indonesia and Malaysia. The positive impact in 2013 of £255 million reflected the overall impact of an increase in fund earned rates for participating business, principally arising in Hong Kong, Singapore and Taiwan, mainly due to the increase in long-term interest rates. There were partial offsets arising in Indonesia and Malaysia, valuing the negative impact of future health and protection profits at a higher discount rate. (iii) US operations The effect of changes in economic assumptions for US operations comprises: 2014 £m 2013 £m Effect of changes in 10-year treasury rates: Fixed annuity and other general account business note (a) 151 (244) Variable annuity businessnote (b) (228) 382 Decrease in additional allowance for credit risknote (c) - 104 Totalnote (d) (77) 242 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Notes: (a) For fixed annuity and other general account business, the credit of £151 million in 2014 principally arises from the effect on the future projected spread income of applying a lower discount rate on the opening value of the in-force book, arising from the 90 basis points reduction in the 10-year treasury rates (2013: charge of £(244) million reflecting the 130 basis points increase). (b) In 2014 there was a 90 basis points decline in 10-year treasury rates. For variable annuity business the charge of £(228) million principally reflects the net effect of the consequent decrease in the assumed future rate of return on the underlying separate account assets, resulting in lower projected fee income and an increase in projected benefit costs, partially offset by the decrease in the risk discount rate. The credit of £382 million in 2013 reflected an increase in the risk free rate of 130 basis points. (c) For 2013 the £104 million effect of the decrease in the additional allowance for credit risk within the risk discount rate reflected the reduction in credit spreads (50 basis points for spread business and 10 basis points for variable annuity business). (d) The overall credit in 2013 of £242 million included a charge of £(13) million for the effect of a change in required capital on the EEV basis from 235 per cent to 250 per cent of risk-based capital. (iv) UK insurance operations The effect of changes in economic assumptions for UK insurance operations comprises the following: 2014 £m 2013 £m Effect of changes in expected long-term rates of return, risk discount rates and other changes: Shareholder-backed annuity businessnote (a) 352 (56) With-profits and other businessnote (b) (375) 188 Total (23) 132 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Notes: (a) For shareholder-backed annuity business the overall positive effect reflects the effect on the present value of projected spread income arising from the reduction in expected long-term rates of return and risk discount rates, following the swap rate decline in 2014. (b) For with-profits and other business the total charge in 2014 of £(375) million (2013: credit of £188 million) includes the net effect of the reduction in fund earned rates and risk discount rates (as shown in note 17(iii)), arising from the 130 basis points decrease (2013: increase of 120 basis points) in the 15-year government bond rate and portfolio changes. 7 Sale of PruHealth and PruProtect business On 10 November 2014, the Prudential Assurance Company Limited announced an agreement to sell its 25 per cent equity stake in the PruHealth and PruProtect businesses to Discovery Group Europe Limited. The sale was completed on 14 November 2014. This transaction gave rise to a gain on disposal of £44 million. 8 Held for sale Japan Life business On 5 February 2015, the Group announced that it had completed the sale of its closed book life insurance business in Japan, PCA Life Insurance Company Limited to SBI Holdings, Inc. following regulatory approvals. The loss of Japan Life business in the 2013 results includes the reduction in EEV carrying value to reflect the completion of sale. 9 Domestication of the Hong Kong branch business On 1 January 2014, following consultation with policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. The 2014 EEV basis results includes opening adjustments arising from the transfer of capital that was previously held within the UK business in respect of the Hong Kong branch operations and additional capital requirements that arise from the newly established subsidiaries as follows: 2014 £m Adjustment to shareholders' equity at 1 January 2014 Free surplus Required capital Total net worth Value of in-force business Total long-term business operations Asia operations (104) 104 - (40) (40) UK insurance operations 69 (69) - 29 29 Opening adjustment (35) 35 - (11) (11) The net EEV basis effect of £(11) million represents the cost of holding higher required capital levels in the stand-alone Hong Kong shareholder-backed long-term insurance business. The post-tax costs incurred to enable the domestication in 2014 were £4 million (2013: £28 million). 10 Net core structural borrowings of shareholder-financed operations 31 Dec 2014 £m 31 Dec 2013 £m IFRS basis Mark to market value adjustment EEV basis at market value IFRS basis Mark to market value adjustment EEV basis at market value Holding company cash and short-term investments (1,480) - (1,480) (2,230) - (2,230) Core structural borrowings - central funds 3,869 579 4,448 4,211 392 4,603 Holding company net borrowings 2,389 579 2,968 1,981 392 2,373 Core structural borrowings - Prudential Capital 275 - 275 275 - 275 Core structural borrowings - Jackson 160 42 202 150 38 188 Net core structural borrowings of shareholder-financed operations 2,824 621 3,445 2,406 430 2,836 * Including central finance subsidiaries. 11 Analysis of movement in free surplus Free surplus is the excess of the regulatory basis net assets for EEV reporting purposes (net worth) over the capital required to support the covered business. Where appropriate, adjustments are made to the net worth so that backing assets are included at fair value rather than cost so as to comply with the EEV Principles. (i) Underlying free surplus generated The 2013 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2013 CER comparative results are translated at 2014 average exchange rates. 2014 £m 2013 £m % change AER CER * AER CER Asia operations Underlying free surplus generated from in-force life business 860 819 742 5% 16% Investment in new businessnotes (ii)(a), (ii)(g) (346) (310) (285) (12)% (21)% Long-term business 514 509 457 1% 12% Eastspring Investmentsnote (ii)(b) 78 64 59 22% 32% Total 592 573 516 3% 15% US operations Underlying free surplus generated from in-force life business 1,191 1,129 1,072 5% 11% Investment in new businessnote (ii)(a) (187) (298) (283) 37% 34% Long-term business 1,004 831 789 21% 27% Broker-dealer and asset managementnote (ii)(b) 6 39 37 (85)% (84)% Total 1,010 870 826 16% 22% UK insurance operations Underlying free surplus generated from in-force life business 645 680 680 (5)% (5)% Investment in new businessnote (ii)(a) (73) (29) (29) (152)% (152)% Long-term business 572 651 651 (12)% (12)% General insurance commissionnote (ii)(b) 19 22 22 (14)% (14)% Total 591 673 673 (12)% (12)% M&G (including Prudential Capital)note (ii)(b) 386 346 346 12% 12% Underlying free surplus generated 2,579 2,462 2,361 5% 9% Representing: Long-term business: Expected in-force cashflows (including expected return on net assets) 2,382 2,150 2,037 11% 17% Effects of changes in operating assumptions, operating experience variances and other operating items 314 478 457 (34)% (31)% Underlying free surplus generated from in-force life business 2,696 2,628 2,494 3% 8% Investment in new businessnotes (ii)(a), (ii)(g) (606) (637) (597) 5% (2)% Total long-term business 2,090 1,991 1,897 5% 10% Asset managementnote (ii)(b) 489 471 464 4% 5% Underlying free surplus generated 2,579 2,462 2,361 5% 9% (ii) Movement in Free surplus Long-term business and asset management operations 2014 £m 2013 £m Long-term business Asset management and UK general insurance commission Free surplus of long-term business, asset management and UK general insurance commission Free surplus of long-term business, asset management and UK general insurance commission note 13 note (b) Underlying movement: Investment in new businessnotes (a), (g) (606) - (606) (637) Business in force: Expected in-force cash flows (including expected return on net assets) 2,382 489 2,871 2,621 Effects of changes in operating assumptions, operating experience variances and other operating items 314 - 314 478 2,090 489 2,579 2,462 Increase in EEV assumed level of required capital - - - (58) Loss attaching to held for sale Japan Life businessnote 8 - - - (40) Gain on sale of PruHealth and PruProtect notes 7, 13 130 - 130 - Other non-operating itemsnote (c) (252) (14) (266) (722) 1,968 475 2,443 1,642 Net cash flows to parent companynote (d) (1,170) (312) (1,482) (1,341) Bancassurance agreement and purchase of Thanachart Life - - - 365 Exchange movements, timing differences and other itemsnote (e) 210 (80) 130 (352) Net movement in free surplus 1,008 83 1,091 314 Balance at beginning of year: As previously reported 3,220 783 4,003 3,689 Effect of domestication of Hong Kong branch on 1 January 2014note 9 (35) - (35) - Balance at 1 January 3,185 783 3,968 3,689 Balance at 31 December 2014 / 31 December 2013note (g) 4,193 866 5,059 4,003 Representing: Asia operations 1,347 213 1,560 1,379 US operations 1,416 141 1,557 1,074 UK operations 1,430 512 1,942 1,550 4,193 866 5,059 4,003 Balance at beginning of year: Asia operations 1,185 194 1,379 1,181 US operations 956 118 1,074 1,319 UK operations 1,079 471 1,550 1,189 3,220 783 4,003 3,689 Notes: (a) Free surplus invested in new business represents amounts set aside for required capital and acquisition costs. (b) For the purposes of this analysis, free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post-tax earnings and shareholders' equity. (c) Non-operating items are principally short-term fluctuations in investment returns and the effect of changes in economic assumptions for long-term business operations. (d) Net cash flows to parent company for long-term business operations reflect the flows as included in the holding company cash flow at transaction rates. (e) Exchange movements, timing differences and other items represent: 2014 £m Long-term business Asset management and UK general insurance commission Total Exchange movementsnote 13 134 11 145 Mark to market value movements on Jackson assets backing surplus and required capitalnote 12 77 - 77 Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes (17) (1) (18) Othernote (f) 16 (90) (74) 210 (80) 130 (f) Other primarily reflects the effect of intra-group loans, contingent loan funding as shown in note 13(i), timing differences and other non-cash items. (g) Investment in new business includes the annual amortisation charge of amounts incurred to secure exclusive distribution rights through our bancassurance partners at a rate that reflects the pattern in which the future economic benefits are expected to be consumed by reference to new business levels. Included within the overall free surplus balance of our Asian life entities is £304 million representing unamortised amounts incurred to secure exclusive distribution rights through bancassurance partners. These amounts exclude £883 million of Asia distribution rights intangibles that are financed by loan arrangements from central companies, the costs of which are allocated to the Asia life segment as the amortisation cost is incurred. 12 Reconciliation of movement in shareholders' equity 2014 £m Long-term business operations Other operations Group Total Asia operations US operations UK insurance operations Total long-term business operations note (i) note (i) Post-tax operating profit (based on longer- term investment returns) Long-term business: New businessnote 3 1,162 694 270 2,126 - 2,126 Business in forcenote 4 739 834 476 2,049 - 2,049 1,901 1,528 746 4,175 - 4,175 Asset management - - - - 470 470 Other results (1) - (20) (21) (528) (549) Post-tax operating profit based on longer- term investment returns 1,900 1,528 726 4,154 (58) 4,096 Total post-tax non-operating profit 170 (245) 600 525 (278) 247 Profit for the year 2,070 1,283 1,326 4,679 (336) 4,343 Other items taken directly to equity Exchange movements on foreign operations and net investment hedges 375 483 - 858 (121) 737 Intra-group dividends (including statutory transfers)note (ii) (410) (413) (200) (1,023) 1,023 - Investment in operationsnote (iii) 3 - - 3 (3) - External dividends - - - - (895) (895) Other movements note (iv) 9 (17) (64) (72) 126 54 Mark to market value movements on Jackson assets backing surplus and required capital - 77 - 77 - 77 Net increase in shareholders' equity 2,047 1,413 1,062 4,522 (206) 4,316 Shareholders' equity at beginning of year: As previously reported 10,305 6,966 7,342 24,613 243 24,856 Effect of domestication of Hong Kong branch on 1 January 2014note 9 (40) - 29 (11) - (11) Shareholders' equity at 31 December 2014note (i) 12,312 8,379 8,433 29,124 37 29,161 Representing: Statutory IFRS basis shareholders' equity: Net assets 3,315 4,067 3,785 11,167 (819) 10,348 Goodwill - - - - 1,463 1,463 Total IFRS basis shareholders' equity 3,315 4,067 3,785 11,167 644 11,811 Additional retained profit (loss) on an EEV basisnote (v) 8,997 4,312 4,648 17,957 (607) 17,350 EEV basis shareholders' equity 12,312 8,379 8,433 29,124 37 29,161 Balance at 31 December 2013 Representing: Statutory IFRS basis shareholders' equity: Net assets 2,564 3,446 2,976 8,986 (797) 8,189 Goodwill - - - - 1,461 1,461 Total IFRS basis shareholders' equity 2,564 3,446 2,976 8,986 664 9,650 Additional retained profit (loss) on an EEV basisnote (v) 7,741 3,520 4,366 15,627 (421) 15,206 EEV basis shareholders' equity 10,305 6,966 7,342 24,613 243 24,856 Notes: (i) For the purposes of the table above, goodwill of £233 million (2013: £231 million) related to Asia long-term operations is included in Other operations. (ii) Intra-group dividends (including statutory transfers) represent dividends that have been declared in the year and amounts accrued in respect of statutory transfers. The amounts included in note 11 for these items are as per the holding company cashflow at transaction rates. The difference primarily relates to intra-group loans, timing differences arising on statutory transfers, and other non-cash items. (iii) Investment in operations reflects increases in share capital. (iv) Included in other movements there was a charge of £(11) million (2013: £(53) million) for the shareholders' share of actuarial and other gains and losses on the defined benefit schemes. (v) The additional retained loss on an EEV basis for Other operations primarily represents the mark to market value adjustment for holding company net borrowings of a charge of £(579) million (2013: £(392) million), as shown in note 10. 