Prudential PLC — Regulatory Filings 2017

Mar 14, 2017

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RNS Number : 3356Z Prudential PLC 14 March 2017 European Embedded Value (EEV) Basis Results Post-tax operating profit based on longer-term investment returns Results analysis by business area 2016 £m 2015 £m Note notes (iii),(vi) Asia operations New business 4 2,030 1,482 Business in force 5 1,044 798 Long-term business 3,074 2,280 Eastspring Investments 125 101 Total 3,199 2,381 US operations New business 4 790 809 Business in force 5 1,181 999 Long-term business 1,971 1,808 Broker-dealer and asset management (3) 7 Total 1,968 1,815 UK operationsnote (iv) New business:note (v) Excluding UK bulk annuities 4 268 201 UK bulk annuities - 117 268 318 Business in force 5 375 545 Long-term business 643 863 General insurance commission 23 22 Total UK insurance operations 666 885 M&G 341 358 Prudential Capital 22 18 Total 1,029 1,261 Other income and expenditurenote (i) (679) (566) Solvency II and restructuring costsnote (ii) (57) (51) Interest received from tax settlement 37 - Operating profit based on longer-term investment returns 5,497 4,840 Analysed as profit (loss) from: New business:note (v) Excluding UK bulk annuities 4 3,088 2,492 UK bulk annuities - 117 3,088 2,609 Business in force 5 2,600 2,342 Long-term business 5,688 4,951 Asset management and general insurance commission 508 506 Other results (699) (617) 5,497 4,840 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 14(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 an 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. (iv) The EEV basis results have been prepared in accordance with the amended EEV Principles dated April 2016, prepared by the CFO Forum of major European insurers. The 2016 results for UK insurance operations have been prepared to reflect the Solvency II regime. The 2015 results for UK insurance operations were prepared reflecting the Solvency I basis being the regime applicable for the year. There is no change to the basis of preparation for Asia and US operations. (v) Following Prudential's withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately. (vi) The Group agreed in November 2016 to sell, subject to regulatory approval, its life business in Korea. Accordingly, the presentation of the 2015 comparative EEV basis results and related notes have been adjusted from those previously published for the reclassification of the result attributable to the held for sale Korea life business, as described in note 17. This approach has been adopted consistently throughout this supplementary information. POST-TAX SUMMARISED CONSOLIDATED INCOME STATEMENT Note 2016 £m 2015 £m Asia operations 3,199 2,381 US operations 1,968 1,815 UK operations 1,029 1,261 Other income and expenditure (679) (566) Solvency II and restructuring costs (57) (51) Interest received on tax settlement 37 - Operating profit based on longer-term investment returns 5,497 4,840 Short-term fluctuations in investment returns 6 (507) (1,215) Effect of changes in economic assumptions 7 (60) 66 Mark to market value movements on core borrowings (4) 221 Loss attaching to the held for sale Korea life business 17 (410) 39 Total non-operating results (981) (889) Profit for the year attributable to equity holders of the Company 4,516 3,951 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). ** The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year. Basic earnings per share 2016 2015 Based on post-tax operating profit including longer-term investment returns (in pence) 214.7p 189.6p Based on post-tax profit attributable to equity holders of the Company (in pence) 176.4p 154.8p Average number of shares (millions) 2,560 2,553 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). MOVEMENT IN SHAREHOLDERS' EQUITY Note 2016 £m 2015 £m Profit for the year attributable to equity shareholders 4,516 3,951 Items taken directly to equity: Exchange movements on foreign operations and net investment hedges 9 4,211 244 External dividends 9 (1,267) (974) Mark to market value movements on Jackson assets backing surplus and required capital 9 (11) (76) Other movements 9 (367) 53 Net increase in shareholders' equity 9 7,082 3,198 Shareholders' equity at beginning of year As previously reported 9 32,359 29,161 Effect of implementation of Solvency II on 1 January 2016 2 (473) - 31,886 29,161 Shareholders' equity at end of year 9 38,968 32,359 Comprising: 31 Dec 2016 £m 31 Dec 2015 £m Long-term business operations Asset management and other operations Total Long-term business operations Asset management and other operations Total Asia operations 18,717 383 19,100 13,876 306 14,182 US operations 11,805 204 12,009 9,487 182 9,669 UK insurance operations 10,307 25 10,332 9,647 22 9,669 M&G - 1,820 1,820 - 1,774 1,774 Prudential Capital - 22 22 - 70 70 Other operations - (4,315) (4,315) - (3,005) (3,005) Shareholders' equity at end of year 40,829 (1,861) 38,968 33,010 (651) 32,359 Representing: Net assets excluding acquired goodwill and holding company net borrowings 40,584 961 41,545 32,777 866 33,643 Acquired goodwill 245 1,230 1,475 233 1,230 1,463 Holding company net borrowings at market valuenote 8 - (4,052) (4,052) - (2,747) (2,747) 40,829 (1,861) 38,968 33,010 (651) 32,359 * The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year. SUMMARY STATEMENT OF FINANCIAL POSITION Note 31 Dec 2016 £m 31 Dec 2015 £m Total assets less liabilities, before deduction for insurance funds 407,928 340,666 Less insurance funds: Policyholder liabilities (net of reinsurers' share) and unallocated surplus of with-profits funds (393,262) (327,711) Less shareholders' accrued interest in the long-term business 9 24,302 19,404 (368,960) (308,307) Total net assets 9 38,968 32,359 Share capital 129 128 Share premium 1,927 1,915 IFRS basis shareholders' reserves 12,610 10,912 Total IFRS basis shareholders' equity 9 14,666 12,955 Additional EEV basis retained profit 9 24,302 19,404 Total EEV basis shareholders' equity (excluding non-controlling interests) 9 38,968 32,359 * Following its classification as held for sale, Korea life business is included in total assets at a carrying value of £105 million (see note 17 for details). ** Including liabilities in respect of insurance products classified as investment contracts under IFRS 4. *** The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. Net asset value per share 31 Dec 2016 31 Dec 2015 Based on EEV basis shareholders' equity of £38,968 million (2015: £32,359 million) (in pence) 1,510p 1,258p Number of issued shares at year end (millions) 2,581 2,572 Annualised return on embedded value 17% 17% * Annualised return on embedded value is based on EEV post-tax operating profit, as a percentage of opening EEV basis shareholders' equity. ** The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. Notes on the EEV basis results 1 Basis of preparation The EEV basis results have been prepared in accordance with the EEV Principles dated April 2016, prepared by the European Insurance CFO Forum. There is no change to the EEV methodology. The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime, as discussed in note 2 below. The 2015 comparative results for UK insurance operations were prepared reflecting the Solvency I basis, being the regime applicable for the year. There is no change to the basis of preparation for Asia and the US operations. Where appropriate, the EEV basis results include the effects of adoption of EU-endorsed IFRS. The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles. The auditors have reported on the 2016 EEV basis results supplement to the Company's statutory accounts for 2016. Their report was (i) unqualified, and (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report. Except for the change in presentation of the results of the operating and non-operating results for Asia operations to show separately the contribution from the held for sale Korea life business (see note 17 for details), the 2015 results have been derived from the EEV basis results supplement to the Company's statutory accounts for 2015. The supplement included an unqualified audit report from the auditors. A detailed description of the EEV methodology and accounting presentation is provided in note 14. 2  Effect of Solvency II implementation on EEV basis results on 1 January 2016 The Solvency II framework is effective from 1 January 2016. For our operations in Asia and the US there is no impact on the EEV results since Solvency II does not act as the local constraint on the ability to distribute profits to the Group. The embedded value for these businesses will continue to be driven by local regulatory and target capital requirements. For the UK insurance operations, Solvency II has an impact on the EEV results as it changes the local regulatory valuation of net worth and capital requirements, affecting the components of the EEV. The impact of Solvency II on EEV shareholders' equity on 1 January 2016 is shown below: Total EEV basis shareholders' equity £m As reported at 31 December 2015 32,359 Opening adjustment at 1 January 2016 for long-term business operations Effect of implementation of Solvency II on net worthnote (a) 2,760 Effect of implementation of Solvency II on net value of in-force business (VIF)note (b) (3,233) (473) Group total shareholders' equity as at 1 January 2016note (c) 31,886 Notes (a) The Solvency II framework requires technical provisions to be valued on a best estimate basis and capital requirements to be risk-based. It also requires the establishment of a risk margin (which for business in force at 31 December 2015 can be broadly offset by transitional measures). As a result of applying this framework the EEV net worth increased by £2,760 million reflecting the release of the prudent regulatory margins previously included under Solvency I, and also from the recognition within net worth of a portion of future shareholder transfers expected from the with-profits fund. The higher net worth incorporated increases in required capital reflecting the higher solvency capital requirements of the new regime. (b) The net value of in-force business (VIF) is correspondingly impacted as follows: - the release of prudent regulatory margins and recognition of a portion of future with-profits business shareholders' transfers within net worth lead to a corresponding reduction in the VIF; - the run-off of the risk margin, net of transitional measures, is now captured in VIF; and - the cost of capital deducted from the gross VIF increases as a result of the higher Solvency II capital requirements. The overall impact of these changes was to reduce the value of in-force by £(3,233) million. (c) At 1 January 2016 the effect of these changes was a net reduction in EEV shareholders' equity of £(473) million. The impact of Solvency II in 2016 for UK insurance operations is estimated to have reduced total operating profit from new and in-force business by £(39) million. 3  Results analysis by business area The 2015 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2015 CER comparative results are translated at 2016 average exchange rates. Annual premium equivalents (APE)note 16 2016 £m 2015 £m % change Note AER CER AER CER Asia operations 3,599 2,712 3,020 33% 19% US operations 1,561 1,729 1,950 (10)% (20)% UK retail operations 1,160 874 874 33% 33% Group total excluding UK bulk annuities 4 6,320 5,315 5,844 19% 8% UK bulk annuities - 151 151 (100)% (100)% Group total 6,320 5,466 5,995 16% 5% Post-tax operating profit 2016 £m 2015 £m % change Note AER CER AER CER Asia operations New business 4 2,030 1,482 1,660 37% 22% Business in force 5 1,044 798 895 31% 17% Long-term business 3,074 2,280 2,555 35% 20% Eastspring Investments 125 101 112 24% 12% Total 3,199 2,381 2,667 34% 20% US operations New business 4 790 809 913 (2)% (13)% Business in force 5 1,181 999 1,127 18% 5% Long-term business 1,971 1,808 2,040 9% (3)% Broker-dealer and asset management (3) 7 8 (143)% (138)% Total 1,968 1,815 2,048 8% (4)% UK operations New business UK retail operations 4 268 201 201 33% 33% UK bulk annuities - 117 117 (100)% (100)% 268 318 318 (16)% (16)% Business in force 5 375 545 545 (31)% (31)% Long-term business 643 863 863 (25)% (25)% General insurance commission 23 22 22 5% 5% Total UK insurance operations 666 885 885 (25)% (25)% M&G 341 358 358 (5)% (5)% Prudential Capital 22 18 18 22% 22% Total 1,029 1,261 1,261 (18)% (18)% Other income and expenditure (679) (566) (566) (20)% (20)% Solvency II and restructuring costs (57) (51) (51) (12)% (12)% Interest received on tax settlement 37 - - n/a n/a Operating profit based on longer-term investment returns 5,497 4,840 5,359 14% 3% Analysed as profit (loss) from: New business: Life operations excluding UK bulk annuities 4 3,088 2,492 2,774 24% 11% UK bulk annuities - 117 117 (100)% (100)% 3,088 2,609 2,891 18% 7% Business in force 5 2,600 2,342 2,567 11% 1% Total long-term business 5,688 4,951 5,458 15% 4% Asset management and general insurance commission 508 506 518 0% (2)% Other results (699) (617) (617) (13)% (13)% Operating profit based on longer-term investment returns 5,497 4,840 5,359 14% 3% Post-tax profit 2016 £m 2015 £m % change Note AER CER AER CER Operating profit based on longer-term investment returns 5,497 4,840 5,359 14% 3% Short-term fluctuations in investment returns 6 (507) (1,215) (1,343) 58% 62% Effect of changes in economic assumptions 7 (60) 66 66 (191)% (191)% Mark to market value movements on core borrowings (4) 221 220 (102)% (102)% (Loss) profit attaching to the held for sale Korea life business 17 (410) 39 42 n/a n/a Total non-operating loss (981) (889) (1,015) (10)% 3% Profit for the year attributable to shareholders 4,516 3,951 4,344 14% 4% Basic earnings per share (in pence) 2016 2015 % change AER CER AER CER Based on post-tax operating profit including longer-term investment returns, 214.7p 189.6p 209.9p 13% 2% Based on post-tax profit 176.4p 154.8p 170.2p 14% 4% * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). ** The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. *** Following Prudential's withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately. 