13 Reconciliation of movement in net worth and value of in-force for long-term business 2014 £m Total Value of long-term Free Required Total net in-force business Surplus capital worth business operations note 11 note (iii) Group Shareholders' equity at beginning of year: As previously reported 3,220 3,954 7,174 17,439 24,613 Effect of domestication of Hong Kong branch on 1 January 2014note 9 (35) 35 - (11) (11) 3,185 3,989 7,174 17,428 24,602 New business contributionnotes (ii) and 3 (606) 453 (153) 2,279 2,126 Existing business - transfer to net worth 2,276 (316) 1,960 (1,960) - Expected return on existing businessnote 4 106 81 187 1,253 1,440 Changes in operating assumptions and experience variances note 4 335 36 371 238 609 Development expenses, solvency II and restructuring costs (21) - (21) - (21) Post-tax operating profit based on longer-term investment returns 2,090 254 2,344 1,810 4,154 Gain on sale of PruHealth and PruProtectnote 7 130 (32) 98 (54) 44 Other non-operating items (252) 220 (32) 513 481 Post-tax profit from long-term business 1,968 442 2,410 2,269 4,679 Exchange movements on foreign operations and net investment hedges 134 125 259 599 858 Intra-group dividends (including statutory transfers) and investment in operationsnote (i) (1,099) - (1,099) 79 (1,020) Other movements 5 - 5 - 5 Shareholders' equity at 31 December 2014 4,193 4,556 8,749 20,375 29,124 Representing: Asia operations Shareholders' equity at beginning of year: As previously reported 1,185 977 2,162 8,143 10,305 Effect of domestication of Hong Kong branch on 1 January 2014note 9 (104) 104 - (40) (40) 1,081 1,081 2,162 8,103 10,265 New business contributionnotes (ii) and 3 (346) 130 (216) 1,378 1,162 Existing business - transfer to net worth 828 (23) 805 (805) - Expected return on existing businessnote 4 62 - 62 586 648 Changes in operating assumptions and experience variancesnote 4 (29) 44 15 76 91 Development expenses (1) - (1) - (1) Post-tax operating profit based on longer-term investment returns 514 151 665 1,235 1,900 Other non-operating items 118 70 188 (18) 170 Post-tax profit from long-term business 632 221 853 1,217 2,070 Exchange movements on foreign operations and net investment hedges 56 25 81 294 375 Intra-group dividends and investment in operations (407) - (407) - (407) Other movements (15) - (15) 24 9 Shareholders' equity at 31 December 2014 1,347 1,327 2,674 9,638 12,312 US operations Shareholders' equity at 1 January 2014 956 1,607 2,563 4,403 6,966 New business contributionnotes (ii) and 3 (187) 216 29 665 694 Existing business - transfer to net worth 883 (210) 673 (673) - Expected return on existing businessnote 4 30 48 78 304 382 Changes in operating assumptions and experience variancesnote 4 278 4 282 170 452 Post-tax operating profit based on longer-term investment returns 1,004 58 1,062 466 1,528 Other non-operating items (269) (55) (324) 79 (245) Post-tax profit from long-term business 735 3 738 545 1,283 Exchange movements on foreign operations and net investment hedges 78 100 178 305 483 Intra-group dividends (413) - (413) - (413) Other movements 60 - 60 - 60 Shareholders' equity at 31 December 2014 1,416 1,710 3,126 5,253 8,379 UK insurance operations Shareholders' equity at beginning of year: As previously reported 1,079 1,370 2,449 4,893 7,342 Effect of domestication of Hong Kong branch on 1 January 2014note 9 69 (69) - 29 29 1,148 1,301 2,449 4,922 7,371 New business contributionnotes (ii) and 3 (73) 107 34 236 270 Existing business - transfer to net worth 565 (83) 482 (482) - Expected return on existing businessnote 4 14 33 47 363 410 Changes in operating assumptions and experience variancesnote 4 86 (12) 74 (8) 66 Solvency II and restructuring costs (20) - (20) - (20) Post-tax operating profit based on longer-term investment returns 572 45 617 109 726 Gain on sale of PruHealth and PruProtectnote 7 130 (32) 98 (54) 44 Other non-operating items (101) 205 104 452 556 Post-tax profit from long-term business 601 218 819 507 1,326 Intra-group dividends (including statutory transfers)note (i) (279) - (279) 79 (200) Other movements (40) - (40) (24) (64) Shareholders' equity at 31 December 2014 1,430 1,519 2,949 5,484 8,433 Notes: (i) The amounts shown in respect of free surplus and the value of in-force business for UK insurance operations for intra-group dividends (including statutory transfers) include the repayment of contingent loan funding. Contingent loan funding represents amounts whose repayment to the lender is contingent upon future surpluses emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall. (ii) New business contribution per £1 million of free surplus invested: 2014 £m 2013 £m Asia operations US operations UK insurance operations Total long-term business operations Asia operations US operations UK insurance operations Total long-term business operations Post-tax new business contributionnote 3 1,162 694 270 2,126 1,139 706 237 2,082 Free surplus invested in new business (346) (187) (73) (606) (310) (298) (29) (637) Post-tax new business contribution £1 million of free surplus invested 3.4 3.7 3.7 3.5 3.7 2.4 8.2 3.3 (iii) The value of in-force business comprises the value of future margins from current in-force business less the cost of holding required capital as shown below: 31 Dec 2014 £m 31 Dec 2013 £m Asia operations US operations UK insurance operations Total long-term business operations Asia operations US operations UK insurance operations Total long-term business operations Value of in-force business before deduction of cost of capital and time value of guarantees 10,168 5,914 5,756 21,838 8,540 4,769 5,135 18,444 Cost of capital (417) (199) (272) (888) (347) (220) (242) (809) Cost of time value of guaranteesnote (iv) (113) (462) - (575) (50) (146) - (196) Net value of in-force business 9,638 5,253 5,484 20,375 8,143 4,403 4,893 17,439 (iv) The increase in the cost of time value of guarantees for US operations from £(146) million at 2013 to £(462) million at 2014 primarily relates to variable annuity business. It mainly arises from the decrease in the expected long-term separate account rate of return following the 90 basis points decline in the US 10-year treasury bond rate and the impact from new business written in the year, partly offset by the level of equity performance. 14 Expected transfer of value of in-force business to free surplus The discounted value of in-force business and required capital can be reconciled to the 2014 and 2013 totals in the tables below for the emergence of free surplus as follows: 2014 £m 2013 £m Required capitalnote 13 4,556 3,954 Value of in-force (VIF)note 13 20,375 17,439 Add back: deduction for cost of time value of guaranteesnote 13 575 196 Expected cashflow from sale of Japan Life business (23) (25) Other itemsnote (1,382) (1,157) Total 24,101 20,407 Note: 'Other items' represent amounts incorporated into VIF where there is no definitive timeframe for when the payments will be made or receipts received. In particular, other items includes the deduction of the value of the shareholders' interest in the estate, the value of which is derived by increasing final bonus rates so as to exhaust the estate over the lifetime of the in-force with-profits business. This is an assumption to give an appropriate valuation. To be conservative this item is excluded from the expected free surplus generation profile below. Cash flows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash flows use the same methodology underpinning the Group's embedded value reporting and so are subject to the same assumptions and sensitivities. The table below shows how the VIF generated by the in-force business and the associated required capital is modelled as emerging into free surplus over future years. 2014 £m Expected period of conversion of future post tax distributable earnings and required capital flows to free surplus 2014 Total as shown above 1-5 years 6 -10 years 11-15 years 16 -20 years 21-40 years 40+ years Asia operations 10,859 3,660 2,289 1,553 1,026 1,874 457 US operations 7,471 3,867 2,298 873 334 99 - UK insurance operations 5,771 2,111 1,464 973 606 604 13 Total 24,101 9,638 6,051 3,399 1,966 2,577 470 100% 40% 25% 14% 8% 11% 2% 2013 £m Expected period of conversion of future post tax distributable earnings and required capital flows to free surplus 2013Total as shown above 1-5 years 6 -10 years 11-15 years 16 -20 years 21-40 years 40+ years Asia operations 9,021 3,168 1,883 1,275 855 1,465 375 US operations 6,234 3,326 1,845 653 271 139 - UK insurance operations 5,152 1,915 1,326 870 536 487 18 Total 20,407 8,409 5,054 2,798 1,662 2,091 393 100% 41% 25% 14% 8% 10% 2% Following its reclassification as held for sale, the Asia cashflows exclude any cashflows in respect of Japan. 15 Sensitivity of results to alternative assumptions (a) Sensitivity analysis - economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2014 (31 December 2013) and the post-tax new business contribution after the effect of required capital for 2014 and 2013 to: • 1 per cent increase in the discount rates; • 1 per cent increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates); • 1 per cent rise in equity and property yields; • 10 per cent fall in market value of equity and property assets (embedded value only); • The statutory minimum capital level (by contrast to EEV basis required capital), (for embedded value only); • 5 basis point increase in UK long-term expected defaults; and • 10 basis point increase in the liquidity premium for UK annuities. In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. New business contribution 2014 £m 2013 £m Asia operations US operations UK insurance operations Total long-term business operations Asia operations US operations UK insurance operations Total long-term business operations Post-tax new business contributionnote 3 1,162 694 270 2,126 1,139 706 237 2,082 Discount rates - 1% increase (176) (27) (38) (241) (148) (34) (29) (211) Interest rates - 1% increase 13 61 (15) 59 23 47 (1) 69 Interest rates - 1% decrease (52) (101) 19 (134) (55) (69) - (124) Equity/property yields - 1% rise 46 73 12 131 45 63 10 118 Long-term expected defaults - 5 bps increase - - (10) (10) - - (6) (6) Liquidity premium - 10 bps increase - - 20 20 - - 12 12 * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Embedded value of long-term business operations 2014 £m 2013 £m Total Total UK long-term UK long-term Asia US insurance business Asia US insurance business operations operations operations operations operations operations operations operations Shareholders' equitynote 12 12,312 8,379 8,433 29,124 10,305 6,966 7,342 24,613 Discount rates - 1% increase (1,214) (268) (602) (2,084) (992) (266) (529) (1,787) Interest rates - 1% increase (462) (232) (362) (1,056) (297) (65) (380) (742) Interest rates - 1% decrease 211 16 452 679 200 (12) 443 631 Equity/property yields - 1% rise 435 365 282 1,082 370 250 210 830 Equity/property market values - 10% fall (221) (129) (380) (730) (183) (90) (238) (511) Statutory minimum capital 129 139 4 272 109 153 4 266 Long-term expected defaults - 5 bps increase - - (139) (139) - - (114) (114) Liquidity premium - 10 bps increase - - 278 278 - - 228 228 The sensitivities shown above are for the impact of instantaneous changes on the embedded value of long-term business operations and include the combined effect on the value of in-force business and net assets at the balance sheet dates indicated. If the change in assumption shown in the sensitivities were to occur, then the effect shown above would be recorded within two components of the profit analysis for the following year. These are for the effect of economic assumption changes and short-term fluctuations in investment returns. In addition to the sensitivity effects shown above, the other components of the profit for the following year would be calculated by reference to the altered assumptions, for example new business contribution and unwind of discount, together with the effect of other changes such as altered corporate bond spreads. In addition for Jackson, the fair value movements on assets backing surplus and required capital which are taken directly to shareholders' equity would also be affected by changes in interest rates. (b) Sensitivity analysis - non-economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2014 (31 December 2013) and the post-tax new business contribution after the effect of required capital for 2014 and 2013 to: • 10 per cent proportionate decrease in maintenance expenses (a 10 per cent sensitivity on a base assumption of £10 per annum would represent an expense assumption of £9 per annum); • 10 per cent proportionate decrease in lapse rates (a 10 per cent sensitivity on a base assumption of 5 per cent would represent a lapse rate of 4.5 per cent per annum); and • 5 per cent proportionate decrease in base mortality and morbidity rates (i.e. increased longevity). New business contribution 2014 £m 2013 £m Asia operations US operations UK insurance operations Total long-term business operations Asia operations US operations UK insurance operations Total long-term business operations Post-tax new business contributionnote 3 1,162 694 270 2,126 1,139 706 237 2,082 Maintenance expenses - 10% decrease 23 8 3 34 23 8 3 34 Lapse rates - 10% decrease 88 27 6 121 85 27 6 118 Mortality and morbidity - 5% decrease 52 2 (20) 34 58 4 (6) 56 Change representing effect on: Life business 52 2 1 55 58 4 2 64 UK annuities - - (21) (21) - - (9) (9) * The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, the 2013 results are shown on a comparable basis - see note 1. Embedded value of long-term business operations 2014 £m 2013 £m Asia operations US operations UK insurance operations Total long-term business operations Asia operations US operations UK insurance operations Total long-term business operations Shareholders' equitynote 12 12,312 8,379 8,433 29,124 10,305 6,966 7,342 24,613 Maintenance expenses - 10% decrease 136 71 56 263 126 59 58 243 Lapse rates - 10% decrease 422 354 67 843 352 294 79 725 Mortality and morbidity - 5% decrease 433 163 (347) 249 377 154 (254) 277 Change representing effect on: Life business 433 163 9 605 377 154 20 551 UK annuities - - (356) (356) - - (274) (274) 16 Methodology and accounting presentation (a) Methodology Overview The embedded value is the present value of the shareholders' interest in the earnings distributable from assets allocated to covered business after sufficient allowance has been made for the aggregate risks in that business. The shareholders' interest in the Group's long-term business comprises: • the present value of future shareholder cash flows from in-force covered business (value of in-force business), less deductions for: - the cost of locked-in required capital; and - the time value of cost of options and guarantees; • locked-in required capital; and • the shareholders' net worth in excess of required capital (free surplus). The value of future new business is excluded from the embedded value. Notwithstanding the basis of presentation of results (as explained in note 16(b)(iii)) no smoothing of market or account balance values, unrealised gains or investment return is applied in determining the embedded value or profit. Separately, the analysis of profit is delineated between operating profit based on longer-term investment returns and other constituent items (as explained in note 16(b)(i)). (i) Covered business The EEV results for the Group are prepared for 'covered business', as defined by the EEV Principles. Covered business represents the Group's long-term insurance business for which the value of new and in-force contracts is attributable to shareholders. The post-tax EEV basis results for the Group's covered business are then combined with the post-tax IFRS basis results of the Group's other operations. Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management, as described in note 16(a)(vii). The definition of long-term business operations is consistent with previous practice and comprises those contracts falling under the definition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment contracts (GICs) but do not fall within the technical definition. Covered business comprises the Group's long-term business operations, with two exceptions: • the closed Scottish Amicable Insurance Fund (SAIF) which is excluded from covered business. SAIF is a ring-fenced sub-fund of the Prudential Assurance Company (PAC) long-term fund, established by a Court approved Scheme of Arrangement in October 1997. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund. • the presentational treatment of the Group's principal defined benefit pension scheme, the Prudential Staff Pension Scheme (PSPS). The partial recognition of the surplus for PSPS is recognised in 'Other' operations. A small amount of UK group pensions business is also not modelled for EEV reporting purposes. (ii)  Valuation of in-force and new business The embedded value results are prepared incorporating best estimate assumptions about all relevant factors including levels of future investment returns, expenses, persistency and mortality (as described in note 17). These assumptions are used to project future cash flows. The present value of the future cash flows is then calculated using a discount rate which reflects both the time value of money and the non-diversifiable risks associated with the cash flows that are not otherwise allowed for. New business In determining the EEV basis value of new business, premiums are included in projected cash flows on the same basis of distinguishing annual and single premium business as set out for statutory basis reporting. New business premiums reflect those premiums attaching to covered business, including premiums for contracts classified as investment products for IFRS basis reporting. New business premiums for regular premium products are shown on an annualised basis. Internal vesting business is classified as new business where the contracts include an open market option. The post-tax contribution from new business represents profits determined by applying operating assumptions as at the end of the year. For UK immediate annuity business and single premium Universal Life products in Asia, primarily in Singapore, the new business contribution is determined by applying economic assumptions reflecting point-of-sale market conditions. This is consistent with how the business is priced as crediting rates are linked to yields on specific assets and the yield is locked-in when the assets are purchased at the point-of-sale of the policy. For other business within the Group, end of year economic assumptions are used. New business profitability is a key metric for the Group's management of the development of the business. In addition, post-tax new business margins are shown by reference to annual premium equivalents (APE) and the present value of new business premiums (PVNBP). These margins are calculated as the percentage of the value of new business profit to APE and PVNBP. APE is calculated as the aggregate of regular new business amounts and one-tenth of single new business amounts. PVNBP is calculated as equalling single premiums plus the present value of expected premiums of new regular premium business, allowing for lapses and other assumptions made in determining the EEV new business contribution. Valuation movements on investments With the exception of debt securities held by Jackson, investment gains and losses during the year (to the extent that changes in capital values do not directly match changes in liabilities) are included directly in the profit for the year and shareholders' equity as they arise. The results for any covered business conceptually reflect the aggregate of the IFRS results and the movements on the additional shareholders' interest recognised on the EEV basis. Thus the start point for the calculation of the EEV results for Jackson, as for other businesses, reflects the market value movements recognised on the IFRS basis. However, in determining the movements on the additional shareholders' interest, the basis for calculating the Jackson EEV result acknowledges that, for debt securities backing liabilities, the aggregate EEV results reflect the fact that the value of in-force business instead incorporates the discounted value of future spread earnings. This value is not affected generally by short-term market movements on securities that broadly speaking, are held for the longer-term. Fixed income securities backing the free surplus and required capital for Jackson are accounted for at fair value. However, consistent with the treatment applied under IFRS for Jackson securities classified as available-for-sale, movements in unrealised appreciation on these securities are accounted for in equity rather than in the income statement, as shown in the movement in shareholders' equity. (iii)  Cost of capital A charge is deducted from the embedded value for the cost of capital supporting the Group's long-term business. This capital is referred to as required capital. The cost is the difference between the nominal value of the capital and the discounted value of the projected releases of this capital allowing for investment earnings (post-tax) on the capital. The annual result is affected by the movement in this cost from year-to-year which comprises a charge against new business profit and generally a release in respect of the reduction in capital requirements for business in force as this runs off. Where required capital is held within a with-profits long-term fund, the value placed on surplus assets in the fund is already discounted to reflect its release over time and no further adjustment is necessary in respect of required capital. (iv)  Financial options and guarantees Nature of financial options and guarantees in Prudential's long-term business Asia operations Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK business broadly apply to similar types of participating contracts principally written in the Hong Kong, Singapore and Malaysia. Participating products have both guaranteed and non-guaranteed elements. There are also various non-participating long-term products with guarantees. The principal guarantees are those for whole of life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with market conditions. US operations (Jackson) The principal financial options and guarantees in Jackson are associated with the fixed annuity and variable annuity (VA) lines of business. Fixed annuities provide that, at Jackson's discretion, it may reset the interest rate credited to policyholders' accounts, subject to a guaranteed minimum. The guaranteed minimum return varies from 1.0 per cent to 5.5 per cent for 2014 and 2013, depending on the particular product, jurisdiction where issued, and date of issue. For 2014, 86 per cent (2013: 86 per cent) of the account values on fixed annuities are for policies with guarantees of 3 per cent or less. The average guarantee rate is 2.7 per cent (2013: 2.8 per cent). Fixed annuities also present a risk that policyholders will exercise their option to surrender their contracts in periods of rapidly rising interest rates, possibly requiring Jackson to liquidate assets at an inopportune time. Jackson issues VA contracts where it contractually guarantees to the contract holder either: a) return of no less than total deposits made to the contract adjusted for any partial withdrawals; b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return; or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable at specified dates during the accumulation period (Guaranteed Minimum Withdrawal Benefit (GMWB)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)) or as income benefits (Guaranteed Minimum Income Benefits (GMIB)). These guarantees generally protect the policyholder's value in the event of poor equity market performance. Jackson hedges the GMDB and GMWB guarantees through the use of equity options and futures contracts, and fully reinsures the GMIB guarantees. Jackson also issues fixed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing a guaranteed minimum return. The guaranteed minimum returns are of a similar nature to those described above for fixed annuities. UK insurance operations For covered business the only significant financial options and guarantees in the UK insurance operations arise in the with-profits fund. With-profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses - annual and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration. The with-profits fund also held a provision on the Pillar I Peak 2 basis of £50 million at 31 December 2014 (31 December 2013: £36 million) to honour guarantees on a small number of guaranteed annuity option products. The Group's main exposure to guaranteed annuity options in the UK is through the non-covered business of SAIF. A provision on the Pillar I Peak 2 basis of £549 million was held in SAIF at 31 December 2014 (31 December 2013: £328 million) to honour the guarantees. As described in note 16(a)(i) above, the assets and liabilities are wholly attributable to the policyholders of the fund. Therefore the movement in the provision has no direct impact on shareholders. Time value The value of financial options and guarantees comprises two parts. One is given by a deterministic valuation on best estimate assumptions (the intrinsic value). The other part arises from the variability of economic outcomes in the future (the time value). Where appropriate, a full stochastic valuation has been undertaken to determine the time value of the financial options and guarantees. The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations. Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes but with an allowance for correlation between the various asset classes. Details of the key characteristics of each model are given in notes 17(iv),(v) and (vi). In deriving the time value of financial options and guarantees, management actions in response to emerging investment and fund solvency conditions have been modelled. Management actions encompass, but are not confined to investment allocation decisions, levels of reversionary and terminal bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance with assumed management actions applying in the emerging investment and fund solvency conditions. In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options actually available to management. For the PAC with-profits fund, the actions assumed are consistent with those set out in the Principles and Practices of Financial Management which explains how regular and final bonus rates within the discretionary framework are determined, subject to the general legislative requirements applicable. (v) Level of required capital In adopting the EEV Principles, Prudential has based required capital on its internal targets subject to it being at least the local statutory minimum requirements. For with-profits business written in a segregated life fund, as is the case in Asia and the UK, the capital available in the fund is sufficient to meet the required capital requirements. For shareholder-backed business the following capital requirements apply: • Asia operations: the level of required capital has been set to an amount at least equal to the higher of local statutory requirements and the internal target; • US operations: the level of required capital has been set at 250 per cent of the risk-based capital required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL); and • UK insurance operations: the capital requirements are set to an amount at least equal to the higher of Pillar I and Pillar II requirements for shareholder-backed business of UK insurance operations as a whole. (vi) With-profits business and the treatment of the estate The proportion of surplus allocated to shareholders from the PAC with-profits fund has been based on the present level of 10 per cent. The value attributed to the shareholders' interest in the estate is derived by increasing final bonus rates (and related