4 Analysis of new business contribution (i) Group summary 2016 Annual premium and contribution equivalents (APE) Present value of new business premiums (PVNBP) New business contribution New business margin APE PVNBP £m £m £m % % note 16 note 16 note Asia operationsnote (ii) 3,599 19,271 2,030 56 10.5 US operations 1,561 15,608 790 51 5.1 UK insurance operations 1,160 10,513 268 23 2.5 Group total 6,320 45,392 3,088 49 6.8 2015* Annual premium and contribution equivalents (APE) Present value of new business premiums (PVNBP) New business contribution New business margin APE PVNBP £m £m £m % % note 16 note 16 note Asia operationsnote (ii) 2,712 14,428 1,482 55 10.3 US operations 1,729 17,286 809 47 4.7 UK retail operations, 874 7,561 201 23 2.7 Total excluding UK bulk annuities 5,315 39,275 2,492 47 6.3 UK bulk annuities 151 1,508 117 77 7.8 Group total 5,466 40,783 2,609 48 6.4 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). ** The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. *** Following Prudential's withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately. Note The increase in new business contribution of £596 million from £2,492 million for 2015 (excluding the contributions from UK bulk annuities) to £3,088 million for 2016 comprises an increase on a CER basis of £314 million and an increase of £282 million for foreign exchange effects. The increase of £314 million on a CER basis comprises a contribution of £226 million for higher retail sales volumes in 2016, a £17 million effect of movement in long-term interest rates, generated by the active basis of setting economic assumptions (analysed as Asia £14 million, US £13 million and UK £(10) million), and a £71 million impact of pricing, product and other actions. (ii) Asia operations - new business contribution by territory 2016 £m 2015 £m AER CER China 63 30 32 Hong Kong 1,363 835 941 Indonesia 175 229 260 Taiwan 31 28 31 Other 398 360 396 Total Asia operations 2,030 1,482 1,660 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). 5 Operating profit from business in force (i) Group summary 2016 £m Asia operations US operations UK insurance operations Total note (ii) note (iii) note (iv) note Unwind of discount and other expected returns 866 583 445 1,894 Effect of changes in operating assumptions 54 170 25 249 Experience variances and other items 124 428 (95) 457 Total 1,044 1,181 375 2,600 2015 £m Asia operations US operations UK insurance operations Total note (ii) note (iii) note (iv) note Unwind of discount and other expected returns 725 472 488 1,685 Effect of changes in operating assumptions 12 115 55 182 Experience variances and other items 61 412 2 475 Total 798 999 545 2,342 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). ** The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year. Note The movement in operating profit from business in force of £258 million from £2,342 million for 2015 to £2,600 million for 2016 comprises: £m Movement in unwind of discount and other expected returns: Effects of changes in: Growth in opening value 126 Interest rates (28) Foreign exchange 141 Implementation of Solvency II on 1 January 2016 (30) 209 Movement in effect of changes in operating assumptions, experience variances and other items (including foreign exchange of £84 million) 49 Net movement in operating profit from business in force 258 (ii) Asia operations 2016 £m 2015 £m Unwind of discount and other expected returnsnote (a) 866 725 Effect of changes in operating assumptions: Mortality and morbidity 33 63 Persistency and withdrawalsnote (b) (47) (46) Expense 15 (1) Othernote (c) 53 (4) 54 12 Experience variances and other items: Mortality and morbiditynote (d) 71 54 Persistency and withdrawalsnote (e) 52 17 Expensenote (f) (23) (32) Other 24 22 124 61 Total Asia operations 1,044 798 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). Notes (a) The increase in unwind of discount and other expected returns of £141 million from £725 million for 2015 to £866 million for 2016 comprises a positive £61 million impact for the growth in the opening in-force value, a positive £81 million foreign exchange effect and a net £(1) million effect for movements in long-term interest rates. (b) The 2016 charge of £(47) million (2015: £(46) million) for persistency assumption changes comprises positive and negative contributions from our various operations, with positive persistency updates on health and protection products being more than offset by negative effects for unit-linked business. (c) The 2016 credit of £53 million for other assumption changes reflects a number of offsetting items, including modelling improvements and those arising from asset allocation changes in a number of territories. (d) The positive mortality and morbidity experience variance in 2016 of £71 million (2015: £54 million) mainly reflects better than expected experience in a number of territories. (e) The positive £52 million for persistency and withdrawals experience in 2016 (2015: £17 million) comprises positive and negative contributions from various operations, with positive persistency experience on health and protection products which more than offsets negative experience on unit-linked products. (f) The negative expense experience variance in 2016 of £(23) million (2015: £(32) million) principally arises in operations which are currently sub-scale (China, Malaysia Takaful and Taiwan). (iii) US operations 2016 £m 2015 £m Unwind of discount and other expected returnsnote (a) 583 472 Effect of changes in operating assumptionsnote (b) 170 115 Experience variances and other items: Spread experience variancenote (c) 119 149 Amortisation of interest-related realised gains and lossesnote (d) 88 70 Othernote (e) 221 193 428 412 Total US operations 1,181 999 Notes (a) The increase in unwind of discount and other expected returns of £111 million from £472 million for 2015 to £583 million for 2016 comprises a positive £40 million effect for the underlying growth in the in-force book, a positive £60 million foreign exchange effect and an £11 million impact of the 20 basis points increase in the US 10-year treasury yield during the year. (b) The 2016 credit of £170 million comprises assumption updates for mortality, persistency and expense, together with an increase in the assumed level of tax relief reflecting recent experience. (c) The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults (see note 15(ii)). The spread experience variance in 2016 of £119 million (2015: £149 million) includes the positive effect of transactions previously undertaken to more closely match the overall asset and liability duration. The reduction compared to the prior year reflects the effects of declining yields in the portfolio caused by the prolonged low interest rate environment. (d) 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 period when the bonds would have otherwise matured to better reflect the long-term returns included in operating profits. (e) Other experience variances of £221 million in 2016 (2015: £193 million) include the effects of positive persistency experience and other variances. (iv) UK insurance operations 2016 £m 2015 £m Unwind of discount and other expected returnsnote (a) 445 488 Reduction in future UK corporate tax ratenote (b) 25 55 Othernote (c) (95) 2 Total UK insurance operations 375 545 * The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year. Notes (a) The decrease in unwind of discount and expected returns of £(43)million from 2015 of £488 million to £445 million for 2016 comprises a positive £25 million effect for the underlying growth in the in-force book, more than offset by a £(38) million effect driven by the 70 basis points decrease in the 15-year gilt yield during the year and a negative £(30) million representing the net effect of adopting the Solvency II regime. (b) The credit of £25 million (2015: £55 million) for the reduction in UK corporate tax rate reflects the beneficial effect of applying a lower corporation tax rate (see note 15) to future life profits from in-force business in the UK. (c) Other items comprise the following: 2016 £m 2015 £m Longevity reinsurance (90) (134) Impact of specific management actions to improve solvency positionnote (d) 110 75 Provision for cost of undertaking past non-advised annuity sales review and potential redressnote (e) (145) - Other itemsnote (f) 30 61 (95) 2 (d) The 2016 benefit of £110 million (2015: £75 million) arises from the specific management actions to improve solvency, including the effect of repositioning the fixed income asset portfolio. (e) In response to the findings of the FCA's Thematic Review of Annuities Sales Practices, the UK business will review all internally vesting annuities sold without advice after 1 July 2008. Reflecting this, the UK 2016 result includes a provision of £145 million (post-tax) for the estimated cost of the review and any appropriate customer redress, but excludes any potential for insurance recoveries. (f) The 2016 credit of £30 million (2015: £61 million) comprises assumption updates and experience variances for mortality, expense, persistency and other items. 6 Short-term fluctuations in investment returns Short-term fluctuations in investment returns included in profit for the year arise as follows: (i) Group summary 2016 £m 2015 £m Asia operationsnote (ii) (100) (213) US operationsnote (iii) (1,102) (753) UK insurance operationsnote (iv) 869 (194) Other operationsnote (v) (174) (55) Total (507) (1,215) * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). (ii) Asia operations The short-term fluctuations in investment returns for Asia operations comprise: 2016 £m 2015 £m Hong Kong (105) (144) Singapore 52 (104) Other (47) 35 Total Asia operationsnote (100) (213) * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). Note For 2016, the charge of £(100) million mainly reflects the impact of interest rate movements on bonds and other investment returns, with losses due to increased long-term interest rates in Hong Kong, partly offset by gains in Singapore (as shown in note 15(i)). (iii) US operations The short-term fluctuations in investment returns for US operations comprise: 2016 £m 2015 £m Investment return related experience on fixed income securitiesnote (a) (85) (17) Investment return related impact due to changed expectation of profits on in-force variable annuity business in future periods based on current year separate account return, net of related hedging activity and other itemsnote (b) (1,017) (736) Total US operations (1,102) (753) Notes (a) The charge relating to fixed income securities comprises the following elements: - the impact on portfolio yields of changes in the asset portfolio in the year; - 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; and - credit experience (versus the longer-term assumption). (b) This item reflects the net impact of: - changes in projected future fees and future benefit costs arising from the difference between the actual growth in separate account asset values in the current year of 8.9 per cent and that assumed at the start of the year of 6.0 per cent; and - related hedging activity arising from realised and unrealised gains and losses on equity-related hedges and interest rate options, and other items. (iv) UK insurance operations The short-term fluctuations in investment returns for UK insurance operations comprise: 2016 £m 2015 £m Shareholder-backed annuity businessnote (a) 431 (88) With-profits and other businessnote (b) 438 (106) Total UK insurance operations 869 (194) * The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year. 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. (b) The £438 million fluctuations in 2016 for with-profits and other business represent the impact of achieving a 13.6 per cent pre-tax return on the with-profits fund (including unallocated surplus) compared to the assumed rate of return of 5.0 per cent (2015: total return of 3.1 per cent compared to assumed rate of 5.4 per cent), together with the effect of a partial hedge of future shareholder transfers expected to emerge from the UK's with-profits sub-fund entered into to protect future shareholder with-profit transfers from movements in the UK equity market. (v) Other operations Short-term fluctuations in investment returns for other operations of negative £(174) million (2015: negative £(55) million) include unrealised value movements on investments held outside of the main life operations. 