shareholder transfers) so as to exhaust the estate over the lifetime of the in-force with-profits business. In any scenarios where the total assets of the life fund are insufficient to meet policyholder claims in full, the excess cost is fully attributed to shareholders. Similar principles apply, where appropriate, for other with-profits funds of the Group's Asia operations. (vii) Internal asset management The new business and in-force results from long-term business include the projected value of profits or losses from asset management and service companies that support the Group's covered insurance businesses. The results of the Group's asset management operations include the current year profits from the management of both internal and external funds. EEV basis shareholders' other income and expenditure is adjusted to deduct the unwind of the expected internal asset management profit margin for the year. The deduction is on a basis consistent with that used for projecting the results for covered insurance business. Group operating profit accordingly includes the variance between actual and expected profit in respect of management of the covered business assets. (viii) Allowance for risk and risk discount rates Overview Under the EEV Principles, discount rates used to determine the present value of future cash flows are set by reference to risk-free rates plus a risk margin. The risk margin should reflect any non-diversifiable risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. Prudential has selected a granular approach to better reflect differences in market risk inherent in each product group. The risk discount rate so derived does not reflect an overall Group market beta but instead reflects the expected volatility associated with the cash flows for each product category in the embedded value model. Since financial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding the effect of these product features. The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate, and allowance for non-diversifiable non-market risk. No allowance is required for non-market risks where these are assumed to be fully diversifiable. Market risk allowance The allowance for market risk represents the beta multiplied by an equity risk premium. Except for UK shareholder-backed annuity business (as explained below) such an approach has been used for all of the Group's businesses. The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each product group and hence the volatility of product cash flows. These are determined by considering how the profits from each product are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return it is possible to derive a product specific beta. Product level betas reflect the most recent product mix to produce appropriate betas and risk discount rates for each major product grouping. Additional credit risk allowance The Group's methodology is to allow appropriately for credit risk. The allowance for total credit risk is to cover: • expected long-term defaults; • credit risk premium (to reflect the volatility in downgrade and default levels); and • short-term downgrades and defaults. These allowances are initially reflected in determining best estimate returns and through the market risk allowance described above. However, for those businesses which are largely backed by holdings of debt securities these allowances in the projected returns and market risk allowances may not be sufficient and an additional allowance may be appropriate. The practical application of the allowance for credit risk varies depending upon the type of business as described below. Asia operations For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are sufficient. Accordingly no additional allowance for credit risk is required. The projected rates of return for holdings of corporate bonds comprise the risk-free rate plus an assessment of long-term spread over the risk-free rate. US operations (Jackson) For Jackson business, the allowance for long-term defaults is reflected in the risk margin reserve (RMR) charge which is deducted in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate. The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults as shown in note 17(ii). In determining this allowance a number of factors have been considered. These factors, in particular, include: (a) How much of the credit spread on debt securities represents an increased credit risk not reflected in the RMR long-term default assumptions, and how much is liquidity premium (which is the premium required by investors to compensate for the risk of longer-term investments which cannot be easily converted into cash, and converted at the fair market value). In assessing this effect, consideration has been given to a number of approaches to estimating the liquidity premium by considering recent statistical data; and (b) Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible in adverse economic scenarios to pass on a component of credit losses to policyholders (subject to guarantee features) through lower investment return rates credited to policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate. The level of the additional allowance is assessed at each reporting period to take account of prevailing credit conditions and as the business in force alters over time. The additional allowance for variable annuity business has been set at one-fifth of the non-variable annuity business to reflect the proportion of the allocated holdings of general account debt securities. The level of allowance differs from that for UK annuity business for investment portfolio differences and to take account of the management actions available in adverse economic scenarios to reduce crediting rates to policyholders, subject to guarantee features of the products. UK operations (1) Shareholder-backed annuity business For Prudential's UK shareholder-backed annuity business, Prudential has used a market consistent embedded value (MCEV) approach to derive an implied risk discount rate which is then applied to the projected best estimate cash flows. In the annuity MCEV calculations as the assets are generally held to maturity to match long duration liabilities, the future cash flows are discounted using the swap yield curve plus an allowance for liquidity premium based on Prudential's assessment of the expected return on the assets backing the annuity liabilities after allowing for: (a) expected long-term defaults derived as a percentage of historical default experience based on Moody's data for the period 1970 to 2009 and the definition of the credit rating assigned to each asset held is the second highest credit rating published by Moody's, Standard & Poor's and Fitch; (b) a credit risk premium, which is derived as the excess over the expected long-term defaults, of the 95th percentile of historical cumulative defaults based on Moody's data for the period 1970 to 2009, and subject to a minimum margin over expected long-term defaults of 50 per cent; (c) an allowance for a 1 notch downgrade of the asset portfolio subject to credit risk and; (d) an allowance for short-term downgrades and defaults. For the purposes of presentation in the EEV results, the results on this basis are reconfigured. Under this approach the projected earned rate of return on the debt securities held is determined after allowing for expected long-term defaults and, where necessary, an additional allowance for an element of short-term downgrades and defaults to bring the allowance in the earned rate up to best estimate levels. The allowances for credit risk premium, 1 notch downgrade and the remaining element of short-term downgrade and default allowances are incorporated into the risk margin included in the discount rate, as shown in note 17(iii)(b). (2) With-profits fund non-profit annuity business For UK non-profit annuity business including that attributable to the PAC with-profits fund, the basis for determining the aggregate allowance for credit risk is consistent with that applied for UK shareholder-backed annuity business (as described above). The allowance for credit risk for this business is taken into account in determining the projected cash flows to the with-profits fund, which are in turn discounted at the risk discount rate applicable to all of the projected cash flows of the fund. (3) With-profits fund holdings of debt securities The UK with-profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus. The assumed earned rate for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defined as the risk-free rate plus a long-term risk premium. Allowance for non-diversifiable non-market risks The majority of non-market and non-credit risks are considered to be diversifiable. Finance theory cannot be used to determine the appropriate component of beta for non-diversifiable non-market risks since there is no observable risk premium associated with it that is akin to the equity risk premium. Recognising this, a pragmatic approach has been applied. A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group's businesses. For the Group's US business and UK business other than shareholder-backed annuity, no additional allowance is necessary. For UK shareholder-backed annuity business a further allowance of 50 basis points is used to reflect the longevity risk which is of particular relevance. For the Group's Asia operations in China, India, Indonesia, the Philippines, Taiwan, Thailand and Vietnam, additional allowances are applied for emerging market risk ranging from 100 to 250 basis points. (ix) Foreign currency translation Foreign currency profits and losses have been translated at average exchange rates for the year. Foreign currency assets and liabilities have been translated at year end rates of exchange. The principal exchange rates are shown in note A1 of the IFRS statements. (x) Taxation In determining the post-tax profit for the year for covered business, the overall tax rate includes the impact of tax effects determined on a local regulatory basis. Tax payments and receipts included in the projected cash flows to determine the value of in-force business are calculated using rates that have been announced and substantively enacted by the end of the reporting period. (xi) Inter-company arrangements The EEV results for covered business incorporate annuities established in the PAC non-profit sub-fund from vesting pension polices in SAIF (which is not covered business). The EEV results also incorporate the effect of the reinsurance arrangement of non-profit immediate pension annuity liabilities of SAIF to PRIL. In addition, the free surplus and value of in-force business are calculated after taking account of the impact of contingent loan arrangements between Group companies (movements in the contingent loan liability are reflected via the projected cash flows in the value of in-force and the related funding is reflected in free surplus). (b) Accounting presentation (i) Analysis of post-tax profit To the extent applicable, the presentation of the EEV post-tax profit for the year is consistent in the classification between operating and non-operating results with the basis that the Group applies for the analysis of IFRS basis results. Operating results reflect underlying results including longer-term investment returns (which are determined as described in note 16(b)(ii) below) and incorporate the following: • new business contribution, as defined in note 16(a)(ii); • unwind of discount on the value of in-force business and other expected returns, as described in note 16(b)(iii) below; • the impact of routine changes of estimates relating to non-economic assumptions, as described in note 16(b)(iv) below; and • non-economic experience variances, as described in note 16(b)(v) below. Non-operating results comprise the following: • short-term fluctuations in investment returns; • the mark to market value movements on core borrowings; • the effect of changes in economic assumptions; • the gain on sale of PruHealth and PruProtect in 2014; • the costs associated with the domestication of the Hong Kong branch which became effective on 1 January 2014; and • the loss attaching to the held for sale Japan Life business. Total profit attributable to shareholders and basic earnings per share include these items, together with actual investment returns. The Company believes that operating profit, as adjusted for these items, better reflects underlying performance. (ii) Investment returns included in operating profit For the investment element of the assets covering the net worth of long-term insurance business, investment returns are recognised in operating results at the expected long-term rate of return. These expected returns are calculated by reference to the asset mix of the portfolio. For the purpose of calculating the longer-term investment return to be included in the operating result of the PAC with-profits fund of UK operations, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset values at the beginning of the reporting period are adjusted to remove the effects of short-term market movements as explained in note 16(b)(iii) below. For the purpose of determining the long-term returns for debt securities of US operations for fixed annuity and other general account business, a risk margin charge is included which reflects the expected long-term rate of default based on the credit quality of the portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold bonds and for equity-related investments, a long-term rate of return is assumed, which reflects the aggregation of end of period risk-free rates and equity risk premium. For US variable annuity separate account business, operating profit includes the unwind of discount on the opening value of in-force adjusted to reflect end of period projected rates of return with the excess or deficit of the actual return recognised within non-operating profit, together with the related hedging activity. For UK annuity business, rebalancing of the asset portfolio backing the liabilities to policyholders may, from time to time, take place to align it more closely with the internal benchmark of credit quality that management applies. Such rebalancing will result in a change in the projected yield on the asset portfolio and the allowance for default risk. The net effect of these changes is included in the result for the year. (iii) Unwind of discount and other expected returns The unwind of discount and other expected returns is determined by reference to: • the value of in-force business at the beginning of the period (adjusted for the effect of current period economic and operating assumption changes); and • required capital and surplus assets. In applying this general approach, the unwind of discount included in operating profit for the with-profits business of UK insurance operations is determined by reference to the opening value of in-force, as adjusted for the effects of short-term investment volatility due to market movements (i.e. smoothed). In the summary statement of financial position and for total profit reporting, asset values and investment returns are not smoothed. At 31 December 2014 the shareholders' interest in the smoothed surplus assets used for this purpose only, were £194 million lower (31 December 2013: £136 million lower) than the surplus assets carried in the statement of financial position. (iv) Effect of changes in operating assumptions Operating profit includes the effect of changes to operating assumptions on the value of in-force at the end of the period. For presentational purposes, the effect of change is delineated to show the effect on the opening value of in-force with the experience variance being determined by reference to the end of period assumptions. (v) Operating experience variances Operating profits include the effect of experience variances on non-economic assumptions, which are calculated with reference to the embedded value assumptions at the end of the reporting period, such as persistency, mortality and morbidity, expenses and other factors. (vi) Effect of changes in economic assumptions Movements in the value of in-force business at the beginning of the period caused by changes in economic assumptions, net of the related change in the time value of cost of options and guarantees, are recorded in non-operating results. 