7 Effect of changes in economic assumptions The effects of changes in economic assumptions for in-force business included in the profit for the year arise as follows: (i) Group summary 2016 £m 2015 £m Asia operationsnote (ii) 70 (139) US operationsnote (iii) 45 109 UK insurance operationsnote (iv) (175) 96 Total (60) 66 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). (ii) Asia operations The effect of changes in economic assumptions for Asia operations comprises: 2016 £m 2015 £m Hong Kong 85 100 Indonesia 46 (15) Malaysia (20) (30) Singapore (60) (50) Taiwan 12 (97) Other 7 (47) Total Asia operationsnote 70 (139) * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). Note The positive effect for 2016 of £70 million largely arises from the movements in long-term interest rates (see note 15(i)). Non-operating profits arise from higher interest rates and hence fund earned rates in Hong Kong, together with the beneficial impact of valuing future health and protection profits at lower discount rates in Indonesia. Losses arise from a fall in interest rates in Singapore and a higher discount rate in Malaysia. (iii) US operations The effect of changes in economic assumptions for US operations comprises: 2016 £m 2015 £m Variable annuity business 86 104 Fixed annuity and other general account business (41) 5 Total US operationsnote 45 109 Note For 2016, the credit of £45 million mainly reflects the increase in the assumed separate account return and reinvestment rates for variable annuity business, following the 20 basis points increase in the US 10-year treasury yield, resulting in higher projected fee income and a decrease in projected benefit costs. For fixed annuity and other general account business, the impact reflects the effect on the present value of future projected spread income of applying a higher discount rate on the opening value of the in-force book. (iv) UK insurance operations The effect of changes in economic assumptions for UK insurance operations comprises: 2016 £m 2015 £m Shareholder-backed annuity businessnote (a) (113) (56) With-profits and other businessnote (b) (62) 152 Total UK insurance operations (175) 96 * The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year. Notes (a) For shareholder-backed annuity business the overall negative effect of £(113) million for 2016 (2015: £(56) million) reflects an increase in the cost of capital, driven by the lower interest rates, partially offset by the change in the present value of projected spread income arising mainly from the adoption of lower risk discount rates as shown in note 15(iii). (b) The charge of £(62) million for 2016 (2015: credit of £152 million) reflects the net effect of changes in expected future fund earned rates and risk discount rates (as shown in note 15(iii)). 8 Net core structural borrowings of shareholder-financed operations 31 Dec 2016 £m 31 Dec 2015 £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 (including central finance subsidiaries) cash and short-term investments (2,626) - (2,626) (2,173) - (2,173) Central fundsnote Subordinated debt 5,772 182 5,954 4,018 211 4,229 Senior debt 549 175 724 549 142 691 6,321 357 6,678 4,567 353 4,920 Holding company net borrowings 3,695 357 4,052 2,394 353 2,747 Prudential Capital bank loan 275 - 275 275 - 275 Jackson surplus notes 202 65 267 169 55 224 Net core structural borrowings of shareholder-financed operations 4,172 422 4,594 2,838 408 3,246 Note In June 2016, the Company issued core structural borrowings of US$1,000 million 5.25 per cent Tier 2 perpetual subordinated notes. The proceeds net of costs were £681 million. In September 2016, the Company issued core structural borrowings of US$725 million 4.38 per cent Tier 2 perpetual subordinated notes. The proceeds net of costs were £546 million. The movement in IFRS basis core structural borrowings from 2015 to 2016 also includes foreign exchange effects. 9 Reconciliation of movement in shareholders' equity 2016 £m Long-term business operations Asset management and UK general insurance commission Other operations Group Total Asia operations US operations UK insurance operations Total long-term business operations note (i) note (i) Operating profit based on longer-term investment returns: Long-term business: New businessnote 4 2,030 790 268 3,088 - - 3,088 Business in forcenote 5 1,044 1,181 375 2,600 - - 2,600 3,074 1,971 643 5,688 - 5,688 Asset management and general insurance commission - - - - 508 - 508 Other results - - (33) (33) - (666) (699) Post-tax operating profit 3,074 1,971 610 5,655 508 (666) 5,497 Loss attaching to the held for sale Korea life businessnote 17 (395) - - (395) - (15) (410) Other non-operating (loss) profit (30) (1,057) 694 (393) (38) (140) (571) Profit for the year 2,649 914 1,304 4,867 470 (821) 4,516 Other items taken directly to equity: Exchange movements on foreign operations and net investment hedges 2,714 1,878 - 4,592 83 (464) 4,211 Intra-group dividends and investment in operationsnote (ii) (594) (388) (281) (1,263) (462) 1,725 - External dividends - - - - (1,267) (1,267) Mark to market value movements on Jackson assets backing surplus and required capital - (11) - (11) - - (11) Other movementsnote (iii) (6) (75) (169) (250) 9 (126) (367) Net increase in shareholders' equity 4,763 2,318 854 7,935 100 (953) 7,082 Shareholders' equity at beginning of year: As previously reported 13,643 9,487 9,647 32,777 2,354 (2,772) 32,359 Effect of implementation of Solvency IInote 2 - - (473) (473) - - (473) Other opening adjustmentsnote (v) 66 - 279 345 - (345) - 13,709 9,487 9,453 32,649 2,354 (3,117) 31,886 Shareholders' equity at end of year 18,472 11,805 10,307 40,584 2,454 (4,070) 38,968 Representing: Statutory IFRS basis shareholders' equity: Net assets (liabilities) 4,747 5,204 5,974 15,925 1,224 (3,958) 13,191 Goodwill - - - - 1,230 245 1,475 Total IFRS basis shareholders' equity 4,747 5,204 5,974 15,925 2,454 (3,713) 14,666 Additional retained profit (loss) on an EEV basisnote (iv) 13,725 6,601 4,333 24,659 - (357) 24,302 EEV basis shareholders' equity 18,472 11,805 10,307 40,584 2,454 (4,070) 38,968 Balance at beginning of year: Statutory IFRS basis shareholders' equity: Net assets (liabilities) 3,789 4,154 5,397 13,340 1,124 (2,972) 11,492 Goodwill - - - - 1,230 233 1,463 Total IFRS basis shareholders' equity 3,789 4,154 5,397 13,340 2,354 (2,739) 12,955 Additional retained profit (loss) on an EEV basisnote (iv) 9,920 5,333 4,056 19,309 - (378) 18,931 EEV basis shareholders' equity 13,709 9,487 9,453 32,649 2,354 (3,117) 31,886 * The balance at the beginning of the year has been presented after the adjustments for the impact of Solvency II for UK insurance operations at 1 January 2016 (see note 2 for details), together with the effect of a classification change (see note (v) below). Notes (i) Other operations of £(4,070) million represents the shareholders' equity of £(4,315) million for other operations as shown in the movement in shareholders' equity and includes goodwill of £245 million (2015: £233 million) related to Asia long-term operations. (ii) Intra-group dividends represent dividends that have been declared in the year and investments in operations reflect increases in share capital. The amounts included in note 11 for these items are as per the holding company cash flow at transaction rates. The difference primarily relates to intra-group loans, foreign exchange and other non-cash items. (iii) Other movements include reserve movements in respect of the shareholders' share of actuarial gains and losses on defined benefit pension schemes, share capital subscribed, share-based payments and treasury shares. (iv) 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 £(357) million (2015: £(353) million), as shown in note 8. (v) Other opening adjustments represents the effect of a classification change of £345 million from Other operations to UK insurance operations of £279 million and to Asia insurance operations of £66 million in order to align with Solvency II segmental reporting, which has no overall effect on the Group's EEV. 10 Analysis of movement in net worth and value of in-force for long-term business 2016 £m Total Value of long-term Free Required Total net in-force business surplus capital worth business operations note 11 note Group Shareholders' equity at beginning of year: As previously reported 5,642 4,704 10,346 22,431 32,777 Opening adjustments (1,473) 4,578 3,105 (3,233) (128) 4,169 9,282 13,451 19,198 32,649 New business contribution (903) 595 (308) 3,396 3,088 Existing business - transfer to net worth 3,060 (637) 2,423 (2,423) - Expected return on existing businessnote 5 99 193 292 1,602 1,894 Changes in operating assumptions and experience variancesnote 5 857 (231) 626 80 706 Solvency II and restructuring costs (33) - (33) - (33) Post-tax operating profit 3,080 (80) 3,000 2,655 5,655 Loss attaching to held for sale Korea life businessnote 9 (86) - (86) (309) (395) Other non-operating items (932) 505 (427) 34 (393) Profit for the year from long-term business 2,062 425 2,487 2,380 4,867 Exchange movements on foreign operations and net investment hedges 633 589 1,222 3,370 4,592 Intra-group dividends and investment in operations (1,263) - (1,263) - (1,263) Other movements (250) - (250) (11) (261) Shareholders' equity at end of year 5,351 10,296 15,647 24,937 40,584 Asia operations New business contribution (476) 139 (337) 2,367 2,030 Existing business - transfer to net worth 1,157 (92) 1,065 (1,065) - Expected return on existing businessnote 5 39 54 93 773 866 Changes in operating assumptions and experience variancesnote 5 14 94 108 70 178 Post-tax operating profit 734 195 929 2,145 3,074 Loss attaching to held for sale Korea life businessnote 9 (86) - (86) (309) (395) Other non-operating items (91) 29 (62) 32 (30) Profit for the year from long-term business 557 224 781 1,868 2,649 US operations New business contribution (298) 324 26 764 790 Existing business - transfer to net worth 1,223 (213) 1,010 (1,010) - Expected return on existing businessnote 5 47 53 100 483 583 Changes in operating assumptions and experience variancesnote 5 596 5 601 (3) 598 Post-tax operating profit 1,568 169 1,737 234 1,971 Non-operating items (770) (108) (878) (179) (1,057) Profit for the year from long-term business 798 61 859 55 914 UK insurance operations New business contribution (129) 132 3 265 268 Existing business - transfer to net worth 680 (332) 348 (348) - Expected return on existing businessnote 5 13 86 99 346 445 Changes in operating assumptions and experience variancesnote 5 247 (330) (83) 13 (70) Solvency II and restructuring costs (33) - (33) - (33) Post-tax operating profit 778 (444) 334 276 610 Non-operating items (71) 584 513 181 694 Profit for the year from long-term business 707 140 847 457 1,304 * Opening adjustments represent the impact of implementation of Solvency II for UK insurance operations at 1 January 2016 (see note 2 for details), together with the effect of a classification change, as discussed in note 9(v). Note The net 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 2016 £m 31 Dec 2015 £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 15,371 8,584 3,468 27,423 11,280 7,355 3,043 21,678 Cost of capital (477) (319) (692) (1,488) (438) (229) (713) (1,380) Cost of time value of guarantees (87) (911) - (998) (88) (1,012) - (1,100) Net value of in-force business 14,807 7,354 2,776 24,937 10,754 6,114 2,330 19,198 Total net worth 3,665 4,451 7,531 15,647 2,955 3,373 7,123 13,451 Total embedded valuenote 9 18,472 11,805 10,307 40,584 13,709 9,487 9,453 32,649 * The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results in the table above are presented after the adjustments for the impact of Solvency II for UK insurance operations at 1 January 2016, together with the effect of a classification change, as discussed in note 9(v). 11 Analysis of movement in free surplus For EEV covered business, 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. Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post-tax earnings and shareholders' equity, net of goodwill. Free surplus for other operations is taken to be EEV basis post-tax earnings and shareholders' equity for central operations, net of goodwill, with subordinated debt recorded as free surplus to the extent that it is classified as available capital under Solvency II. Free surplus for insurance and asset management operations and Group total free surplus, including other operations, are shown in the tables below. (i) Underlying free surplus generated - insurance and asset management operations The 2015 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2015 CER comparative results are translated at 2016 average exchange rates. 2016 £m 2015 £m % change AER CER AER CER Asia operations Underlying free surplus generated from in-force life business 1,210 951 1,064 27% 14% Investment in new businessnote (iii)(a) (476) (386) (426) (23)% (12)% Long-term business 734 565 638 30% 15% Eastspring Investmentsnote (iii)(b) 125 101 112 24% 12% Total 859 666 750 29% 15% US operations Underlying free surplus generated from in-force life business 1,866 1,426 1,608 31% 16% Investment in new businessnote (iii)(a) (298) (267) (301) (12)% 1% Long-term business 1,568 1,159 1,307 35% 20% Broker-dealer and asset managementnote (iii)(b) (3) 7 8 (143)% (138)% Total 1,565 1,166 1,315 34% 19% UK insurance operations Underlying free surplus generated from in-force life business 907 878 878 3% 3% Investment in new businessnote (iii)(a) (129) (65) (65) (98)% (98)% Long-term business 778 813 813 (4)% (4)% General insurance commissionnote (iii)(b) 23 22 22 5% 5% Total 801 835 835 (4)% (4)% M&G 341 358 358 (5)% (5)% Prudential Capital 22 18 18 22% 22% Underlying free surplus generated from insurance and asset management operations 3,588 3,043 3,276 18% 10% Representing: Long-term business: Expected in-force cash flows (including expected return on net assets) 3,159 2,693 2,941 17% 7% Effects of changes in operating assumptions, experience variances and other items 824 562 609 47% 35% Underlying free surplus generated from in-force life business 3,983 3,255 3,550 22% 12% Investment in new businessnote (iii)(a) (903) (718) (792) (26)% (14)% Total long-term business, 3,080 2,537 2,758 21% 12% Asset management and general insurance commissionnote (iii)(b) 508 506 518 0% (2)% 3,588 3,043 3,276 18% 10% * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). ** The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year. (ii) Underlying free surplus generated - total Group 2016 £m 2015 £m % change AER CER AER CER Underlying free surplus generated from insurance and asset management operationsnote (i) 3,588 3,043 3,276 18% 10% Other income and expenditure net of restructuring and Solvency II costsnote (iii)(b) (703) (588) (588) (20)% (20)% Interest received on tax settlement 37 - - n/a n/a Group total underlying free surplus generated, including other operations 2,922 2,455 2,688 19% 9% * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). (iii) Movement in free surplus - long-term business and asset management operations 2016 £m Long-term business Asset management and UK general insurance commission Total insurance and asset management operations Central and other operations Group total note 10 note (b) note (b) Underlying free surplus generated 3,080 508 3,588 (666) 2,922 Loss attaching to held for sale Korea life businessnote 10 (86) - (86) - (86) Other non-operating itemsnote (c) (932) (38) (970) (169) (1,139) 2,062 470 2,532 (835) 1,697 Net cash flows to parent companynote (d) (1,236) (482) (1,718) 1,718 - External dividends - (1,267) (1,267) Exchange rate movements, timing differences and other itemsnote (e) 356 112 468 1,144 1,612 Net movement in free surplus 1,182 100 1,282 760 2,042 Balance at 1 January 2016: Balance at beginning of year 5,642 1,124 6,766 1,224 7,990 Opening adjustments (1,473) - (1,473) (345) (1,818) 4,169 1,124 5,293 879 6,172 Balance at end of year 5,351 1,224 6,575 1,639 8,214 Representing: Asia operations 2,142 - 2,142 US operations 2,418 - 2,418 UK operations 2,015 - 2,015 Other operations - 1,639 1,639 6,575 1,639 8,214 Balance at 1 January 2016: Asia operations 1,814 - 1,814 US operations 1,733 - 1,733 UK operations 1,746 - 1,746 Other operations - 879 879 5,293 879 6,172 * Opening adjustments represent the impact of implementation of Solvency II at 1 January 2016 (see note 2 for details), together with the effect of a reclassification between long-term business and other operations, as discussed in note 9(v). Balance at 1January 2016 has been presented after the opening adjustments. 2015 £m Long-term business Asset management and UK general insurance commission Total insurance and asset management operations Central and other operations Group total note (b) note (b) Underlying free surplus generated 2,537 506 3,043 (588) 2,455 Disposal of Japan life business 23 - 23 - 23 Results of the held for sale Korea life businessnote 17 15 - 15 - 15 Other non-operating itemsnote (c) (415) (53) (468) 29 (439) 2,160 453 2,613 (559) 2,054 Net cash flows to parent companynote (d) (1,271) (354) (1,625) 1,625 - External dividends - - - (974) (974) Exchange rate movements, timing differences and other itemsnote (e) 560 159 719 (307) 412 Net movement in free surplus 1,449 258 1,707 (215) 1,492 Balance at beginning of year 4,193 866 5,059 1,439 6,498 Balance at end of year 5,642 1,124 6,766 1,224 7,990 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). Notes (a) Free surplus invested in new business represents amounts set aside for required capital and acquisition costs. (b) Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post-tax earnings and shareholders' equity, net of goodwill. Free surplus for other operations is taken to be EEV basis post-tax earnings and shareholders' equity net of goodwill, with subordinated debt recorded as free surplus to the extent that it is classified as available capital under Solvency II. (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 rate movements, timing differences and other items represent: 2016 £m Long-term business Asset management and UK general insurance commission Total insurance and asset management operations Central and other operations Group total Exchange rate movements 633 83 716 48 764 Mark to market value movements on Jackson assets backing surplus and required capitalnote 9 (11) - (11) - (11) Other itemsnote (f) (266) 29 (237) 1,096 859 356 112 468 1,144 1,612 2015 £m Long-term business Asset management and UK general insurance commission Total insurance and asset management operations Central and other operations Group total Exchange rate movements 67 3 70 10 80 Mark to market value movements on Jackson assets backing surplus and required capital (76) - (76) - (76) Other itemsnote (f) 569 156 725 (317) 408 560 159 719 (307) 412 (f) Other items include the movements in subordinated debt for Other operations, together with the effect of intra-group loans and other non-cash items. The 2015 results also included the effect of a classification change of £702 million from Other operations to UK insurance operations in order to align with Solvency II segmental reporting, with no overall effect on the Group's EEV. 12 Expected transfer of value of in-force business and required capital to free surplus The discounted value of in-force business and required capital can be reconciled to the 2016 and 2015 totals for the emergence of free surplus as follows: 2016 £m 2015 £m Required capitalnote 10 10,296 9,282 Value of in-force business (VIF)note 10 24,937 19,198 Add back: deduction for cost of time value of guaranteesnote 10 998 1,100 Expected free surplus generation from the sale of Korea life businessnote 17 (76) - Other itemsnote (1,430) (1,714) Total 34,725 27,866 * In order to show the cash flows for UK insurance operations on a comparable basis, the 2015 comparative results for UK insurance operations reflect the impact of the implementation of Solvency II at 1 January 2016 (see note 2 for details). 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 include the deduction 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 EEV 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. 2016 £m Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus 2016 Total as shown above 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years Asia operations 16,393 5,141 3,331 2,209 1,515 3,118 1,079 US operations 10,556 5,542 3,203 1,240 372 199 - UK insurance operations 7,776 2,890 1,931 1,119 901 899 36 Total 34,725 13,573 8,465 4,568 2,788 4,216 1,115 100% 39% 25% 13% 8% 12% 3% * Asia operations exclude the cash flows in respect of the held for sale Korea life business. 2015 £m Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus 2015 Total as shown above 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years Asia operations 11,858 3,916 2,552 1,669 1,115 2,055 551 US operations 8,740 4,361 2,752 1,129 383 115 - UK insurance operations 7,268 2,446 1,812 1,198 866 920 26 Total 27,866 10,723 7,116 3,996 2,364 3,090 577 100% 38% 26% 14% 9% 11% 2% ** In order to show the cash flows for UK insurance operations on a comparable basis, the 2015 comparative results for UK insurance operations reflect the impact of the implementation of Solvency II at 1 January 2016 (see note 2 for details). 13 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 2016 and 31 December 2015 and the new business contribution after the effect of required capital for 2016 and 2015 to: - 1 per cent increase in the discount rates; - 1 per cent increase in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates); - 0.5 per cent decrease in interest rates (1 per cent decrease for 2015), 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); and - 5 basis points increase in UK long-term expected defaults. * To reflect the current level of low interest rates, the sensitivity of new business contribution and embedded value to a 0.5 per cent reduction in interest rates is shown for 2016. In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. New business contribution 2016 £m 2015 £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 New business contributionnote 4 2,030 790 268 3,088 1,482 809 318 2,609 Discount rates - 1% increase (375) (43) (32) (450) (254) (38) (40) (332) Interest rates - 1% increase 51 64 27 142 30 80 7 117 Interest rates - 1% decrease - - - - (78) (127) (9) (214) Interest rates - 0.5% decrease (30) (49) (15) (94) - - - - Equity/property yields - 1% rise 129 91 28 248 71 95 20 186 Long-term expected defaults - 5 bps increase - - (2) (2) - - (8) (8) * In order to show the Asia long-term business on a comparable basis, the 2015 comparatives for new business contribution have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). ** The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. Embedded value of long-term business operations 31 Dec 2016 £m 31 Dec 2015 £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 9 18,472 11,805 10,307 40,584 13,643 9,487 9,647 32,777 Discount rates - 1% increase (2,078) (379) (809) (3,266) (1,448) (271) (586) (2,305) Interest rates - 1% increase (701) (241) (638) (1,580) (380) (46) (328) (754) Interest rates - 1% decrease - - - - 132 (93) 426 465 Interest rates - 0.5% decrease 248 25 369 642 - - - - Equity/property yields - 1% rise 771 653 314 1,738 506 514 271 1,291 Equity/property market values - 10% fall (361) (11) (399) (771) (246) (411) (373) (1,030) Statutory minimum capital 150 223 - 373 148 162 4 314 Long-term expected defaults - 5 bps increase - - (138) (138) - - (141) (141) * The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. 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 assumptions 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 changes in interest rates, the effect shown above for Jackson would also be recorded within the fair value movements on assets backing surplus and required capital, which are taken directly to shareholders' equity. (b) Sensitivity analysis - non-economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2016 and 31 December 2015 and the new business contribution after the effect of required capital for 2016 and 2015 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 (ie increased longevity). New business contribution 2016 £m 2015 £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 New business contributionnote 4 2,030 790 268 3,088 1,482 809 318 2,609 Maintenance expenses - 10% decrease 33 10 3 46 27 8 2 37 Lapse rates - 10% decrease 132 26 11 169 104 25 9 138 Mortality and morbidity - 5% decrease 57 4 (4) 57 49 1 (13) 37 Change representing effect on: Life business 57 4 - 61 49 1 1 51 UK annuities - - (4) (4) - - (14) (14) * In order to show the Asia long-term business on a comparable basis, the 2015 comparatives for new business contribution have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). ** The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. Embedded value of long-term business operations 31 Dec 2016 £m 31 Dec 2015 £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 9 18,472 11,805 10,307 40,584 13,643 9,487 9,647 32,777 Maintenance expenses - 10% decrease 187 104 91 382 153 80 68 301 Lapse rates - 10% decrease 659 533 79 1,271 508 394 75 977 Mortality and morbidity - 5% decrease 554 192 (302) 444 449 172 (299) 322 Change representing effect on: Life business 554 192 12 758 449 172 11 632 UK annuities - - (314) (314) - - (310) (310) * The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. 14 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 14(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 14(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, including the Group's investments in joint venture and associate insurance operations, 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 asset management and other operations. Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management, as described in note 14(a)(vii). The definition of long-term business operations 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, mortality and morbidity, as described in note 15. 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 premiums and one-tenth of single premiums. PVNBP is calculated as equalling single premiums plus the present value of expected premiums of regular premium new 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 an IFRS basis. However, in determining the movements on the additional shareholders' interest, the basis for calculating the EEV result for Jackson 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 (depreciation) 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 locked-in required capital supporting the Group's long-term business. 