17 Assumptions Principal economic assumptions The EEV basis results for the Group's operations have been determined using economic assumptions where the long-term expected rates of return on investments and risk discount rates are set by reference to period end rates of return on government bonds. Expected returns on equity and property asset classes and corporate bonds are derived by adding a risk premium, based on the Group's long-term view, to the risk-free rate. The total profit that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same as that calculated under the IFRS basis. Since the embedded value basis reflects discounted future cash flows, under this methodology the profit emergence is advanced, thus more closely aligning the timing of the recognition of profits with the efforts and risks of current management actions, particularly with regard to business sold during the year. (i) Asia operationsnote (b) Risk discount rate % 10-year government bond yield % Expected long-term Inflation % New business In force 31 Dec 2014 31 Dec 2013 31 Dec 2014 31 Dec 2013 31 Dec 2014 31 Dec 2013 31 Dec 2014 31 Dec 2013 China 10.2 11.2 10.2 11.2 3.7 4.7 2.5 2.5 Hong Kongnotes (b), (c) 3.7 4.9 3.7 4.8 2.2 3.1 2.3 2.3 India 13.0 14.0 13.0 14.0 8.0 9.0 4.0 4.0 Indonesia 12.0 12.5 12.0 12.5 7.9 8.6 5.0 5.0 Korea 6.7 7.4 6.5 7.6 2.6 3.6 3.0 3.0 Malaysianote (c) 6.6 6.5 6.6 6.5 4.1 4.2 2.5 2.5 Philippines 10.8 10.5 10.8 10.5 4.0 3.8 4.0 4.0 Singaporenote (c) 4.3 4.6 5.0 5.3 2.3 2.6 2.0 2.0 Taiwan 4.2 4.3 4.1 4.1 1.6 1.7 1.0 1.0 Thailand 9.5 10.7 9.5 10.7 2.7 3.9 3.0 3.0 Vietnam 14.0 15.7 14.0 15.7 7.2 9.0 5.5 5.5 Total weighted risk discount ratenote (a) 6.9 8.1 6.6 7.2 Equity risk premiums in Asia (excluding those for the held for sale Japan Life business) range from 3.5 per cent to 8.7 per cent for 2014 and 2013. Notes: (a) The weighted risk discount rates for Asia operations shown above have been determined by weighting each country's risk discount rates by reference to the post-tax EEV basis new business result and the closing value of in-force business. The changes in the risk discount rates for individual Asia territories reflect the movements in government bond yields, together with the effects of movements in the allowance for market risk and changes in product mix. (b) For Hong Kong the assumptions shown are for US dollar denominated business. For other territories, the assumptions are for local currency denominated business. (c) The mean equity return assumptions for the most significant equity holdings of the Asia operations were: 31 Dec 2014 % 31 Dec 2013 % Hong Kong 6.2 7.1 Malaysia 10.1 10.1 Singapore 8.3 8.6 (ii) US operations 31 Dec 2014 % 31 Dec 2013 % Assumed new business spread margins: Fixed Annuity business: January to June issues 1.5 1.2 July to December issues 1.5 1.75 Fixed Index Annuity business: January to June issues 2.0 1.45 July to December issues 2.0 2.0 Institutional business 0.7 0.75 Allowance for long-term defaults included in projected spreadnote 16(a)(viii) 0.25 0.25 Risk discount rate: Variable annuity: Risk discount rate 6.9 7.6 Additional allowance for credit risk included in risk discount ratenote 16 (a)(viii) 0.2 0.2 Non-variable annuity: Risk discount rate 3.9 4.8 Additional allowance for credit risk included in risk discount ratenote 16 (a)(viii) 1.0 1.0 Weighted average total: New business 6.7 7.4 In force 6.2 6.9 US 10-year treasury bond rate at end of year 2.2 3.1 Pre-tax expected long-term nominal rate of return for US equities 6.2 7.1 Expected long-term rate of inflation 2.8 2.6 Equity risk premium 4.0 4.0 S&P equity return volatility note 17 (v) 18.0 19.0 * including the proportion of variable annuity business invested in the general account and fixed index annuity business, the assumed spread margin grades up linearly by 25 basis points to a long-term assumption over five years. ** including the proportion of variable annuity business invested in the general account. (iii) UK insurance operations 31 Dec 2014 % 31 Dec 2013 % Shareholder-backed annuity business:note (b) Risk discount rate: New business 6.5 6.8 In forcenote (a) 6.9 8.3 Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business: New business 4.1 4.2 In forcenote (a) 3.2 4.3 Other business: Risk discount rate: New business 5.3 6.1 In force 5.9 6.8 Pre-tax expected long-term nominal rates of investment return: UK equities 6.2 7.5 Overseas equities 6.2 to 9.0 7.1 to 9.2 Property 4.9 6.2 15-year gilt rate 2.2 3.5 Corporate bonds 3.8 5.1 Expected long-term rate of inflation 3.0 3.4 Equity risk premium 4.0 4.0 Notes: (a) For shareholder-backed annuity business, the movements in the pre-tax long-term nominal rates of return and the risk discount rates for in-force business mainly reflect the effect of changes in asset yields. (b) Credit spread treatment: For Prudential Retirement Income Limited, which has approximately 90 per cent of UK shareholder-backed annuity business, the credit assumptions used in the underlying MCEV calculation (see note 16(a)(viii)) and the residual liquidity premium element of the bond spread over swap rates are as follows: Individual annuity new business Total in-force business 31 Dec 2014 (bps) 31 Dec 2013 (bps) 31 Dec 2014 (bps) 31 Dec 2013 (bps) Bond spread over swap rates 108 117 143 133 Total credit risk allowance 29 37 58 62 Liquidity premium 79 80 85 71 * The new business liquidity premium is based on the weighted average of the point of sale liquidity premia. The overall allowance for credit risk is prudent by comparison with historic rates of default and would be sufficient to withstand a wide range of extreme credit events over the expected lifetime of the annuity business. Stochastic assumptions Details are given below of the key characteristics of the models used to determine the time value of the financial options and guarantees as referred to in note 16(a)(iv). (iv) Asia operations • The stochastic cost of guarantees is primarily of significance for the Hong Kong, Korea, Malaysia, Singapore and Taiwan operations. • The principal asset classes are government and corporate bonds. • The asset return models are similar to the models as described for UK insurance operations below. • The volatility of equity returns ranges from 18 per cent to 35 per cent in both years, and the volatility of government bond yields ranges from 0.9 per cent to 2.3 per cent in both years. (v) US operations (Jackson) • Interest rates and equity returns are projected using a log-normal generator reflecting historical market data. • Corporate bond returns are based on Treasury yields plus a spread that reflects current market conditions. • The volatility of equity returns ranges from 18 per cent to 27 per cent (2013: 19 per cent to 32 per cent) and the standard deviation of interest rates ranges from 2.2 per cent to 2.5 per cent for both years. (vi) UK insurance operations • Interest rates are projected using a stochastic interest rate model calibrated to the current market yields. • Equity returns are assumed to follow a log-normal distribution. • The corporate bond return is calculated based on a risk-free bond return plus a mean-reverting spread. • Property returns are also modelled on a risk-free bond return plus a risk premium with a stochastic process reflecting total property returns. • The standard deviation of equities and property ranges from 15 per cent to 20 per cent for both years. Operating assumptions Best estimate assumptions Best estimate assumptions are used for the cash flow projections, where best estimate is defined as the mean of the distribution of future possible outcomes. The assumptions are reviewed actively and changes are made when evidence exists that material changes in future experience are reasonably certain. Assumptions required in the calculation of the value of options and guarantees, for example relating to volatilities and correlations, or dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, reflect any dynamic relationships between the assumptions and the stochastic variables. Demographic assumptions Persistency, mortality and morbidity assumptions are based on an analysis of recent experience but also reflect expected future experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary in line with the emerging investment conditions according to management's expectations. Expense assumptions Expense levels, including those of service companies that support the Group's long-term business operations, are based on internal expense analysis investigations and are appropriately allocated to acquisition of new business and renewal of in-force business. Exceptional expenses are identified and reported separately. For mature business, it is Prudential's policy not to take credit for future cost reduction programmes until the savings have been delivered. For businesses which are currently sub-scale (China, Malaysia Takaful and Taiwan) and India (where the business model is being adapted as the industry continues to adjust to regulatory changes), expense overruns are reported where these are expected to be short-lived. For Asia operations, the expenses comprise costs borne directly and recharged costs from the Asia regional head office, that are attributable to covered business. The assumed future expenses for these operations also include projections of these future recharges. Development expenses are charged as incurred. Corporate expenditure, which is included in other income and expenditure, comprises: • Expenditure for Group head office, to the extent not allocated to the PAC with-profits funds, together with Solvency II implementation and restructuring costs, which are charged to the EEV basis results as incurred; and • Expenditure of the Asia regional head office that is not allocated to the covered business or asset management operations which is charged as incurred. These costs are primarily for corporate related activities and are included within corporate expenditure. Tax rates The assumed long term effective tax rates for operations reflect the incidence of taxable profits and losses in the projected cash flows as explained in note 16(a)(x). The local standard corporate tax rates applicable for the most significant operations for 2014 and 2013, are as follows: Standard corporate tax rates % Asia operations: Hong Kong 16.5 Indonesia 25.0 Malaysia 2015: 25.0; From 2016: 24.0 Singapore 17.0 US operations 35.0 UK operations 20.0 * 16.5 per cent on 5 per cent of premium income 18 New business premiums and contributions note (i) Single Regular Annual premium and contribution equivalents Present value of new business premiums (APE) (PVNBP) note 16(a)(ii) note 16(a)(ii) 2014 £m 2013 £m 2014 £m 2013 £m 2014 £m 2013 £m 2014 £m 2013 £m Group insurance operations Asia 2,272 2,136 2,010 1,911 2,237 2,125 12,331 11,375 US 15,555 15,712 - 2 1,556 1,573 15,555 15,723 UK 6,681 5,128 189 212 857 725 7,471 5,978 Group total 24,508 22,976 2,199 2,125 4,650 4,423 35,357 33,076 Asia insurance operations Cambodia - - 3 1 3 1 16 3 Hong Kong 419 326 603 455 645 487 3,861 2,795 Indonesia 280 303 357 445 385 477 1,619 1,943 Malaysia 117 114 189 197 201 208 1,284 1,352 Philippines 121 193 39 34 51 53 248 299 Singapore 677 571 289 304 357 361 2,683 2,588 Thailand 92 66 74 61 83 68 392 289 Vietnam 4 2 61 54 61 54 247 204 SE Asia operations inc. Hong Kong 1,710 1,575 1,615 1,551 1,786 1,709 10,350 9,473 Chinanote (ii) 239 114 81 71 105 83 550 409 Korea 212 311 92 82 113 113 609 641 Taiwan 83 102 116 107 124 117 462 491 Indianote (iii) 28 34 106 100 109 103 360 361 Total Asia insurance operations 2,272 2,136 2,010 1,911 2,237 2,125 12,331 11,375 US insurance operations Variable annuities 10,899 10,795 - - 1,090 1,079 10,899 10,795 Elite access (variable annuity) 3,108 2,585 - - 311 259 3,108 2,585 Fixed annuities 527 555 - - 53 55 527 555 Fixed index annuities 370 907 - - 37 91 370 907 Life - 1 - 2 - 2 - 12 Wholesale 651 869 - - 65 87 651 869 Total US insurance operations 15,555 15,712 - 2 1,556 1,573 15,555 15,723 UK and Europe insurance operations Direct and partnership annuities 162 284 - - 16 28 162 284 Intermediated annuities 139 488 - - 14 49 139 488 Internal vesting annuities 764 1,305 - - 76 131 764 1,305 Total individual annuities 1,065 2,077 - - 106 208 1,065 2,077 Corporate pensions 92 120 138 161 147 173 592 686 Onshore bonds 2,318 