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 post-tax investment earnings 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 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 (FA) 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 both years, depending on the particular product, jurisdiction where issued, and date of issue. For 2016, 87 per cent (2015: 87 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 2.6 per cent (2015: 2.6 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 upon depletion of funds (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 policyholders' value in the event of poor equity market performance. Jackson hedges the GMWB and GMDB guarantees through the use of equity options and futures contracts, and fully reinsures the GMIB guarantees. Jackson also issues fixed index annuities (FIA) 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 PAC with-profits fund also held a provision on the Solvency II basis of £62 million at 31 December 2016 (Pillar I Peak 2 basis at 31 December 2015: £47 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 Solvency II basis of £571 million was held in SAIF at 31 December 2016 (Pillar I Peak 2 basis at 31 December 2015: £412 million) to honour the guarantees. As described in note 14(a)(i), 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' funds. Time value The value of financial options and guarantees comprises two parts: - The first part arises from a deterministic valuation on best estimate assumptions (the intrinsic value). - The second 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 15(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. Following the implementation of Solvency II which became effective on 1 January 2016, a portion of future shareholder transfers expected from the with-profits fund is recognised within net worth, together with the associated 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 (RBC) required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL); and - UK insurance operations: the capital requirements are set at the Solvency II Solvency Capital Requirement (SCR) for shareholder-backed business as a whole; for 2015, the capital requirements were set to an amount at least equal to the higher of Solvency I Pillar I and Pillar II requirements for shareholder-backed business 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 in-force and new business 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 assets for covered business. (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. For Asia and US operations, the risk-free rates are based on 10-year local government bond yields. For UK insurance operations, following the implementation of Solvency II on 1 January 2016, the EEV risk-free rate is based on the full term structure of interest rates, ie a yield curve, rather than using a flat 15-year gilt yield (as for 2015). This yield curve is used to determine the embedded value at the end of the reporting period. 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 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 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 15(ii). In determining this allowance a number of factors have been considered. These factors, in particular, include: - 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 - 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 liabilities, the future cash flows are discounted using the swap yield curve plus an allowance for liquidity premium based on the Solvency II allowance for credit risk. The Solvency II allowance is set by European Insurance and Occupational Pensions Authority (EIOPA) using a prudent assumption that all future downgrades will be replaced annually, and allowing for the credit spread floor. 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 a best estimate credit risk allowance. The remaining elements of prudence within the Solvency II allowance are incorporated into the risk margin included in the discount rate, shown in note 14(iii). In 2015, the allowance for liquidity premium was based on Prudential's assessment of the expected return on the assets backing the annuity liabilities after allowing for expected long-term defaults, a credit risk premium, an allowance for a 1-notch downgrade of the asset portfolio subject to credit risk; and an allowance for short-term downgrades and defaults. (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 risk free, 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 Asia operations in China, Indonesia, the Philippines, Taiwan, Thailand and Vietnam, additional allowances are applied for emerging market risk ranging from 100 to 250 basis points. For the Group's US business and UK business, no additional allowance is necessary. In 2015, for UK shareholder-backed annuity business, a further allowance of 50 basis points was used to reflect the longevity risk, which is covered by the solvency capital requirements following the implementation of Solvency II from 1 January 2016. (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 exchange rates. The principal exchange rates are shown in note A1 of the IFRS financial 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 policies 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 the PAC non-profit sub-fund. (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 14(b)(ii) below) and incorporate the following: - new business contribution, as defined in note 14(a)(ii); - unwind of discount on the value of in-force business and other expected returns, as described in note 14(b)(iii) below; - the impact of routine changes of estimates relating to operating assumptions, as described in note 14(b)(iv) below; and - operating experience variances, as described in note 14(b)(v) below. Non-operating results comprise the recurrent items of: - short-term fluctuations in investment returns; - the mark to market value movements on core borrowings; and - the effect of changes in economic assumptions. In addition, non-operating profit also includes the effect of adjustment to the carrying value of the held for sale Korea life business in 2016 and a reclassification of the result attributable to the held for sale Korea life business in both years (see note 17 for details). Total profit attributable to shareholders and basic earnings per share include these items, together with actual investment returns. The Group 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 14(b)(iii) below. For the purpose of determining the long-term returns for debt securities of US operations for FA 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 VA separate account business, operating profit includes the unwind of discount on the opening value of in-force business 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 operating 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 year (adjusted for the effect of current year economic and operating assumption changes); and - required capital and surplus assets. UK operations In applying this general approach, the unwind of discount included in operating profit is determined by reference to the following: - The unwind is determined by reference to an implied single risk discount rate for 2016. Following the implementation of Solvency II the EEV risk-free rate is based on a yield curve (as set out in note 14a(viii) above), which is used to derive a single implied discount rate which, if this rate had been used, would reproduce the same embedded value as that calculated by reference to the yield curve. The difference between the operating profit determined using the single implied discount rate and that derived using the yield curve is included within non-operating profit. - For with-profits business, the opening value of in-force is adjusted for the effect of short-term investment volatility due to market movements (ie smoothed). In the summary statement of financial position and for total profit reporting, asset values and investment returns are not smoothed. At 31 December 2016, the shareholders' interest in the smoothed surplus assets used for this purpose only were £77 million lower (31 December 2015: £58 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 non-economic assumptions on the value of in-force at the end of the year. For presentational purposes the effect of changes is delineated to show the effect on the opening value of in-force as operating assumption changes, with the experience variances subsequently being determined by reference to the end-of-period assumptions (see note 14(b)(v) below). (v) Operating experience variances Operating profit includes the effect of experience variances on non-economic assumptions, such as persistency, mortality and morbidity, expenses and other factors, which are calculated with reference to the end-of-period assumptions. (vi) Effect of changes in economic assumptions Movements in the value of in-force business at the beginning of the year 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. For UK insurance operations, the effect is after allowing for the recalculation of transitional measures on technical provisions. 15 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 year-end risk-free rates of return (defined below for each of the Group's insurance operations). 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 profit with the efforts and risks of current management actions, particularly with regard to business sold during the year. (i) Asia operationsnotes (b), (c) The risk-free rates of return for Asia operations are defined as 10-year government bond yields at the end of the year. Risk discount rate % 10-year government bond yield % Expected long-term Inflation % New business In-force business 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 2016 2015 2016 2015 2016 2015 2016 2015 China 9.6 9.4 9.6 9.4 3.1 2.9 2.5 2.5 Hong Kongnotes (b), (d) 3.9 3.7 3.9 3.7 2.5 2.3 2.3 2.3 Indonesia 12.0 12.8 12.0 12.8 8.1 8.9 5.0 5.0 Malaysianote (d) 6.8 6.6 6.9 6.7 4.3 4.2 2.5 2.5 Philippines 11.6 11.3 11.6 11.3 4.8 4.6 4.0 4.0 Singaporenote (d) 4.2 4.3 5.0 5.1 2.5 2.6 2.0 2.0 Taiwan 4.0 4.0 4.0 3.9 1.2 1.0 1.0 1.0 Thailand 9.4 9.3 9.4 9.3 2.7 2.5 3.0 3.0 Vietnam 13.0 13.8 13.0 13.8 6.3 7.1 5.5 5.5 Total weighted risk discount ratenote (a) 5.3 5.9 6.1 6.4 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 contribution and the closing value of in-force business. The changes in the risk discount rates for individual Asia territories reflect the movements in 10-year 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) Equity risk premiums in Asia range from 3.5 per cent to 8.7 per cent (2015: from 3.5 per cent to 8.6 per cent). (d) The mean equity return assumptions for the most significant equity holdings of the Asia operations are: 31 Dec 2016 % 31 Dec 2015 % Hong Kong 6.5 6.3 Malaysia 10.2 10.2 Singapore 8.5 8.6 (ii) US operations The risk-free rates of return for US operations are defined as 10-year treasury bond yield at the end of the year. 31 Dec 2016 % 31 Dec 2015 % Assumed new business spread margins: Fixed annuity business: January to June issues 1.25 1.25 July to December issues 1.25 1.50 Fixed index annuity business: January to June issues 1.50 1.50 July to December issues 1.50 1.75 Institutional business 0.50 0.70 Allowance for long-term defaults included in projected spreadnote 14(a)(viii) 0.21 0.24 Risk discount rate: Variable annuity: Risk discount rate 6.9 6.8 Additional allowance for credit risk included in risk discount ratenote 14(a)(viii) 0.2 0.2 Non-variable annuity: Risk discount rate 4.1 3.9 Additional allowance for credit risk included in risk discount ratenote 14(a)(viii) 1.0 1.0 Weighted average total: New business 6.8 6.7 In-force business 6.5 6.2 US 10-year treasury bond yield 2.5 2.3 Pre-tax expected long-term nominal rate of return for US equities 6.5 6.3 Expected long-term rate of inflation 3.0 2.8 Equity risk premium 4.0 4.0 S&P equity return volatilitynote (v) 18.0 18.0 * 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 Effective from 1 January 2016, following the implementation of Solvency II, the EEV risk-free rate is based on the full term structure of interest rates, ie a yield curve, which is used to determine the embedded value at the end of the reporting period. For 2016, these yield curves are used to derive pre-tax expected long-term nominal rates of investment return and risk discount rates. For the purpose of determining the unwind of discount in the analysis of operating profit, these yield curves are used to derive a single implied risk discount rate, as explained in note 14(a)(viii). For 2015, risk-free rates of return and risk discount rates were based on a flat 15-year gilt yield at the end of the year. The key economic assumptions are shown below for both years, for 2016 the single implied risk discount rate is shown, along with the 15-year nominal rate of return based on the yield curve. For 2015 the long-term nominal rates of return are shown. 31 Dec 2016 % 31 Dec 2015 % Shareholder-backed annuity business:note (a) Risk discount rate: New business 3.9 5.7 In-force business 4.5 7.4 Pre-tax expected 15-year / long-term nominal rates of investment return:note (b) New business 3.0 3.5 In-force business 2.8 3.5 With-profits and other business: Risk discount rate: New business 4.7 5.6 In-force business 4.9 5.7 Pre-tax expected 15-year / long-term nominal rates of investment return:note (b) Overseas equities 6.2 to 9.4 6.3 to 9.4 Property 4.5 5.2 15-year gilt yield 1.7 2.4 Corporate bonds 3.5 4.1 Expected 15-year / long-term rate of inflation 3.6 3.1 Equity risk premium 4.0 4.0 * The risk discount rates for with-profits and other business shown above represents a weighted average total of the rates applied to determine the present value of future cash flows, including a portion of future with-profits business shareholders' transfers recognised in net worth Notes (a) For shareholder-backed annuity business, the movements in the pre-tax long-term nominal rates of return and risk discount rates for new and in-force businesses reflect the effect of changes in asset yields (based on average yields for new business). (b) The table below shows the pattern of the UK risk-free Solvency II spot yield curve at the end of 31 December 2016: 31 Dec 2016 Year 1 5 10 15 20 Risk-free rate (%) 0.4 0.7 1.1 1.3 1.3 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 14(a)(iv). (iv) Asia operations - The stochastic cost of guarantees is primarily of significance for the Hong Kong, 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, and the volatility of government bond yields ranges from 0.9 per cent to 2.3 per cent for 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 for both years, and the standard deviation of interest rates ranges from 2.3 per cent to 2.6 per cent (2015: from 2.2 per cent to 2.5 per cent). (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 return plus a mean-reverting spread. - Property returns are also modelled on a risk-free 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), 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 14(a)(x). The local standard corporate tax rates applicable for the most significant operations for 2016 and 2015 are as follows: Standard corporate tax rates % Asia operations: Hong Kong 16.5 per cent on 5 per cent of premium income Indonesia 25.0 Malaysia 2015: 25.0; from 2016: 24.0 Singapore 17.0 US operations 35.0 UK operations 2015: 20.0; from 2017: 19.0; from 2020: 17.0 * The Finance Bill included a reduction in the UK corporate tax rate from 18 per cent to 17 per cent effective from 1 April 2020. The impact of this reduction on the UK in-force business is shown in note 5(iv)(b). 16 New business premiums and contributionsnote (i) Single premiums Regular premiums Annual premium and contribution equivalents (APE) Present value of new business premiums (PVNBP) note 14(a)(ii) note 14(a)(ii) 2016 £m 2015 £m 2016 £m 2015 £m 2016 £m 2015 £m 2016 £m 2015 £m Group insurance operations Asia* 2,397 1,938 3,359 2,518 3,599 2,712 19,271 14,428 US 15,608 17,286 - - 1,561 1,729 15,608 17,286 UK 9,836 6,955 177 179 1,160 874 10,513 7,561 Group total excluding UK bulk annuities 27,841 26,179 3,536 2,697 6,320 5,315 45,392 39,275 UK bulk annuities - 1,508 - - - 151 - 1,508 Group total 27,841 27,687 3,536 2,697 6,320 5,466 45,392 40,783 Asia insurance operations Cambodia - - 14 8 14 8 66 38 Hong Kong 1,140 546 1,798 1,158 1,912 1,213 10,930 7,007 Indonesia 236 230 255 303 279 326 1,048 1,224 Malaysia 110 100 233 201 244 211 1,352 1,208 Philippines 91 146 61 44 70 59 278 287 Singapore 523 454 299 264 351 309 2,627 2,230 Thailand 80 69 81 88 89 95 404 422 Vietnam 6 6 115 82 116 83 519 343 SE Asia operations including Hong Kong 2,186 1,551 2,856 2,148 3,075 2,304 17,224 12,759 Chinanote (ii) 124 308 187 111 199 142 880 739 Taiwan 36 45 146 127 150 131 499 442 Indianote (iii) 51 34 170 132 175 135 668 488 Total Asia insurance operations 2,397 1,938 3,359 2,518 3,599 2,712 19,271 14,428 US insurance operations Variable annuities 10,653 11,977 - - 1,065 1,198 10,653 11,977 Elite Access (variable annuity) 2,056 3,144 - - 206 314 2,056 3,144 Fixed annuities 555 477 - - 55 48 555 477 Fixed index annuities 508 458 - - 51 46 508 458 Wholesale 1,836 1,230 - - 184 123 1,836 1,230 Total US insurance operations 15,608 17,286 - - 1,561 1,729 15,608 17,286 UK and Europe insurance operations Individual annuities 546 565 - - 55 57 546 565 Bonds 3,834 3,327 - - 384 333 3,835 3,328 Corporate pensions 110 175 121 135 132 152 479 600 Individual pensions 2,532 1,185 35 32 289 150 2,681 1,295 Income drawdown 1,649 1,024 - - 165 102 1,649 1,024 Other products 1,165 679 21 12 135 80 1,323 749 Total Retail 9,836 6,955 177 179 1,160 874 10,513 7,561 Wholesale - 1,508 - - - 151 - 1,508 Total UK and Europe insurance operations 9,836 8,463 177 179 1,160 1,025 10,513 9,069 Group total 27,841 27,687 3,536 2,697 6,320 5,466 45,392 40,783 Group total excluding UK bulk annuities 27,841 26,179 3,536 2,697 6,320 5,315 45,392 39,275 * For 2016, the risk discount rates used to calculate PVNBP for UK insurance operations are on a basis that reflects the Solvency II regime effective on 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. ** The new business premiums and contributions exclude the results attributable to the held for sale Korea life business (see note 17 for details). The 2015 comparatives have been similarly adjusted. *** Following Prudential's withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately. 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. A reconciliation of APE and gross earned premiums on an IFRS basis is provided in Note E within the EEV unaudited financial information. (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. 17 Agreement to sell Korea life business In November 2016, the Group reached an agreement to sell the life insurance subsidiary in Korea, PCA Life Insurance, to Mirae Asset Life Insurance for KRW 170 billion (£114 million at 31 December 2016 closing exchange rate). Completion of the transaction is subject to regulatory approval. Consistent with the classification of the business as held for sale for IFRS reporting, the EEV carrying value has been set to £105 million at 31 December 2016, representing the estimated proceeds, net of £9 million of related expenses. In order to facilitate comparisons of the Group's retained businesses, the EEV basis operating profit excludes the contribution from the Korea life business. The 2015 comparative results have been similarly adjusted. For 2016, the post-tax result for the year of £5 million, including short-term fluctuations in investment returns and the effect of changes in economic assumptions, together with the £(415) million adjustment to the carrying value have given rise to an aggregate loss of £(410) million. The 2015 amount of £39 million represents the previously reported profit after tax for this business. The tables below show the results of the held for sale Korea life business which were included in the Group's results for half year 2016 and full year 2015. EEV post-tax results Half year 2016 £m Full year 2015 £m Operating profit New business contribution 3 8 Profit from business in force 3 33 6 41 Non-operating loss (17) (2) Total profit after tax (11) 39 Underlying free surplus generated New business contribution (9) (27) Profit from business in force 3 34 (6) 7 Non-operating profit 17 8 Total free surplus generated 11 15 New business premiums and contributions Single premiums £m Regular premiums £m Annual premium and contribution equivalents (APE) £m Present value of new business premiums (PVNBP) £m Half year 2016 42 46 50 276 Full year 2015 182 123 141 780 Additional EEV 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, ie falling within one of the classes of insurance specified in part II of Schedule 1 to the Regulated Activities Order under Prudential Regulation Authority 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. Post-tax New Business Profit has been determined using the European Embedded Value (EEV) methodology set out in our EEV basis results supplement. The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016. The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. 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. * The additional financial information is not covered by the KPMG independent audit opinion. Notes to Schedules A(i) to A(v) (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. Average rate Closing rate Local Currency: £ 2016 2015 % appreciation (depreciation) of local currency against GBP 31 Dec 2016 31 Dec 2015 % appreciation (depreciation) of local currency against GBP China 8.99 9.61 7% 8.59 9.57 11% Hong Kong 10.52 11.85 13% 9.58 11.42 19% Indonesia 18,026.11 20,476.93 14% 16,647.30 20,317.71 22% Malaysia 5.61 5.97 6% 5.54 6.33 14% Singapore 1.87 2.10 12% 1.79 2.09 17% Thailand 47.80 52.38 10% 44.25 53.04 20% US 1.35 1.53 13% 1.24 1.47 19% Vietnam 30,292.79 33,509.21 11% 28,136.99 33,140.64 18% ** Average rate is for the 12 month period 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 the second half of the year represent the difference between the year-to-date reported sterling results at the year end and the results for the first half of the year. The second half results therefore include the true up between the first half and full year average exchange rates applied to the first half sales. (1b) Insurance new business for overseas operations for 2015 has been calculated using constant exchange rates (CER). (2) Annual Equivalents, calculated as regular new business contributions plus 10 per cent of single new business contributions, are subject to rounding. 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. For 2016, the risk discount rates used to calculate PVNBP for UK insurance operations are on a basis that reflects the Solvency II regime effective on 1 January 2016. The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. (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 £146,711 million (2015: £89,553 million) and net inflows of £403 million (2015: net inflows £1,066 million). (9) Total Group Investment Operations funds under management exclude MMF funds under management of £7,714 million at 31 December 2016 (31 December 2015: £6,006 million). (10) The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016. The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. (11) Following Prudential's withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately. (12) The 2015 comparatives for Asia insurance operations have been adjusted to exclude the contribution from the held for sale Korea life business (APE sales of £141 million, PVNBP of £780 million, and new business contribution of £8 million). Schedule A(i) New Business Insurance Operations (Actual Exchange Rates) Single premium Regular premium Annual Equivalents PVNBP 2016 2015 2016 2015 2016 2015 2016 2015 YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) £m £m £m £m £m £m £m £m Group Insurance Operations Asia(1a) (12) 2,397 1,938 24% 3,359 2,518 33% 3,599 2,712 33% 19,271 14,428 34% US(1a) 15,608 17,286 (10)% - - - 1,561 1,729 (10)% 15,608 17,286 (10)% UK retail(11) 9,836 6,955 41% 177 179 (1)% 1,160 874 33% 10,513 7,561 39% Group total excluding UK bulk annuities(12) 27,841 26,179 6% 3,536 2,697 31% 6,320 5,315 19% 45,392 39,275 16% UK bulk annuities(11) - 1,508 (100)% - - - - 151 (100)% - 1,508 (100)% Group Total(12) 27,841 27,687 1% 3,536 2,697 31% 6,320 5,466 16% 45,392 40,783 11% Asia Insurance Operations(1a) Cambodia - - - 14 8 75% 14 8 75% 66 38 74% Hong Kong 1,140 546 109% 1,798 1,158 55% 1,912 1,213 58% 10,930 7,007 56% Indonesia 236 230 3% 255 303 (16)% 279 326 (14)% 1,048 1,224 (14)% Malaysia 110 100 10% 233 201 16% 244 211 16% 1,352 1,208 12% Philippines 91 146 (38)% 61 44 39% 70 59 19% 278 287 (3)% Singapore 523 454 15% 299 264 13% 351 309 14% 2,627 2,230 18% Thailand 80 69 16% 81 88 (8)% 89 95 (6)% 404 422 (4)% Vietnam 6 6 - 115 82 40% 116 83 40% 519 343 51% SE Asia Operations including Hong Kong 2,186 1,551 41% 2,856 2,148 33% 3,075 2,304 33% 17,224 12,759 35% China(6) 124 308 (60)% 187 111 68% 199 142 40% 880 739 19% Taiwan 36 45 (20)% 146 127 15% 150 131 15% 499 442 13% India(4) 51 34 50% 170 132 29% 175 135 30% 668 488 37% Total Asia Insurance Operations(12) 2,397 1,938 24% 3,359 2,518 33% 3,599 2,712 33% 19,271 14,428 34% US Insurance Operations(1a) Variable annuities 10,653 11,977 (11)% - - - 1,065 1,198 (11)% 10,653 11,977 (11)% Elite Access (variable annuity) 2,056 3,144 (35)% - - - 206 314 (34)% 2,056 3,144 (35)% Fixed annuities 555 477 16% - - - 55 48 15% 555 477 16% Fixed index annuities 508 458 11% - - - 51 46 11% 508 458 11% Wholesale 1,836 1,230 49% - - - 184 123 50% 1,836 1,230 49% Total US Insurance Operations 15,608 17,286 (10)% - - - 1,561 1,729 (10)% 15,608 17,286 (10)% UK & Europe Insurance Operations Individual annuities 546 565 (3)% - - - 55 57 (4)% 546 565 (3)% Bonds 3,834 3,327 15% - - - 384 333 15% 3,835 3,328 15% Corporate pensions 110 175 (37)% 121 135 (10)% 132 152 (13)% 479 600 (20)% Individual pensions 2,532 1,185 114% 35 32 9% 289 150 93% 2,681 1,295 107% Income drawdown 1,649 1,024 61% - - - 165 102 62% 1,649 1,024 61% Other products 1,165 679 72% 21 12 75% 135 80 69% 1,323 749 77% Total UK Retail 9,836 6,955 41% 177 179 (1)% 1,160 874 33% 10,513 7,561 39% UK bulk annuities - 1,508 (100)% - - - - 151 (100)% - 1,508 (100)% Total UK & Europe Insurance Operations 9,836 8,463 16% 177 179 (1)% 1,160 1,025 13% 10,513 9,069 16% Group Total(12) 27,841 27,687 1% 3,536 2,697 31% 6,320 5,466 16% 45,392 40,783 11% Group total excluding UK bulk annuities(11) (12) 27,841 26,179 6% 3,536 2,697 31% 6,320 5,315 19% 45,392 39,275 16% Schedule A(ii) New Business Insurance Operations (Constant Exchange Rates) Note: In schedule A(ii) constant exchange rates (CER) have been used to calculate insurance new business for overseas operations for 2015. Single premium Regular premium Annual Equivalents PVNBP 2016 2015 2016 2015 2016 2015 2016 2015 YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) YTD YTD +/- (%) £m £m £m £m £m £m £m £m Group Insurance Operations Asia(1a) (1b) (12) 2,397 2,150 11% 3,359 2,805 20% 3,599 3,020 19% 19,271 16,081 20% US(1a) (1b) 15,608 19,499 (20)% - - - 1,561 1,950 (20)% 15,608 19,499 (20)% UK retail(11) 9,836 6,955 41% 177 179 (1)% 1,160 874 33% 10,513 7,561 39% Group total excluding UK bulk annuities(11) (12) 27,841 28,604 (3)% 3,536 2,984 18% 6,320 5,844 8% 45,392 43,141 5% UK bulk annuities - 1,508 (100)% - - - - 151 (100)% - 1,508 (100)% Group Total(12) 27,841 30,112 (8)% 3,536 2,984 18% 6,320 5,995 5% 45,392 44,649 2% Asia Insurance Operations(1a) (1b) Cambodia - - - 14 8 75% 14 8 75% 66 43 53% Hong Kong 1,140 616 85% 1,798 1,306 38% 1,912 1,368 40% 10,930 7,895 38% Indonesia 236 262 (10)% 255 345 (26)% 279 371 (25)% 1,048 