1,754 - - 232 176 2,321 1,756 Other products 1,496 901 51 51 201 140 1,783 1,183 Wholesale 1,710 276 - - 171 28 1,710 276 Total UK and Europe insurance operations 6,681 5,128 189 212 857 725 7,471 5,978 Group total 24,508 22,976 2,199 2,125 4,650 4,423 35,357 33,076 Notes: (i) The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement. (ii) New business in China is included at Prudential's 50 per cent interest in the China life operation. (iii) New business in India is included at Prudential's 26 per cent interest in the India life operation. Additional Unaudited Financial Information A New Business BASIS OF PREPARATION The format of the schedules is consistent with the distinction between insurance and investment products as applied for previous financial reporting periods. With the exception of some US institutional business, products categorised as 'insurance' refer to those classified as contracts of long-term insurance business for regulatory reporting purposes, i.e falling within one of the classes of insurance specified in part II of Schedule 1 to the Regulated Activities Order under PRA regulations. The details shown for insurance products include contributions for contracts that are classified under IFRS 4 'Insurance Contracts' as not containing significant insurance risk. These products are described as investment contracts or other financial instruments under IFRS. Contracts included in this category are primarily certain unit-linked and similar contracts written in UK Insurance Operations, and Guaranteed Investment Contracts and similar funding agreements written in US Operations. New business premiums for regular premium products are shown on an annualised basis. Internal vesting business is classified as new business where the contracts include an open market option. New business premiums reflect those premiums attaching to covered business, including premiums for contracts designed as investment products for IFRS reporting. Investment products referred to in the tables for funds under management are unit trusts, mutual funds and similar types of retail fund management arrangements. These are unrelated to insurance products that are classified as investment contracts under IFRS 4, as described in the preceding paragraph, although similar IFRS recognition and measurement principles apply to the acquisition costs and fees attaching to this type of business. New Business Profit (post-tax) has been determined using the European Embedded Value (EEV) methodology set out in our EEV preliminary report. In determining the EEV basis value of new business written in the period policies incept, premiums are included in projected cash flows on the same basis of distinguishing annual and single premium business as set out for statutory basis reporting. Annual premium equivalent (APE) sales are subject to rounding. Notes to Schedules A(i) to A(x) (1) Prudential plc reports its results using both actual exchange rates (AER) and constant exchange rates (CER) so as to eliminate the impact of exchange translation. Local currency: £ 2014 2013 2014 vs 2013 (depreciation) appreciation of local currency against GBP Hong Kong Average Rate 12.78 12.14 (5)% Closing Rate 12.09 12.84 6% Indonesia Average Rate 19,538.56 16,376.89 (16)% Closing Rate 19,311.31 20,156.57 4% Malaysia Average Rate 5.39 4.93 (9)% Closing Rate 5.45 5.43 0% Singapore Average Rate 2.09 1.96 (6)% Closing Rate 2.07 2.09 1% India Average Rate 100.53 91.75 (9)% Closing Rate 98.42 102.45 4% Vietnam Average Rate 34,924.62 32,904.71 (6)% Closing Rate 33,348.46 34,938.60 5% Thailand Average Rate 53.51 48.11 (10)% Closing Rate 51.30 54.42 6% US Average Rate 1.65 1.56 (5)% Closing Rate 1.56 1.66 6% Average rate is for the full year to 31 December (1a) Insurance new business for overseas operations are converted using the year-to-date average exchange rate applicable at the time (AER). The sterling results for individual quarters represent the difference between the year-to-date reported sterling results at successive quarters and will include foreign exchange movements from earlier periods. (1b) Insurance new business for overseas operations for 2013 has been calculated using constant exchange rates (CER). (1c) Constant exchange rates have been used to calculate insurance new business for overseas operations for all periods in 2013 and 2014. (2) Annual Equivalents, calculated as regular new business contributions plus 10 per cent of single new business contributions, are subject to roundings. Present value of new business premiums (PVNBPs) are calculated as equalling single premiums plus the present value of expected premiums of new regular premium business. In determining the present value, allowance is made for lapses and other assumptions applied in determining the EEV new business profit. (3) Balance includes segregated and pooled pension funds, private finance assets and other institutional clients. Other movements reflect the net flows arising from the cash component of a tactical asset allocation fund managed by PPM South Africa. (4) New business in India is included at Prudential's 26 per cent interest in the India life operation. (5) Balance Sheet figures have been calculated at the closing exchange rate. (6) New business in China is included at Prudential's 50 per cent interest in the China life operation. (7) Mandatory Provident Fund (MPF) product sales in Hong Kong are included at Prudential's 36 per cent interest in Hong Kong MPF operation. (8) Investment flows for the period exclude year-to-date Eastspring Money Market Funds (MMF) gross inflows of £67,749 million (2013: £62,536 million) and net inflows of £10 million (2013 net inflows: £522 million). For the discrete fourth quarter the MMF gross inflows were £17,353 million (2013: £17,072 million) and net outflows were £48 million (2013: net inflows of £604 million). (9) Excludes Curian Variable Series Trust funds (internal funds under management). (10) Total M&G and Eastspring excluding MMF. Funds under management for MMF amounted to £4,801 million at 31 December 2014 (31 December 2013: £4,297 million). (11) With effect from 1 January 2015, APE and new business data for the UK and Europe Insurance Operations will be presented using revised product groupings shown in Schedule A(x). This aims to reflect the evolving revenue streams and present greater detail of for certain elements currently included within "Other". Schedule A(i) - New Business Insurance Operations (Actual Exchange Rates) Single Regular Annual Equivalents(2) PVNBP 2014 2013 2014 2013 2014 2013 2014 2013 YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) £m £m £m £m £m £m £m £m Group Insurance Operations Asia (1a) 2,272 2,136 6% 2,010 1,911 5% 2,237 2,125 5% 12,331 11,375 8% US(1a) 15,555 15,712 (1)% - 2 (100)% 1,556 1,573 (1)% 15,555 15,723 (1)% UK 6,681 5,128 30% 189 212 (11)% 857 725 18% 7,471 5,978 25% Group Total 24,508 22,976 7% 2,199 2,125 3% 4,650 4,423 5% 35,357 33,076 7% Asia Insurance Operations(1a) Cambodia - - N/A 3 1 200% 3 1 200% 16 3 433% Hong Kong 419 326 29% 603 455 33% 645 487 32% 3,861 2,795 38% Indonesia 280 303 (8)% 357 445 (20)% 385 477 (19)% 1,619 1,943 (17)% Malaysia 117 114 3% 189 197 (4)% 201 208 (3)% 1,284 1,352 (5)% Philippines 121 193 (37)% 39 34 15% 51 53 (4)% 248 299 (17)% Singapore 677 571 19% 289 304 (5)% 357 361 (1)% 2,683 2,588 4% Thailand 92 66 39% 74 61 21% 83 68 22% 392 289 36% Vietnam 4 2 100% 61 54 13% 61 54 13% 247 204 21% SE Asia Operations inc. Hong Kong 1,710 1,575 9% 1,615 1,551 4% 1,786 1,709 5% 10,350 9,473 9% China(6) 239 114 110% 81 71 14% 105 83 27% 550 409 34% Korea 212 311 (32)% 92 82 12% 113 113 0% 609 641 (5)% Taiwan 83 102 (19)% 116 107 8% 124 117 6% 462 491 (6)% India(4) 28 34 (18)% 106 100 6% 109 103 6% 360 361 (0)% Total Asia Insurance Operations 2,272 2,136 6% 2,010 1,911 5% 2,237 2,125 5% 12,331 11,375 8% US Insurance Operations(1a) Variable Annuities 10,899 10,795 1% - - N/A 1,090 1,079 1% 10,899 10,795 1% Elite Access (Variable Annuity) 3,108 2,585 20% - - N/A 311 259 20% 3,108 2,585 20% Fixed Annuities 527 555 (5)% - - N/A 53 55 (4)% 527 555 (5)% Fixed Index Annuities 370 907 (59)% - - N/A 37 91 (59)% 370 907 (59)% Life - 1 (100)% - 2 (100)% - 2 (100)% - 12 (100)% Wholesale 651 869 (25)% - - N/A 65 87 (25)% 651 869 (25)% Total US Insurance Operations 15,555 15,712 (1)% - 2 (100)% 1,556 1,573 (1)% 15,555 15,723 (1)% UK & Europe Insurance Operations(11) Direct and Partnership Annuities 162 284 (43)% - - N/A 16 28 (43)% 162 284 (43)% Intermediated Annuities 139 488 (72)% - - N/A 14 49 (71)% 139 488 (72)% Internal Vesting Annuities 764 1,305 (41)% - - N/A 76 131 (42)% 764 1,305 (41)% Total Individual Annuities 1,065 2,077 (49)% - - N/A 106 208 (49)% 1,065 2,077 (49)% Corporate Pensions 92 120 (23)% 138 161 (14)% 147 173 (15)% 592 686 (14)% On-shore Bonds 2,318 1,754 32% - - N/A 232 176 32% 2,321 1,756 32% Other Products 1,496 901 66% 51 51 0% 201 140 44% 1,783 1,183 51% Wholesale 1,710 276 520% - - N/A 171 28 511% 1,710 276 520% Total UK & Europe Insurance Operations 6,681 5,128 30% 189 212 (11)% 857 725 18% 7,471 5,978 25% Group Total 24,508 22,976 7% 2,199 2,125 3% 4,650 4,423 5% 35,357 33,076 7% Schedule A(ii) - New Business Insurance Operations (Constant Exchange Rates) Note: In schedule A(ii) constant exchange rates have been used to calculate insurance new business for overseas operations for 2013. Single Regular Annual Equivalents(2) PVNBP 2014 2013 2014 2013 2014 2013 2014 2013 YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) £m £m £m £m £m £m £m £m Group Insurance Operations Asia (1a) (1b) 2,272 1,982 15% 2,010 1,748 15% 2,237 1,946 15% 12,331 10,482 18% US(1a) (1b) 15,555 14,920 4% - 2 (100)% 1,556 1,494 4% 15,555 14,931 4% UK 6,681 5,128 30% 189 212 (11)% 857 725 18% 7,471 5,978 25% Group Total 24,508 22,030 11% 2,199 1,962 12% 4,650 4,165 12% 35,357 31,391 13% Asia Insurance Operations(1a) (1b) Cambodia - - N/A 3 1 200% 3 1 200% 16 3 433% Hong Kong 419 310 35% 603 433 39% 645 464 39% 3,861 2,655 45% Indonesia 280 254 10% 357 374 (5)% 385 399 (4)% 1,619 1,629 (1)% Malaysia 117 104 13% 189 180 5% 201 190 6% 1,284 1,237 4% Philippines 121 176 (31)% 39 30 30% 51 48 6% 248 272 (9)% Singapore 677 536 26% 289 284 2% 357 338 6% 2,683 2,428 11% Thailand 92 59 56% 74 55 35% 83 61 36% 392 260 51% Vietnam 4 2 100% 61 51 20% 61 51 20% 247 192 29% SE Asia Operations inc. Hong Kong 1,710 1,441 19% 1,615 1,408 15% 1,786 1,552 15% 10,350 8,676 19% China(6) 239 108 121% 81 68 19% 105 78 35% 550 387 42% Korea 212 307 (31)% 92 81 14% 113 112 1% 609 633 (4)% Taiwan 83 95 (13)% 116 100 16% 124 110 13% 462 457 1% India(4) 28 31 (10)% 106 91 16% 109 94 16% 360 329 9% Total Asia Insurance Operations 2,272 1,982 15% 2,010 1,748 15% 2,237 1,946 15% 12,331 10,482 18% US Insurance Operations(1a) (1b) Variable Annuities 10,899 10,251 6% - - N/A 1,090 1,025 6% 10,899 10,251 6% Elite Access (Variable Annuity) 3,108 2,455 27% - - N/A 311 246 26% 3,108 2,455 27% Fixed Annuities 527 527 0% - - N/A 53 53 0% 527 527 0% Fixed Index Annuities 370 861 (57)% - - N/A 37 86 (57)% 370 861 (57)% Life - 1 (100)% - 2 (100)% - 2 (100)% - 12 (100)% Wholesale 651 825 (21)% - - N/A 65 82 (21)% 651 825 (21)% Total US Insurance Operations 15,555 14,920 4% - 2 (100)% 1,556 1,494 4% 15,555 14,931 4% UK & Europe Insurance Operations(11) Direct and Partnership Annuities 162 284 (43)% - - N/A 16 28 (43)% 162 284 (43)% Intermediated Annuities 139 488 (72)% - - N/A 14 49 (71)% 139 488 (72)% Internal Vesting Annuities 764 1,305 (41)% - - N/A 76 131 (42)% 764 1,305 (41)% Total Individual Annuities 1,065 2,077 (49)% - - N/A 106 208 (49)% 1,065 2,077 (49)% Corporate Pensions 92 120 (23)% 138 161 (14)% 147 173 (15)% 592 686 (14)% On-shore Bonds 2,318 1,754 32% - - N/A 232 176 32% 2,321 1,756 32% Other Products 1,496 901 66% 51 51 0% 201 140 44% 1,783 1,183 51% Wholesale 1,710 276 520% - - N/A 171 28 511% 1,710 276 520% Total UK & Europe Insurance Operations 6,681 5,128 30% 189 212 (11)% 857 725 18% 7,471 5,978 25% Group Total 24,508 22,030 11% 2,199 1,962 12% 4,650 4,165 12% 35,357 31,391 13% Schedule A(iii) - Total Insurance New Business APE - By Quarter (Actual Exchange Rates) 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 £m £m £m £m £m £m £m £m Group Insurance Operations Asia (1a) 495 515 513 602 507 489 548 693 US(1a) 358 439 405 371 432 439 364 321 UK 185 170 185 185 237 196 215 209 Group Total 1,038 1,124 1,103 1,158 1,176 1,124 1,127 1,223 Asia Insurance Operations(1a) Cambodia - - - 1 - 1 1 1 Hong Kong 107 107 121 152 128 130 166 221 Indonesia 112 128 108 129 86 98 80 121 Malaysia 46 53 52 57 43 48 48 62 Philippines 14 15 12 12 11 11 13 16 Singapore 80 90 87 104 87 85 86 99 Thailand 11 14 22 21 25 17 18 23 Vietnam 10 13 14 17 11 12 16 22 SE Asia Operations inc. Hong Kong 380 420 416 493 391 402 428 565 China(6) 27 20 21 15 38 19 23 25 Korea 30 32 23 28 26 22 32 33 Taiwan 19 26 28 44 24 30 34 36 India(4) 39 17 25 22 28 16 31 34 Total Asia Insurance Operations 495 515 513 602 507 489 548 693 US Insurance Operations(1a) Variable Annuities 240 298 271 270 317 297 260 216 Elite Access (Variable Annuity) 54 73 64 68 69 80 80 82 Fixed Annuities 14 16 14 11 12 15 14 12 Fixed Index Annuities 34 28 22 7 8 10 10 9 Life 1 - - 1 - - - - Wholesale 15 24 34 14 26 37 - 2 Total US Insurance Operations 358 439 405 371 432 439 364 321 UK & Europe Insurance Operations(11) Direct and Partnership Annuities 8 7 7 6 5 5 4 2 Intermediated Annuities 15 14 12 8 7 3 2 2 Internal Vesting Annuities 32 35 31 33 24 19 17 16 Total Individual Annuities 55 56 50 47 36 27 23 20 Corporate Pensions 53 40 45 35 40 39 38 30 On-shore Bonds 45 38 43 50 49 53 60 70 Other Products 32 36 32 40 39 46 57 59 Wholesale - - 15 13 73 31 37 30 Total UK & Europe Insurance Operations 185 170 185 185 237 196 215 209 Group Total 1,038 1,124 1,103 1,158 1,176 1,124 1,127 1,223 Schedule A(iv) - Total Insurance New Business APE - By Quarter (2013 at Constant Exchange Rates) Note: In schedule A(iv) constant exchange rates have been used to calculate insurance new business for overseas operations for all periods in 2013. Discrete quarters in 2014 are presented on actual exchange rates. 