1,391 (25)% Malaysia 110 106 4% 233 214 9% 244 225 8% 1,352 1,287 5% Philippines 91 158 (42)% 61 48 27% 70 63 11% 278 311 (11)% Singapore 523 510 3% 299 296 1% 351 347 1% 2,627 2,507 5% Thailand 80 76 5% 81 96 (16)% 89 103 (14)% 404 462 (13)% Vietnam 6 6 - 115 91 26% 116 92 26% 519 379 37% SE Asia Operations including Hong Kong 2,186 1,734 26% 2,856 2,404 19% 3,075 2,577 19% 17,224 14,275 21% China(6) 124 329 (62)% 187 119 57% 199 152 31% 880 789 12% Taiwan 36 50 (28)% 146 141 4% 150 146 3% 499 491 2% India(4) 51 37 38% 170 141 21% 175 145 21% 668 526 27% Total Asia Insurance Operations(12) 2,397 2,150 11% 3,359 2,805 20% 3,599 3,020 19% 19,271 16,081 20% US Insurance Operations(1a) (1b) Variable annuities 10,653 13,512 (21)% - - - 1,065 1,351 (21)% 10,653 13,512 (21)% Elite Access (variable annuity) 2,056 3,547 (42)% - - - 206 355 (42)% 2,056 3,547 (42)% Fixed annuities 555 538 3% - - - 55 54 2% 555 538 3% Fixed index annuities 508 517 (2)% - - - 51 52 (2)% 508 517 (2)% Wholesale 1,836 1,385 33% - - - 184 138 33% 1,836 1,385 33% Total US Insurance Operations 15,608 19,499 (20)% - - - 1,561 1,950 (20)% 15,608 19,499 (20)% UK & Europe Insurance Operations Individual annuities 546 565 (3)% - - - 55 57 (4)% 546 565 (3)% Bonds 3,834 3,327 15% - - - 384 333 15% 3,835 3,328 15% Corporate pensions 110 175 (37)% 121 135 (10)% 132 152 (13)% 479 600 (20)% Individual pensions 2,532 1,185 114% 35 32 9% 289 150 93% 2,681 1,295 107% Income drawdown 1,649 1,024 61% - - - 165 102 62% 1,649 1,024 61% Other products 1,165 679 72% 21 12 75% 135 80 69% 1,323 749 77% Total UK Retail 9,836 6,955 41% 177 179 (1)% 1,160 874 33% 10,513 7,561 39% UK bulk annuities - 1,508 (100)% - - - - 151 (100)% - 1,508 (100)% Total UK & Europe Insurance Operations 9,836 8,463 16% 177 179 (1)% 1,160 1,025 13% 10,513 9,069 16% Group Total(12) 27,841 30,112 (8)% 3,536 2,984 18% 6,320 5,995 5% 45,392 44,649 2% Group total excluding UK bulk annuities(11) (12) 27,841 28,604 (3)% 3,536 2,984 18% 6,320 5,844 8% 45,392 43,141 5% Schedule A(iii) Total Insurance New Business APE (Actual and Constant Exchange Rates) Note: In schedule A(iii) amounts for the first half (H1) and second half (H2) of 2015 are presented on both actual exchange rate (AER) and constant exchange rate (CER). AER CER 2015 2016 2015 2016 H1 H2 H1 H2 H1 H2 H1 H2 £m £m £m £m £m £m £m £m Group Insurance Operations Asia(1a) (12) 1,292 1,420 1,605 1,994 1,408 1,612 1,700 1,899 US(1a) 857 872 782 779 965 985 827 734 UK retail(11) 393 481 593 567 393 481 593 567 Group total excluding UK bulk annuities(11) (12) 2,542 2,773 2,980 3,340 2,766 3,078 3,120 3,200 UK bulk annuities 117 34 - - 117 34 - - Group Total(12) 2,659 2,807 2,980 3,340 2,883 3,112 3,120 3,200 Asia Insurance Operations(1a) Cambodia 3 5 6 8 4 4 6 8 Hong Kong 519 694 868 1,044 582 786 919 993 Indonesia 183 143 125 154 200 171 133 146 Malaysia 105 106 109 135 104 121 115 129 Philippines 29 30 30 40 31 32 32 38 Singapore 153 156 142 209 168 179 151 200 Thailand 48 47 43 46 50 53 46 43 Vietnam 34 49 44 72 37 55 46 70 SE Asia Operations including Hong Kong 1,074 1,230 1,367 1,708 1,176 1,401 1,448 1,627 China(6) 89 53 109 90 94 58 114 85 Taiwan 61 70 56 94 66 80 61 89 India(4) 68 67 73 102 72 73 77 98 Total Asia Insurance Operations(12) 1,292 1,420 1,605 1,994 1,408 1,612 1,700 1,899 US Insurance Operations(1a) Variable annuities 606 592 500 565 682 669 529 536 Elite Access (variable annuity) 166 148 99 107 187 168 104 102 Fixed annuities 23 25 28 27 27 27 30 25 Fixed index annuities 21 25 28 23 24 28 30 21 Wholesale 41 82 127 57 45 93 134 50 Total US Insurance Operations 857 872 782 779 965 985 827 734 UK & Europe Insurance Operations Individual annuities 28 29 33 22 28 29 33 22 Bonds 156 177 196 188 156 177 196 188 Corporate pensions 76 76 74 58 76 76 74 58 Individual pensions 62 88 134 155 62 88 134 155 Income drawdown 39 63 81 84 39 63 81 84 Other products 32 48 75 60 32 48 75 60 Total UK Retail 393 481 593 567 393 481 593 567 UK bulk annuities 117 34 - - 117 34 - - Total UK & Europe Insurance Operations 510 515 593 567 510 515 593 567 Group Total(12) 2,659 2,807 2,980 3,340 2,883 3,112 3,120 3,200 Group total excluding UK bulk annuities(11) (12) 2,542 2,773 2,980 3,340 2,766 3,078 3,120 3,200 Schedule A(iv) Investment Operations (Actual Exchange Rates) 2015 2016 H1 H2 H1 H2 £m £m £m £m Group Investment Operations Opening FUM 162,380 163,488 156,686 162,384 Net Flows:(8) 2,186 (3,223) (7,378) 1,123 - Gross Inflows 32,078 22,392 15,894 24,239 - Redemptions (29,892) (25,615) (23,272) (23,116) Other Movements (1,078) (3,579) 13,076 11,298 Total Group Investment Operations(9) 163,488 156,686 162,384 174,805 M&G Retail Opening FUM 74,289 69,158 60,801 59,217 Net Flows: (3,418) (7,440) (6,122) (131) - Gross Inflows 14,264 6,836 6,160 9,625 - Redemptions (17,682) (14,276) (12,282) (9,756) Other Movements (1,713) (917) 4,538 5,123 Closing FUM 69,158 60,801 59,217 64,209 Comprising amounts for: UK 38,701 35,738 34,308 35,208 Europe (excluding UK) 28,726 23,524 23,020 26,905 South Africa 1,731 1,539 1,889 2,096 69,158 60,801 59,217 64,209 Institutional(3) Opening FUM 62,758 64,242 65,604 70,439 Net Flows: 1,043 2,807 (844) (993) - Gross Inflows 6,161 6,365 3,571 3,485 - Redemptions (5,118) (3,558) (4,415) (4,478) Other Movements 441 (1,445) 5,679 3,108 Closing FUM 64,242 65,604 70,439 72,554 Total M&G Investment Operations 133,400 126,405 129,656 136,763 PPM South Africa FUM included in Total M&G 5,108 4,365 5,354 6,047 Eastspring - excluding MMF(8) Third Party Retail(7) Opening FUM 21,893 26,017 25,541 27,155 Net Flows: 4,235 616 (787) 1,237 - Gross Inflows 11,089 8,165 5,650 9,875 - Redemptions (6,854) (7,549) (6,437) (8,638) Other Movements (111) (1,092) 2,401 2,401 Closing FUM(5) 26,017 25,541 27,155 30,793 Third Party Institutional Mandates Opening FUM 3,440 4,071 4,740 5,573 Net Flows: 326 794 375 1,010 - Gross Inflows 564 1,026 513 1,254 - Redemptions (238) (232) (138) (244) Other Movements 305 (125) 458 666 Closing FUM(5) 4,071 4,740 5,573 7,249 Total Eastspring Investment Operations 30,088 30,281 32,728 38,042 Schedule A(v) Total Insurance New Business Profit (Actual and Constant Exchange Rates) Note: In schedule A(v) amounts for half year (HY) and full year (FY) 2015 and 2016 are presented on both actual exchange rates (AER) and constant exchange rates (CER) basis. AER CER 2015 2016 2015 2016 HY FY HY FY HY FY HY FY £m £m £m £m £m £m £m £m New Business Profit(1a) (b) Total Asia Insurance Operations(12) 660 1,482 821 2,030 723 1,660 869 2,030 Total US Insurance Operations 371 809 311 790 417 913 329 790 Total UK retail(10) (11) 80 201 125 268 80 201 125 268 Group total excluding UK bulk annuities(10) (11) (12) 1,111 2,492 1,257 3,088 1,220 2,774 1,323 3,088 UK bulk annuities 75 117 - - 75 117 - - Group Total(12) 1,186 2,609 1,257 3,088 1,295 2,891 1,323 3,088 Annual Equivalent(1a) (b) (2) Total Asia Insurance Operations(12) 1,292 2,712 1,605 3,599 1,408 3,020 1,698 3,599 Total US Insurance Operations 857 1,729 782 1,561 965 1,950 827 1,561 Total UK retail(11) 393 874 593 1,160 393 874 593 1,160 Group total excluding UK bulk annuities(11) (12) 2,542 5,315 2,980 6,320 2,766 5,844 3,118 6,320 UK bulk annuities 117 151 - - 117 151 - - Group Total(12) 2,659 5,466 2,980 6,320 2,883 5,995 3,118 6,320 New Business Margin (NBP as % of APE) Total Asia Insurance Operations(12) 51% 55% 51% 56% 51% 55% 51% 56% Total US Insurance Operations 43% 47% 40% 51% 43% 47% 40% 51% Total UK retail(10) (11) 20% 23% 21% 23% 20% 23% 21% 23% Group total excluding UK bulk annuities(10) (11) (12) 44% 47% 42% 49% 44% 47% 42% 49% UK bulk annuities 64% 77% N/A N/A 64% 77% N/A N/A Group Total 45% 48% 42% 49% 45% 48% 42% 49% PVNBP(1a) (b) (2) Total Asia Insurance Operations(12) 6,942 14,428 8,679 19,271 7,579 16,081 9,178 19,271 Total US Insurance Operations 8,574 17,286 7,816 15,608 9,645 19,499 8,268 15,608 Total UK retail(10) (11) 3,355 7,561 5,267 10,513 3,355 7,561 5,267 10,513 Group total excluding UK bulk annuities(10) (11) (12) 18,871 39,275 21,762 45,392 20,579 43,141 22,713 45,392 UK bulk annuities 1,169 1,508 - - 1,169 1,508 - - Group Total(12) 20,040 40,783 21,762 45,392 21,748 44,649 22,713 45,392 New Business Margin (NBP as % of PVNBP) Total Asia Insurance Operations(12) 9.5% 10.3% 9.5% 10.5% 9.5% 10.3% 9.5% 10.5% Total US Insurance Operations 4.3% 4.7% 4.0% 5.1% 4.3% 4.7% 4.0% 5.1% Total UK retail(10) (11) 2.4% 2.7% 2.4% 2.5% 2.4% 2.7% 2.4% 2.5% Group total excluding UK bulk annuities(10) (11) (12) 5.9% 6.3% 5.8% 6.8% 5.9% 6.4% 5.8% 6.8% UK bulk annuities 6.4% 7.8% N/A N/A 6.4% 7.8% N/A N/A Group Total 5.9% 6.4% 5.8% 6.8% 6.0% 6.5% 5.8% 6.8% B Reconciliation of expected transfer of value of in-force business and required capital to free surplus The tables below show how the value of in-force business (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 3 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 used to prepare our 2016 results. In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2016, the tables also present the expected future free surplus to be generated from the investment made in new business during 2016 over the same 40-year period. (i) Expected transfer of value of in-force business (VIF) and required capital to free surplus 2016 £m Undiscounted expected generation from all in-force business at 31 December Undiscounted expected generation from new business written Expected period of emergence Asia US UK Total Asia* US UK Total 2017 1,320 1,446 675 3,441 188 270 27 485 2018 1,247 1,279 669 3,195 157 116 29 302 2019 1,202 1,273 636 3,111 170 123 29 322 2020 1,167 1,281 622 3,070 158 136 31 325 2021 1,142 1,282 606 3,030 170 151 33 354 2022 1,122 1,152 591 2,865 148 84 30 262 2023 1,122 1,116 576 2,814 159 79 29 267 2024 1,098 1,067 557 2,722 154 165 29 348 2025 1,076 914 534 2,524 148 144 28 320 2026 1,050 865 508 2,423 160 159 27 346 2027 1,001 708 486 2,195 137 110 24 271 2028 991 597 451 2,039 142 100 23 265 2029 958 547 434 1,939 135 82 22 239 2030 940 424 409 1,773 132 72 21 225 2031 921 351 381 1,653 146 70 20 236 2032 879 321 490 1,690 130 53 18 201 2033 859 215 465 1,539 130 36 18 184 2034 834 162 438 1,434 127 35 17 179 2035 821 153 413 1,387 123 31 16 170 2036 805 118 392 1,315 130 30 15 175 2037-2041 3,905 699 1,542 6,146 621 55 65 741 2042-2046 3,564 - 1,053 4,617 607 - 66 673 2047-2051 3,257 - 554 3,811 593 - 14 607 2052-2056 2,999 - 301 3,300 585 - 8 593 Total free surplus expected to emerge in the next 40 years 34,280 15,970 13,783 64,033 5,350 2,101 639 8,090 * The analysis excludes amounts incorporated into VIF at 31 December 2016 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 2056. ** Asia operations exclude the cash flows in respect of the held for sale Korea life business. The above amounts can be reconciled to the new business amounts as follows: 2016 £m Asia US UK Total Undiscounted expected free surplus generation for years 2017 to 2056 5,350 2,101 639 8,090 Less: discount effect (2,968) (746) (259) (3,973) Discounted expected free surplus generation for years 2017 to 2056 2,382 1,355 380 4,117 Discounted expected free surplus generation for years 2056+ 292 - 1 293 Less: Free surplus investment in new business (476) (298) (129) (903) Other items (168) (267) 16 (419) Post-tax EEV new business profit 2,030 790 268 3,088 *** 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 2016 shown below can be reconciled to the amount that was expected to be generated as at 31 December 2015 as follows: Group 2016 2017 2018 2019 2020 2021 Other Total £m £m £m £m £m £m £m £m 2015 expected free surplus generation for years 2016 to 2055: As previously published 2,621 2,463 2,383 2,378 2,388 2,369 36,173 50,775 Effect of Solvency II implementation 46 55 49 45 43 48 1,350 1,636 2,667 2,518 2,432 2,423 2,431 2,417 37,523 52,411 Less: Amounts expected to be realised in the current year (2,667) - - - - - - (2,667) Less: Contribution from the held for sale Korea life business - (40) (40) (37) (35) (33) (537) (722) Add: Expected free surplus to be generated in year 2056 - - - - - - 394 394 Foreign exchange differences - 370 355 350 354 346 5,023 6,798 New business - 485 302 322 326 354 6,304 8,093 Operating movements - 11 18 (16) 5 (36) (521) (274) Non-operating and other movements - 97 128 69 (11) (18) 2016 expected free surplus generation for years 2017 to 2056 - 3,441 3,195 3,111 3,070 3,030 48,186 64,033 Asia 2016 2017 2018 2019 2020 2021 Other Total £m £m £m £m £m £m £m £m 2015 expected free surplus generation for years 2016 to 2055 1,015 962 926 905 871 889 20,640 26,208 Less: Amounts expected to be realised in the current year (1,015) - - - - - - (1,015) Less: Contribution from the held for sale Korea life business - (40) (40) (37) (35) (33) (537) (722) Add: Expected free surplus to be generated in year 2056 - - - - - - 358 358 Foreign exchange differences - 179 172 163 158 157 3,737 4,566 New business - 188 157 170 158 170 4,507 5,350 Operating movements - 33 34 8 24 (23) (503) (465) Non-operating and other movements - (2) (2) (7) (9) (18) 2016 expected free surplus generation for years 2017 to 2056 - 1,320 1,247 1,202 1,167 1,142 28,202 34,280 US 2016 2017 2018 2019 2020 2021 Other Total £m £m £m £m £m £m £m £m 2015 expected free surplus generation for years 2016 to 2055 1,120 991 951 970 1,018 982 6,665 12,697 Less: Amounts expected to be realised in the current year (1,120) - - - - - - (1,120) Foreign exchange differences - 191 183 187 196 189 1,286 2,232 New business - 270 116 123 136 151 1,305 2,101 Operating movements - (5) (5) (15) (15) (7) 153 60 Non-operating