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 £m £m £m £m £m £m £m £m Group Insurance Operations Asia(1b) 437 454 473 582 507 489 548 693 US(1b) 337 410 381 366 432 439 364 321 UK 185 170 185 185 237 196 215 209 Group Total 959 1,034 1,039 1,133 1,176 1,124 1,127 1,223 Asia Insurance Operations(1b) Cambodia - - - 1 - 1 1 1 Hong Kong 101 100 114 149 128 130 166 221 Indonesia 87 98 91 123 86 98 80 121 Malaysia 40 47 49 54 43 48 48 62 Philippines 12 13 11 12 11 11 13 16 Singapore 73 83 82 100 87 85 86 99 Thailand 9 13 19 20 25 17 18 23 Vietnam 9 12 13 17 11 12 16 22 SE Asia Operations inc. Hong Kong 331 366 379 476 391 402 428 565 China(6) 26 18 20 14 38 19 23 25 Korea 29 32 23 28 26 22 32 33 Taiwan 18 24 26 42 24 30 34 36 India(4) 33 14 25 22 28 16 31 34 Total Asia Insurance Operations 437 454 473 582 507 489 548 693 US Insurance Operations(1b) Variable Annuities 226 278 255 266 317 297 260 216 Elite Access (Variable Annuity) 51 68 60 67 69 80 80 82 Fixed Annuities 13 15 13 12 12 15 14 12 Fixed Index Annuities 32 26 21 7 8 10 10 9 Life 1 - - 1 - - - - Wholesale 14 23 32 13 26 37 - 2 Total US Insurance Operations 337 410 381 366 432 439 364 321 UK & Europe Insurance Operations(11) Direct and Partnership Annuities 8 7 7 6 5 5 4 2 Intermediated Annuities 15 14 12 8 7 3 2 2 Internal Vesting Annuities 32 35 31 33 24 19 17 16 Total Individual Annuities 55 56 50 47 36 27 23 20 Corporate Pensions 53 40 45 35 40 39 38 30 On-shore Bonds 45 38 43 50 49 53 60 70 Other Products 32 36 32 40 39 46 57 59 Wholesale - - 15 13 73 31 37 30 Total UK & Europe Insurance Operations 185 170 185 185 237 196 215 209 Group Total 959 1,034 1,039 1,133 1,176 1,124 1,127 1,223 Schedule A(v) - Total Insurance New Business APE - By Quarter (2014 and 2013 at Constant Exchange Rates) Note: In schedule A(v) constant exchange rates have been used to calculate insurance new business for overseas operations for all periods in 2013 and 2014 i.e the average exchange rate for the period ended 31 December 2014 is applied to each discrete quarter for 2013 and 2014. 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 £m £m £m £m £m £m £m £m Group Insurance Operations Asia(1c) 437 454 473 582 510 496 550 681 US(1c) 337 410 381 366 434 448 370 304 UK 185 170 185 185 237 196 215 209 Group Total 959 1,034 1,039 1,133 1,181 1,140 1,135 1,194 Asia Insurance Operations(1c) Cambodia - - - 1 - 1 1 1 Hong Kong 101 100 114 149 130 131 169 215 Indonesia 87 98 91 123 86 99 79 121 Malaysia 40 47 49 54 44 48 47 62 Philippines 12 13 11 12 11 12 13 15 Singapore 73 83 82 100 86 86 87 98 Thailand 9 13 19 20 25 18 17 23 Vietnam 9 12 13 17 11 13 15 22 SE Asia Operations inc. Hong Kong 331 366 379 476 393 408 428 557 China(6) 26 18 20 14 38 19 24 24 Korea 29 32 23 28 27 22 32 32 Taiwan 18 24 26 42 24 30 35 35 India(4) 33 14 25 22 28 17 31 33 Total Asia Insurance Operations 437 454 473 582 510 496 550 681 US Insurance Operations(1c) Variable Annuities 226 278 255 266 319 303 264 204 Elite Access (Variable Annuity) 51 68 60 67 69 82 81 79 Fixed Annuities 13 15 13 12 12 15 15 11 Fixed Index Annuities 32 26 21 7 8 10 10 9 Life 1 - - 1 - - - - Wholesale 14 23 32 13 26 38 - 1 Total US Insurance Operations 337 410 381 366 434 448 370 304 UK & Europe Insurance Operations(11) Direct and Partnership Annuities 8 7 7 6 5 5 4 2 Intermediated Annuities 15 14 12 8 7 3 2 2 Internal Vesting Annuities 32 35 31 33 24 19 17 16 Total Individual Annuities 55 56 50 47 36 27 23 20 Corporate Pensions 53 40 45 35 40 39 38 30 On-shore Bonds 45 38 43 50 49 53 60 70 Other Products 32 36 32 40 39 46 57 59 Wholesale - - 15 13 73 31 37 30 Total UK & Europe Insurance Operations 185 170 185 185 237 196 215 209 Group Total 959 1,034 1,039 1,133 1,181 1,140 1,135 1,194 Schedule A(vi) - Investment Operations - By Quarter (Actual Exchange Rates) 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 £m £m £m £m £m £m £m £m Group Investment Operations Opening FUM 129,498 138,926 137,407 142,820 143,916 147,914 153,849 157,533 Net Flows:(8) 3,502 2,344 5,093 126 2,571 4,123 2,893 2,930 - Gross Inflows 13,409 14,561 13,528 11,006 12,146 14,045 12,847 13,670 - Redemptions (9,907) (12,217) (8,435) (10,880) (9,575) (9,922) (9,954) (10,740) Other Movements 5,926 (3,863) 320 970 1,427 1,812 791 1,917 Total Group Investment Operations(10) 138,926 137,407 142,820 143,916 147,914 153,849 157,533 162,380 M&G Retail Opening FUM 54,879 61,427 62,655 64,504 67,202 68,981 71,941 73,012 Net Flows: 2,446 2,308 1,132 1,456 1,291 2,493 1,531 1,371 - Gross Inflows 7,213 8,138 5,919 6,789 7,305 7,468 6,801 7,414 - Redemptions (4,767) (5,830) (4,787) (5,333) (6,014) (4,975) (5,270) (6,043) Other Movements 4,102 (1,080) 717 1,242 488 467 (460) (94) Closing FUM 61,427 62,655 64,504 67,202 68,981 71,941 73,012 74,289 Comprising amounts for: UK 41,194 39,953 40,955 42,016 42,199 42,392 41,756 40,705 Europe (excluding UK) 18,696 21,198 22,064 23,699 25,244 27,927 29,622 31,815 South Africa 1,537 1,504 1,485 1,487 1,538 1,622 1,634 1,769 61,427 62,655 64,504 67,202 68,981 71,941 73,012 74,289 Institutional(3) Opening FUM 56,989 57,745 55,484 59,810 58,787 59,736 60,830 61,572 Net Flows: (15) (899) 3,928 (866) 152 275 138 (164) - Gross Inflows 2,656 2,591 5,364 2,163 1,655 2,894 2,295 2,185 - Redemptions (2,671) (3,490) (1,436) (3,029) (1,503) (2,619) (2,157) (2,349) Other Movements 771 (1,362) 398 (157) 797 819 604 1,350 Closing FUM 57,745 55,484 59,810 58,787 59,736 60,830 61,572 62,758 Total M&G Investment Operations 119,172 118,139 124,314 125,989 128,717 132,771 134,584 137,047 PPM South Africa FUM included in Total M&G 4,701 4,509 4,633 4,513 4,720 4,815 4,905 5,203 Eastspring - excluding MMF(8) Equity/Bond/Other(7) Opening FUM 15,457 17,206 16,756 16,133 16,109 16,753 18,259 19,893 Net Flows: 795 838 65 118 540 1,063 1,127 1,640 - Gross Inflows 3,122 3,596 2,214 1,982 2,546 3,285 3,583 3,760 - Redemptions (2,327) (2,758) (2,149) (1,864) (2,006) (2,222) (2,456) (2,120) Other Movements 954 (1,288) (688) (142) 104 443 507 360 Closing FUM(5) 17,206 16,756 16,133 16,109 16,753 18,259 19,893 21,893 Third Party Institutional Mandates Opening FUM 2,173 2,548 2,512 2,373 1,818 2,444 2,819 3,056 Net Flows: 276 97 (32) (582) 588 292 97 83 - Gross Inflows 418 236 31 72 640 398 168 311 - Redemptions (142) (139) (63) (654) (52) (106) (71) (228) Other Movements 99 (133) (107) 27 38 83 140 301 Closing FUM(5) 2,548 2,512 2,373 1,818 2,444 2,819 3,056 3,440 Total Eastspring Investment Operations 19,754 19,268 18,506 17,927 19,197 21,078 22,949 25,333 US Curian - FUM(5) (9) 6,315 6,466 6,371 6,601 6,781 6,948 7,421 7,933 Schedule A(vii) - Total Insurance New Business Profit (Actual Exchange Rates) 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 YTD YTD YTD YTD YTD YTD YTD YTD £m £m £m £m £m £m £m £m Post-tax analysis New Business Profit(1a) Total Asia Insurance Operations 237 502 767 1,139 243 494 775 1,162 Total US Insurance Operations 125 311 492 706 195 376 530 694 Total UK & Europe Insurance Operations 48 100 163 237 91 145 209 270 Group Total 410 913 1,422 2,082 529 1,015 1,514 2,126 Annual Equivalent(1a) (2) Total Asia Insurance Operations 495 1,010 1,523 2,125 507 996 1,544 2,237 Total US Insurance Operations 358 797 1,202 1,573 432 871 1,235 1,556 Total UK & Europe Insurance Operations 185 355 540 725 237 433 648 857 Group Total 1,038 2,162 3,265 4,423 1,176 2,300 3,427 4,650 New Business Margin (NBP as % of APE) Total Asia Insurance Operations 48% 50% 50% 54% 48% 50% 50% 52% Total US Insurance Operations 35% 39% 41% 45% 45% 43% 43% 45% Total UK & Europe Insurance Operations 26% 28% 30% 33% 38% 33% 32% 32% Group Total 39% 42% 44% 47% 45% 44% 44% 46% PVNBP(1a) (2) Total Asia Insurance Operations 2,734 5,524 8,206 11,375 2,690 5,378 8,408 12,331 Total US Insurance Operations 3,581 7,957 12,006 15,723 4,323 8,703 12,352 15,555 Total UK & Europe Insurance Operations 1,540 2,943 4,398 5,978 2,072 3,741 5,598 7,471 Group Total 7,855 16,424 24,610 33,076 9,085 17,822 26,358 35,357 New Business Margin (NBP as % of PVNBP) Total Asia Insurance Operations 8.7% 9.1% 9.3% 10.0% 9.0% 9.2% 9.2% 9.4% Total US Insurance Operations 3.5% 3.9% 4.1% 4.5% 4.5% 4.3% 4.3% 4.5% Total UK & Europe Insurance Operations 3.1% 3.4% 3.7% 4.0% 4.4% 3.9% 3.7% 3.6% Group Total 5.2% 5.6% 5.8% 6.3% 5.8% 5.7% 5.7% 6.0% Schedule A(viii) - Total Insurance New Business Profit (2013 at Constant Exchange Rates) Note: In schedule A(viii) constant exchange rates have been used to calculate insurance new business for overseas operations for all periods in 2013. The year-to-date amounts for 2014 are presented on actual exchange rates. 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 YTD YTD YTD YTD YTD YTD YTD YTD £m £m £m £m £m £m £m £m Post-tax analysis New Business Profit(1b) Total Asia Insurance Operations 204 433 678 1,032 243 494 775 1,162 Total US Insurance Operations 118 292 461 670 195 376 530 694 Total UK & Europe Insurance Operations 48 100 163 237 91 145 209 270 Group Total 370 825 1,302 1,939 529 1,015 1,514 2,126 Annual Equivalent(1b) (2) Total Asia Insurance Operations 437 891 1,364 1,946 507 996 1,544 2,237 Total US Insurance Operations 337 747 1,128 1,494 432 871 1,235 1,556 Total UK & Europe Insurance Operations 185 355 540 725 237 433 648 857 Group Total 959 1,993 3,032 4,165 1,176 2,300 3,427 4,650 New Business Margin (NBP as % of APE) Total Asia Insurance Operations 47% 49% 50% 53% 48% 50% 50% 52% Total US Insurance Operations 35% 39% 41% 45% 45% 43% 43% 45% Total UK & Europe Insurance Operations 26% 28% 30% 33% 38% 33% 32% 32% Group Total 39% 41% 43% 47% 45% 44% 44% 46% PVNBP(1b) (2) Total Asia Insurance Operations 2,434 4,912 7,409 10,482 2,690 5,378 8,408 12,331 Total US Insurance Operations 3,374 7,456 11,267 14,931 4,323 8,703 12,352 15,555 Total UK & Europe Insurance Operations 1,540 2,943 4,398 5,978 2,072 3,741 5,598 7,471 Group Total 7,348 15,311 23,074 31,391 9,085 17,822 26,358 35,357 New Business Margin (NBP as % of PVNBP) Total Asia Insurance Operations 8.4% 8.8% 9.2% 9.8% 9.0% 9.2% 9.2% 9.4% Total US Insurance Operations 3.5% 3.9% 4.1% 4.5% 4.5% 4.3% 4.3% 4.5% Total UK & Europe Insurance Operations 3.1% 3.4% 3.7% 4.0% 4.4% 3.9% 3.7% 3.6% Group Total 5.0% 5.4% 5.6% 6.2% 5.8% 5.7% 5.7% 6.0% Schedule A(ix) - Total Insurance New Business Profit (2014 and 2013 at Constant Exchange Rates) Note: In schedule A(ix) constant exchange rates have been used to calculate insurance new business for overseas operations for all periods in 2013 and 2014, i.e the average exchange rates for the period ended 31 December 2014 are applied to each period for 2013 and 2014. 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 YTD YTD YTD YTD YTD YTD YTD YTD £m £m £m £m £m £m £m £m Post-tax analysis New Business Profit(1c) Total Asia Insurance Operations 204 433 678 1,032 244 498 781 1,162 Total US Insurance Operations 118 292 461 670 196 381 537 694 Total UK & Europe Insurance Operations 48 100 163 237 91 145 209 270 Group Total 370 825 1,302 1,939 531 1,024 1,527 2,126 Annual Equivalent(1c) (2) Total Asia Insurance Operations 437 891 1,364 1,946 510 1,006 1,556 2,237 Total US Insurance Operations 337 747 1,128 1,494 434 882 1,252 1,556 Total UK & Europe Insurance Operations 185 355 540 725 237 433 648 857 Group Total 959 1,993 3,032 4,165 1,181 2,321 3,456 4,650 New Business Margin (NBP as % of APE) Total Asia Insurance Operations 47% 49% 50% 53% 48% 50% 50% 52% Total US Insurance Operations 35% 39% 41% 45% 45% 43% 43% 45% Total UK & Europe Insurance Operations 26% 28% 30% 33% 38% 33% 32% 32% Group Total 39% 41% 43% 47% 45% 44% 44% 46% PVNBP(1c) (2) Total Asia Insurance Operations 2,434 4,912 7,409 10,482 2,708 5,432 8,477 12,331 Total US Insurance Operations 3,374 7,456 11,267 14,931 4,343 8,818 12,516 15,555 Total UK & Europe Insurance Operations 1,540 2,943 4,398 5,978 2,072 3,741 5,598 7,471 Group Total 7,348 15,311 23,074 31,391 9,123 17,991 26,591 35,357 New Business Margin (NBP as % of PVNBP) Total Asia Insurance Operations 8.4% 8.8% 9.2% 9.8% 9.0% 9.2% 9.2% 9.4% Total US Insurance Operations 3.5% 3.9% 4.1% 4.5% 4.5% 4.3% 4.3% 4.5% Total UK & Europe Insurance Operations 3.1% 3.4% 3.7% 4.0% 4.4% 3.9% 3.7% 3.6% Group Total 5.0% 5.4% 5.6% 6.2% 5.8% 5.7% 5.7% 6.0% Schedule A(x) - Total UK and Europe Insurance Operations New Business APE With effect from 1 January 2015, New Business APE for the UK and Europe Insurance Operations will be presented using revised product groupings. This aims to bring greater focus to products and groupings that reflect the evolving UK market and the business strategy of our UK business. This schedule shows the 2014 and 2013 numbers on this revised basis that will be presented from the first quarter of 2015. (a) Total UK & Europe Insurance New Business APE (AER) (i) Current presentation Single Regular Annual Equivalents(2) PVNBP 2014 2013 2014 2013 2014 2013 2014 2013 YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) £m £m £m £m £m £m £m £m Direct and Partnership Annuities 162 284 (43)% - - N/A 16 28 (43)% 162 284 (43)% Intermediated Annuities 139 488 (72)% - - N/A 14 49 (71)% 139 488 (72)% Internal Vesting Annuities 764 1,305 (41)% - - N/A 76 131 (42)% 764 1,305 (41)% Total Individual Annuities 1,065 2,077 (49)% - - N/A 106 208 (49)% 1,065 2,077 (49)% Corporate Pensions 92 120 (23)% 138 161 (14)% 147 173 (15)% 592 686 (14)% On-shore Bonds 2,318 1,754 32% - - N/A 232 176 32% 2,321 1,756 32% Other Products 1,496 901 66% 51 51 - 201 140 44% 1,783 1,183 51% Wholesale 1,710 276 520% - - N/A 171 28 511% 1,710 276 520% Total UK & Europe Insurance Operations 6,681 5,128 30% 189 212 (11)% 857 725 18% 7,471 5,978 25% (ii) Revised presentation from 2015 Single Regular Annual Equivalents(2) PVNBP 2014 2013 2014 2013 2014 2013 2014 2013 YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) £m £m £m £m £m £m £m £m Individual Annuities 1,065 2,077 (49)% - - N/A 106 208 (49)% 1,065 2,077 (49)% Bonds 2,934 2,187 34% - - N/A 294 219 34% 2,937 2,190 34% Corporate Pensions 92 120 (23)% 138 161 (14%) 147 173 (15)% 592 686 (14)% Individual Pensions 508 298 70% 22 21 5% 72 50 44% 595 377 58% Income Drawdown 352 146 141% - - N/A 35 15 133% 352 146 141% Wholesale 1,710 276 520% - - N/A 171 28 511% 1,710 276 520% Other Products 20 24 (17)% 29 30 (3)% 32 32 0% 220 226 (3)% Total UK & Europe Insurance Operations 6,681 5,128 30% 189 212 (11)% 857 725 18% 7,471 5,978 25% Schedule A(x) - Total UK and Europe Insurance Operations New Business APE (continued) (b) Total UK & Europe Insurance New Business APE - By Quarter (AER) (i) Current presentation 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 £m £m £m £m £m £m £m £m Direct and Partnership Annuities 8 7 7 6 5 5 4 2 Intermediated Annuities 15 14 12 8 7 3 2 2 Internal Vesting Annuities 32 35 31 33 24 19 17 16 Total Individual Annuities 55 56 50 47 36 27 23 20 Corporate Pensions 53 40 45 35 40 39 38 30 On-shore Bonds 45 38 43 50 49 53 60 70 Other Products 32 36 32 40 39 46 57 59 Wholesale - - 15 13 73 31 37 30 Total UK & Europe Insurance Operations 185 170 185 185 237 196 215 209 (i) Revised presentation from 2015 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 £m £m £m £m £m £m £m £m Individual Annuities 55 56 50 47 36 27 23 20 Bonds 52 48 55 64 63 67 77 87 Corporate Pensions 53 40 45 35 40 39 38 30 Individual Pensions 13 13 11 13 12 15 21 24 Income Drawdown 3 3 4 5 5 7 11 12 Wholesale - - 15 13 73 31 37 30 Other Products 9 10 5 8 8 10 8 6 Total UK & Europe Insurance Operations 185 170 185 185 237 196 215 209 B. Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus The tables below show how the VIF generated by the in-force long-term business and the associated required capital is modelled as emerging into free surplus over the next 40 years. Although a small amount (less than 2 per cent) of the Group's embedded value emerges after this date analysis of cash flows emerging in the years shown in the tables is considered most meaningful. The modelled cash flows use the same methodology underpinning the Group's embedded value reporting and so are subject to the same assumptions and sensitivities. In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2014, the tables also present the expected future free surplus to be generated from the investment made in new business during 2014 over the same 40 year period. Expected transfer of value of in-force business (VIF) and required capital to free surplus 2014 £m Undiscounted expected generation from all in-force business at 31 December Undiscounted expected generation from 2014 long-term new business written Expected period of emergence Asia US UK Total Asia US UK Total 2015 953 1,054 506 2,513 124 241 25 390 2016 920 902 514 2,336 144 108 22 274 2017 883 844 501 2,228 149 118 23 290 2018 846 792 503 2,141 119 29 22 170 2019 819 866 494 2,179 118 114 23 255 2020 796 801 482 2,079 104 96 23 223 2021 795 774 473 2,042 107 86 24 217 2022 790 744 465 1,999 108 131 24 263 2023 780 662 470 1,912 103 113 24 240 2024 751 540 459 1,750 111 97 23 231 2025 739 464 448 1,651 96 83 24 203 2026 744 392 436 1,572 105 71 23 199 2027 735 335 423 1,493 93 63 22 178 2028 719 290 411 1,420 95 56 22 173 2029 695 248 401 1,344 103 49 22 174 2030 668 204 388 1,260 92 40 22 154 2031 654 186 375 1,215 92 35 22 149 2032 637 196 366 1,199 90 30 22 142 2033 621 113 348 1,082 88 24 22 134 2034 607 104 327 1,038 96 24 24 144 2035-2039 2,921 19 1,327 4,267 434 (14) 107 527 2040-2044 2,542 - 1,110 3,652 387 - 97 484 2045-2049 2,161 - 521 2,682 335 - 82 417 2050-2054 1,801 - 287 2,088 289 - 29 318 Total free surplus expected to emerge in the next 40 years 24,577 10,530 12,035 47,142 3,582 1,594 773 5,949 * The analysis excludes amounts incorporated into VIF at 31 December 2014 where there is no definitive timeframe for when the payments will be made or receipts received. In particular it excludes the value of the shareholders' interest in the estate. It also excludes any free surplus emerging after 2054.Following their sale, the cash flows exclude any cash flows in respect of Japan and PruHealth and PruProtect. The above amounts can be reconciled to the new business amounts as follows: New business 2014 £m Asia US UK Total Undiscounted expected free surplus generation for years 2015-2054 3,582 1,594 773 5,949 Less: discount effect (2,111) (532) (451) (3,094) Discounted expected free surplus generation for years 2015-2054 1,471 1,062 322 2,855 Discounted expected free surplus generation for years 2054+ 91 - 2 93 PruHealth and PruProtect free surplus generation for new business not included above - - 19 19 Less: Free surplus investment in new businessnote 13 (346) (187) (73) (606) Other items (54) (181) - (235) Post-tax EEV new business profitnote 13 1,162 694 270 2,126 ** In November 2014 the Group disposed of its stake in the PruHealth and PruProtect businesses for an EEV profit of £44 million. New business profit for the year includes new business written by the businesses prior to the disposed date. For the analysis above such profits have been excluded as the Group has realised the cash through sale in 2014. *** Other items represent the impact of the time value of options and guarantees on new business, foreign exchange effects and other non-modelled items. Foreign exchange effects arise as EEV new business profit amounts are translated at average exchange rates and the expected free surplus generation uses year end closing rates. The undiscounted expected free surplus generation from all in-force business at 31 December 2014 shown below can be reconciled to the amount that was expected to be generated as at 31 December 2013 as follows: 2014 2015 2016 2017 2018 2019 Other Total Group £m £m £m £m £m £m £m £m 2013 expected free surplus generation for years 2014-2053 2,165 2,109 2,025 1,911 1,884 1,814 31,638 43,546 Less: Amounts expected to be realised in the current year (2,165) - - - - - - (2,165) Add: Expected free surplus to be generated in year 2054 - - - - - - 367 367 Foreign exchange differences - 77 73 67 65 63 850 1,195 New business - 390 274 290 170 255 4,570 5,949 Sale of PruHealth and PruProtect - (2) (2) (5) (7) (7) (48) (71) Operating movements - 9 (9) 18 47 58 (1,632) (1,679) Non-operating and other movements - (70) (25) (53) (18) (4) 2014 expected free surplus generation for years 2015-2054 - 2,513 2,336 2,228 2,141 2,179 35,745 47,142 2014 2015 2016 2017 2018 2019 Other Total Asia £m £m £m £m £m £m £m £m 2013 expected free surplus generation for years 2014-2053 801 821 798 735 705 682 17,471 22,013 Less: Amounts expected to be realised in the current year (801) - - - - - - (801) Add: Expected free surplus to be generated in year 2054 * - - - - - - 324 324 Foreign exchange differences - 25 26 23 22 21 548 665 New business - 124 144 149 119 118 2,928 3,582 Operating movements - - (29) (1) 7 13 (1,115) (1,206) Non-operating and other movements - (17) (19) (23) (7) (15) 2014 expected free surplus generation for years 2015-2054 - 953 920 883 846 819 20,156 24,577 2014 2015 2016 2017 2018 2019 Other Total US £m £m £m £m £m £m £m £m 2013 expected free surplus generation for years 2014-2053 902 817 760 709 700 666 4,834 9,388 Less: Amounts expected to be realised in the current year (902) - - - - - - (902) Add: Expected free surplus to be generated in year 2054 * - - - - - - - - Foreign exchange differences - 52 47 44 43 42 302 530 New business - 241 108 118 29 114 984 1,594 Operating movements - (10) 7 10 37 35 (48) (80) Non-operating and other movements - (46) (20) (37) (17) 9 2014 expected free surplus generation for years 2015-2054 - 1,054 902 844 792 866 6,072 10,530 2014 2015 2016 2017 2018 2019 Other Total UK £m £m £m £m £m £m £m £m 2013 expected free surplus generation for years 2014-2053 462 471 467 467 479 466 9,333 12,145 Less: Amounts expected to be realised in the current year (462) - - - - - - (462) Add: Expected free surplus to be generated in year 2054 - - - - - - 43 43 New business - 25 22 23 22 23 658 773 Sale of PruHealth and PruProtect - (2) (2) (5) (7) (7) (48) (71) Operating movements - 19 13 9 3 10 (469) (393) Non-operating and other movements - (7) 14 7 6 2 2014 expected free surplus generation for years 2015-2054 - 506 514 501 503 494 9,517 12,035 * Excluding 2014 new business. ** Includes the removal of Japan life business following the sale. At 31 December 2014 the total free surplus expected to be generated over the next five years (years 2015-2019 inclusive), using the same assumptions and methodology as those underpinning our embedded value reporting was £11.4 billion, an increase of £1.7 billion from the £9.7 billion expected over the same period at the end of 2013. This increase primarily reflects the new business written in 2014, which is expected to generate £1,379 million of free surplus over the next five years. Operating, non-operating and disposal of our share of PruHealth and PruProtect and other items are expected to decrease free surplus generation by £70 million over the next five years, which is more than offset by the favourable foreign exchange movements of £345 million. At 31 December 2014 the total free surplus expected to be generated on an undiscounted basis in the next forty years is £47.1 billion, up from the £43.5 billion expected at end of 2013 reflecting the effect of new business written across all three business operations and a positive foreign exchange translation effect arising in the US and Asia operations of £1.2 billion.These positive effects have been offset by a £(1.7) billion adverse effect reflecting operating, market assumption changes and the disposal of our share of PruHealth and PruProtect and other items. These principally reflect the impact of falling interest rates, particularly in Asia. The overall growth in the undiscounted value of free surplus reflects our ability to write both growing and profitable new business. Actual underlying free surplus generated in 2014 from life business in-force at the end of 2014 was £2.7 billion inclusive of £0.3 billion of changes in operating assumptions and experience variances. This compares with the expected 2014 realisation at the end of 2013 of £2.2 billion. This can be analysed further as follows: Asia US UK Total £m £m £m £m Transfer to free surplus in 2014 828 883 565 2,276 Expected return on free assets 62 30 14 106 Changes in operating assumptions and experience variances (30) 278 66 314 Underlying free surplus generated from in-force life business in 2014 860 1,191 645 2,696 2014 free surplus expected to be generated at 31 December 2013 801 902 462 2,165 The equivalent discounted amounts of the undiscounted totals shown previously are shown below: 2014 £m Discounted expected generation from all in-force business at 31 December Discounted expected generation from long-term 2014 new business written Expected period of emergence Asia US UK Total Asia US UK Total 2015 908 1,017 471 2,396 118 233 23 374 2016 807 820 457 2,084 125 97 20 242 2017 720 724 419 1,863 119 101 19 239 2018 644 642 397 1,683 88 23 18 129 2019 581 664 367 1,612 81 86 18 185 2020 529 576 337 1,442 67 68 16 151 2021 494 526 312 1,332 65 56 16 137 2022 459 478 289 1,226 61 81 15 157 2023 424 406 274 1,104 54 65 14 133 2024 383 312 252 947 54 52 13 119 2025 354 255 231 840 43 42 12 97 2026 335 204 212 751 45 33 11 89 2027 311 165 193 669 37 28 10 75 2028 289 137 176 602 36 23 10 69 2029 264 112 161 537 37 19 9 65 2030 239 90 146 475 32 15 8 55 2031 221 80 133 434 30 12 8 50 2032 204 83 122 409 28 10 7 45 2033 188 42 109 339 26 7 7 40 2034 174 39 96 309 28 7 7 42 2035-2039 747 99 321 1,167 112 4 27 143 2040-2044 518 - 195 713 82 - 18 100 2045-2049 362 - 63 425 60 - 12 72 2050-2054 247 - 25 272 43 - 4 47 Total discounted free surplus expected to emerge in the next 40 years 10,402 7,471 5,758 23,631 1,471 1,062 322 2,855 The above amounts can be reconciled to the Group's financial statements as follows: Total £m Discounted expected generation from all in-force business for years 2015-2054 23,631 Discounted expected generation from all in-force business for years after 2054 470 Discounted expected generation from all in-force business (excluding Japan) at 31 December 2014 note 14 24,101 Add: Free surplus of life operations held at 31 December 2014 note 13 4,193 Less: Time value of guarantees note 14 (575) Expected cashflow from the sale of Japan Life business 23 Other non-modelled items* note 14 1,382 Total EEV for life operations 29,124 * Upon completion of the sale of the Japan life business £23 million of free surplus will be released. See note 8 and note 14 of the EEV basis results section for further details. ** These relate to items where there is no definitive timeframe for when the payments will be made or receipts received and are, consequently, excluded from the amounts incorporated into the tables above showing the expected generation of free surplus from in-force business at 31 December 2014. In particular it excludes the value of the shareholders' interest in the estate. C Foreign currency source of key metrics The tables below show the Group's key free surplus, IFRS and EEV metrics analysis by contribution by currency group: Free surplus and IFRS 2014 results Underlying free surplus generated2 Pre-tax Operating profit2,3,4 Shareholders' funds2,3,4 % % % US$ linked1 14 17 14 Other Asia currencies 9 18 18 Total Asia 23 35 32 UK sterling3,4 38 20 46 US$ 4 39 45 22 Total 100 100 100 EEV 2014 results Post-tax New Business profits Post-tax Operating Profit2,3,4 Shareholders' Funds2,3,4 % % % US$ linked1 36 35 29 Other Asia currencies 18 13 15 Total Asia 54 48 44 UK sterling3,4 13 14 33 US$4 33 38 23 Total 100 100 100 Notes: 1US$ linked - comprising the Hong Kong and Vietnam operations where the currencies are pegged to the US dollar and the Malaysia and Singapore operations where the currencies are managed against a basket of currencies including the US dollar. 2Includes long-term, asset management business and other businesses. 3For operating profit and shareholders' funds UK sterling includes amounts in respect of central operations as well as UK insurance operations and M&G. 4 For shareholders' funds, the US$ grouping includes US$ denominated core structural borrowings. Sterling operating profits include all interest payable as sterling denominated, reflecting interest rate currency swaps in place. D Results of sold PruHealth and PruProtect business The tables below show the results of the sold PruHealth and PruProtect business which were included in the Group's results for full year and half year 2014. IFRS 2014 results 2014 £m Full year Half year Pre-tax operating profit 23 8 EEV 2014 post-tax results 2014 £m Full year Half year APE sales 23 14 Operating profit New business contribution 11 6 Total operating profit 11 8 APE and new business contribution 2014 £m APE Post-tax new business contribution Full year 2014 23 11 Q3 2014 20 9 Half year 2014 14 6 Q1 2014 7 3 This information is provided by RNS The company news service from the London Stock Exchange END FR EAADNEAKSEAF