and other movements - (1) 34 8 (54) (33) 2016 expected free surplus generation for years 2017 to 2056 - 1,446 1,279 1,273 1,281 1,282 9,409 15,970 UK 2016 2017 2018 2019 2020 2021 Other Total £m £m £m £m £m £m £m £m 2015 expected free surplus generation for years 2016 to 2055: As previously published 486 510 506 503 499 498 8,868 11,870 Effect of Solvency II implementation 46 55 49 45 43 48 1,350 1,636 532 565 555 548 542 546 10,218 13,506 Less: Amounts expected to be realised in the current year (532) - - - - - - (532) Add: Expected free surplus to be generated in year 2056 - - - - - - 36 36 New business - 27 29 29 31 33 490 639 Operating movements - (17) (11) (9) (4) (6) (169) 134 Non-operating and other movements - 100 96 68 53 33 2016 expected free surplus generation for years 2017 to 2056 - 675 669 636 622 606 10,575 13,783 * Excluding 2016 new business. ** In order to show the cash flows for UK insurance operations on a comparable basis, the 2015 comparative results for UK insurance operations reflect the impact of the implementation of Solvency II at 1 January 2016 (see note 2 for details). *** The contribution from the Korea life business has been removed from expected free surplus generation following its reclassification as held for sale. At 31 December 2016, the total free surplus expected to be generated over the next five years (2017 to 2021 inclusive), using the same assumptions and methodology as those underpinning our 2016 embedded value reporting was £15.8 billion, an increase of £3.3 billion from the £12.5 billion expected over an equivalent period from the end of 2015, after allowing for the effect of the implementation of Solvency II on the opening balance sheet. This increase primarily reflects the new business written in 2016, which is expected to generate £1,788 million of free surplus over the next five years. At 31 December 2016, the total free surplus expected to be generated on an undiscounted basis in the next 40 years is £64.0 billion, up from the £52.4 billion expected at the end of 2015, after allowing for the effect of the implementation of Solvency II on the opening balance sheet, reflecting the effect of new business written across all three business operations of £8.1 billion and a positive foreign exchange translation effect of £6.8 billion. These positive effects have been offset by the negative impact of £(0.7) billion for the removal of the contribution from the Korea life business following its reclassification as held for sale and a £(0.3) billion net effect reflecting operating, market assumption changes and other items. In Asia, these include the negative impact from movements in long-term interest rates and other regular operating assumption changes. In the US, these mainly reflect the positive effect of higher future separate account growth due to the increase in interest rates and the impact of an increase in equity market returns in 2016, partially offset by the negative effect from the acceleration of free surplus from the contingent financing of specific US statutory reserves. In the UK, these mainly arise from the positive effect of higher than assumed investment returns on with-profits funds, partially offset by the negative effect of longevity reinsurance transactions entered into during the year. The longevity reinsurance transactions executed this year had the effect of accelerating the generation of future free surplus into 2016. The overall growth in the Group's undiscounted value of free surplus reflects our ability to write both growing and profitable new business. Actual underlying free surplus generated in 2016 from life business in force at the end of 2016 was £4.0 billion including £0.8 billion of changes in operating assumptions and experience variances. This compares with the expected 2016 realisation at the end of 2015 of £2.7 billion. This can be analysed further as follows: Asia US UK Total £m £m £m £m Transfer to free surplus in 2016 1,157 1,223 680 3,060 Expected return on free assets 39 47 13 99 Changes in operating assumptions and experience variances 14 596 214 824 Underlying free surplus generated from in-force life business in 2016 1,210 1,866 907 3,983 2016 free surplus expected to be generated at 31 December 2015 1,015 1,120 532 2,667 The equivalent discounted amounts of the undiscounted expected transfers from in-force business and required capital into free surplus shown previously are as follows: 2016 £m Discounted expected generation from all in-force business at 31 December Discounted expected generation from long-term 2015 new business written Expected period of emergence Asia US UK Total Asia US UK Total 2017 1,262 1,371 659 3,292 180 261 26 467 2018 1,113 1,141 628 2,882 137 105 27 269 2019 1,007 1,069 572 2,648 141 105 27 273 2020 916 1,009 535 2,460 124 108 28 260 2021 843 952 496 2,291 127 116 28 271 2022 769 803 458 2,030 104 60 25 189 2023 724 734 423 1,881 107 52 23 182 2024 664 658 387 1,709 99 101 21 221 2025 612 531 349 1,492 89 83 19 191 2026 562 477 314 1,353 91 90 17 198 2027 508 365 282 1,155 73 56 15 144 2028 476 292 245 1,013 72 48 14 134 2029 436 251 222 909 65 36 12 113 2030 408 185 197 790 60 30 11 101 2031 381 147 173 701 63 28 10 101 2032 346 131 218 695 55 19 9 83 2033 322 80 197 599 52 12 8 72 2034 299 61 178 538 49 11 7 67 2035 282 57 160 499 46 9 6 61 2036 266 43 148 457 47 8 6 61 2037-2041 1,154 199 515 1,868 203 17 24 244 2042-2046 853 - 197 1,050 163 - 12 175 2047-2051 638 - 129 767 131 - 3 134 2052-2056 473 - 58 531 104 - 2 106 Total discounted free surplus expected to emerge in the next 40 years 15,314 10,556 7,740 33,610 2,382 1,355 380 4,117 The above amounts can be reconciled to the Group's financial statements as follows: 2016 £m Discounted expected generation from all in-force business for years 2017 to 2056 33,610 Discounted expected generation from all in-force business for years after 2056 1,115 Discounted expected generation from all in-force business at 31 December 2016 34,725 Add: Free surplus of life operations held at 31 December 2016 5,351 Less: Time value of guarantees (998) Expected free surplus generation from the sale of Korea life business 76 Other non-modelled items 1,430 Total EEV for life operations 40,584 (ii) Expected emergence of risk margin release and amortisation of transitional The 31 December 2016 Solvency II own funds included £2.5 billion of transitional relief (recalculated at the valuation date), the majority of which relates to UK annuity business in force on 1 January 2016, established to substantially mitigate the impact of recognising the related risk margin on transition to Solvency II. The following table sets out the expected UK annuity business risk margin release net of the related transitional amortisation over the next fifteen years. 2016 £m Undiscounted expected generation from all in-force business at 31 December Shareholder-backed annuity business Other Total UK Expected period of emergence Risk margin release Amortisation of transitional 2017 163 (116) 628 675 2018 153 (116) 632 669 2019 143 (116) 609 636 2020 141 (116) 597 622 2021 136 (116) 586 606 2022 134 (116) 573 591 2023 132 (116) 560 576 2024 127 (116) 546 557 2025 122 (116) 528 534 2026 117 (116) 507 508 2027 114 (116) 488 486 2028 104 (116) 463 451 2029 102 (116) 448 434 2030 97 (116) 428 409 2031 91 (116) 406 381 UK free surplus expected to emerge by 2031 1,876 (1,740) 7,999 8,135 Total UK free surplus expected to emerge from 2032 to 2056 5,648 Total UK free surplus expected to emerge in the next 40 years (note B(i)) 13,783 * Including other UK business lines and other cash flows from annuity business. The UK annuity risk margin release and related transitional amortisation, together with associated tax reconcile to the amounts shown in the Group Solvency II balance sheet (note II(c) of the IFRS additional unaudited financial information) as follows: Risk margin release £bn Amortisation of transitional £bn Annuity in-force business: - Risk margin release less amortisation of transitional expected to emerge by 2031 1.9 (1.7) - Risk margin release expected to emerge after 2031 and gross up for tax 1.1 (0.4) 3.0 (2.1) Risk margin release and transitional for other business operations (pre-tax) 2.9 (0.4) Total (pre-tax) 5.9 (2.5) 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 2016 results Underlying free surplus generated for total insurance and asset management operations Pre-tax operating profit Shareholders' funds % % % note (2) notes (2),(3),(4) notes (2),(3),(4) US$ linkednote(1) 15 21 19 Other Asia currencies 9 17 17 Total Asia 24 38 36 UK sterlingnotes (3),(4) 32 14 51 US$ note (4) 44 48 13 Total 100 100 100 EEV 2016 results Post-tax new business profits Post-tax operating profit Shareholders' funds % % % notes (2),(3),(4) notes (2),(3),(4) US$ linkednote (1) 55 46 36 Other Asia currencies 10 12 13 Total Asia 65 58 49 UK sterlingnotes (3),(4) 9 6 29 US$note (4) 26 36 22 Total 100 100 100 Notes (1) US$ 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. (2) Includes long-term, asset management business and other businesses. (3) For 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 Reconciliation between IFRS and EEV shareholders' funds The table below shows the reconciliation of EEV shareholders' funds and IFRS shareholders' funds at the end of the year: 31 Dec 2016 £m 31 Dec 2015 £m EEV shareholders' funds 38,968 32,359 Less: Value of in-force business of long-term businessnote (a) (24,937) (22,431) Deferred acquisition costs assigned zero value for EEV purposes 9,170 7,010 Othernotes (b),(c) (8,535) (3,983) IFRS shareholders' funds 14,666 12,955 Notes (a) The EEV shareholders' funds comprises the present value of the shareholders' interest in the value in-force business, net worth of long-term business operations and IFRS shareholders' funds of asset management and other operations. The value of in-force business reflects the present value of future shareholder cash flows from long-term in-force business which are not captured as shareholders' interest on an IFRS basis. Net worth represents the net assets for EEV reporting purposes that reflect the regulatory basis position, sometimes with adjustments to achieve consistency with the IFRS treatment of certain items. (b) Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value net worth for long-term insurance operations. It also includes the mark to market of the Group's core borrowings which are fair valued under EEV but not IFRS. The most significant valuation differences relate to changes in the valuation of insurance liabilities. For example, in Jackson where IFRS liabilities are higher than the local regulatory basis as they are principally based on policyholder account balances (with a deferred acquisition costs recognised as an asset) whereas the local regulatory basis used for EEV is based on future cash flows due to the policyholder on a prudent basis with consideration of an expense allowance as applicable, but with no separate deferred acquisition cost asset. (c) The 2016 EEV results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime, effective from 1 January 2016. The 2015 EEV results for UK insurance operations were prepared on a basis reflecting the Solvency I regime. As noted in (b) above, "other adjustments" represent asset and liability valuation differences between IFRS and the local regulatory basis used to value net worth for long-term insurance operations. At 31 December 2016 for the UK this would be the difference between IFRS and Solvency II, and at 31 December 2015 the difference between IFRS and Solvency I. E Reconciliation of APE new business sales to earned premiums The Group reports annual premium equivalent (APE) new business sales as a measure of the new policies sold in the period. This differs to the IFRS measure of premiums earned as shown below: 2016 £m 2015 £m Annual premium equivalents (APE) as published 6,320 5,466 Adjustment to include 100% of single premiums on new business sold in the periodnote (a) 25,057 24,918 Contribution from the held for sale Korea life business 192 305 Premiums from in-force business and other adjustmentsnote (b) 7,412 5,974 Gross premiums earned 38,981 36,663 Outward reinsurance premiums (2,020) (1,157) Earned premiums, net of reinsurance as shown in the IFRS financial statements 36,961 35,506 Notes (a) APE new business sales only include one tenth of single premiums, recorded on policies sold in the period. Gross premiums earned include 100 per cent of such premiums. (b) Other adjustments principally include amounts in respect of the following: - Gross premiums earned includes premiums from existing in-force business as well as new business. The most significant amount is recorded in Asia, where a significant portion of regular premium business is written. Asia in-force premiums form the vast majority of the other adjustment amount; - APE includes new policies written in the period which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts and in the UK for certain unit-linked savings and similar contracts. These are excluded from gross premiums earned and recorded as deposits; - APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and - For the purpose of reporting APE new business sales, we include the Group's share of amounts sold by the Group's insurance joint ventures. Under IFRS, joint ventures are equity accounted and so no amounts are included within gross premiums earned. This information is provided by RNS The company news service from the London Stock Exchange END FR EAFDDFEKXEAF