Slide 1: Solvency II Update
Solvency II Update Nic Nicandrou - Chief Financial Officer Prudential
Slide 2: Forward Looking Statements
Forward Looking Statements This document may contain ‘forward-looking statements’ with respect to certain of Prudential's plans and its goals and expectations relating to its future financial condition, performance, results, strategy and objectives. Statements that are not historical facts, includin
Slide 3: Solvency II: Overview - Key messages
Solvency II: Overview Key messages • Solvency II approvals successfully address areas most critical to Prudential • Solvency II outcome confirms strength and resilience of the Group’s capital position • Drivers of capital generation and consumption for Asia, US and M&G are unaffected • UK in-force e
Slide 4: Key areas of uncertainty remained in August 2015
Solvency II: Overview Key areas of uncertainty remained in August 2015 • Internal model submitted in June Asia • PRA decision expected in December • Health and Protection business Solvency II ‘friendly’ • Strong 1H15 Solvency II capital generation • ‘Prudent’ local statutory basis remains ‘biting’ I
Slide 5: A strong Solvency II capital position
Solvency II: Overview A strong Solvency II capital position Internal model approval step Approval date Estimated Group Solvency II capital position1,2 Matching adjustment November 2015 HY15, £bn Transitionals December 2015 Asia surplus treatment December 2015 Solvency cover 190% US Equivalence (Dedu
Slide 6: Solvency II framed to demonstrate ability to withstand severe stress
Solvency II: Overview Solvency II framed to demonstrate ability to withstand severe stress Probability distribution of Own Funds (illustrative) Own Funds are calculated following 1/200 year stress events over 1 year Example 1/200 year stress events UK Asia1 SCR (stand alone) Equity markets -47% -58%
Slide 7: Capital generation mitigates impact of approval calibrations
Solvency II: Overview Capital generation mitigates impact of approval calibrations Estimated Group Solvency II capital surplus1,2, £bn Mainly reflects £600m Tier 2 Solvency II capital positive market sub-debt issue in generation, driven Changes between Solvency experience June 2015 published economi
Slide 8: A strong Solvency II capital position
Solvency II: Overview A strong Solvency II capital position Estimated Group Solvency II capital surplus1,2, £bn Own Funds SCR Surplus Change in Group Solvency II cover ratio FY14 Disclosure 17.9 8.2 9.7 218% (Prudential ECap) HY15 movements3 1.2 0.1 1.1 +12pts Asia Solvency II surplus (1.3) 0.1 (1.4
Slide 9: Well-diversified risks
Solvency II: Overview Well-diversified risks Reconciliation of IFRS equity to Solvency II Own Funds1,2, HY15 £bn SCR by risk type3, HY15 IFRS equity 12.1 Less: goodwill, DAC, intangibles (3.6) Operational/ Expense Equity Sub-debt 4.3 FX translation 11% 12% Value of shareholder transfer4 3.4 6% US re
Slide 10: High quality capital
Solvency II: Overview High quality capital Solvency II Own Funds by capital tier1,2 Share of Solvency II Own Funds by capital tier1,2 HY15, 100% = £19.4bn 19.4 0.3 Tier 3 – deferred tax Tier 3 3.5 Tier 2 – sub debt 0.7 Tier 1 – hybrid capital Tier 2 1% 18% Other Tier 1 4% Tier 1 = Tier 1 = 81% of 15
Slide 11: Resilient capital position
Solvency II: Overview Resilient capital position Estimated Group Solvency II surplus1,2 Impact on solvency ratio HY15 estimated surplus £9.2bn 190% 20% equity fall £8.9bn 189% (1)% 40% equity fall £7.3bn 175% (15)% 50bp interest rate fall £8.2bn 177% (13)% 100bp interest rate rise £10.3bn 206% +16%
Slide 12: Asia excluded surplus not a constraint
Solvency II: Key uncertainties addressed Asia excluded surplus not a constraint Asia Solvency II surplus1, HY15, £bn Asia Group Solvency II basis • Internal model approach Asia SII surplus excluded Calibrations • Inclusion of stressed VIF in addition SCR from Group result to local regulatory basis s
Slide 13: Contribution from Jackson in line with current free surplus basis
Solvency II: Key uncertainties addressed Contribution from Jackson in line with current free surplus basis US solvency surplus1, HY15, US$bn US Group Solvency II basis • US equivalence (Deduction and Aggregation Free approach) surplus US$2.2bn RBC = Surplus Calibrations • Continue to recognise surpl
Slide 14: Drivers of capital generation / consumption and remittances unchanged
Solvency II: Key uncertainties addressed Drivers of capital generation / consumption and remittances unchanged Asia US M&G US equivalence Group Solvency II basis Internal model approach Capital Requirements Directive (CRD IV) (Deduction and Aggregation) Calibrations • Inclusion of stressed VIF in ad
Slide 15: UK Solvency II surplus in line with prior basis
Solvency II: Key uncertainties addressed UK Solvency II surplus in line with prior basis Calibrations Solvency II surplus, HY15, £bn • Credit: 170bp p.a. credit allowance for annuities3, roughly equivalent to 1.5x the cumulative default losses over the worst 10 years since 1920 Solvency • Longevity:
Slide 16: UK in-force capital dynamics not materially impacted
Solvency II: Key uncertainties addressed UK in-force capital dynamics not materially impacted Expected life in-force free surplus generation1,2, £m Based on Solvency I Based on Solvency II • Free surplus generation underpinned by sizeable with-profits and annuities in-force portfolio £2.5bn £2.3bn £
Slide 17: Approach to capital management
Solvency II: Capital management implications Approach to capital management • Capital defined by local capital regulations and local business needs • ‘Healthy’ buffer above capital requirements Business unit capital • Self-funded organic growth through reinvestment of operating capital generated • C
Slide 18: The Group is highly capital generative
Solvency II: Capital management implications The Group is highly capital generative IFRS operating profit1,2, £m Underlying free surplus generation2,3, £m 3,824 2,462 2,579 3,553 3,085 1,982 2,080 2,344 2,529 1,687 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Cash remittances, £m Operating capi
Slide 19: Well-balanced sources of profit, capital generation and cash
Solvency II: Capital management implications Well-balanced sources of profit, capital generation and cash IFRS operating profit1 Net free surplus generated2 Cash remittances Cumulative share 2010 - 2014 Cumulative share 2010 - 2014 Cumulative share 2010 - 2014 %, 100% = £15.3bn %, 100% = £10.8bn %,
Slide 20: Capital dynamics unchanged for majority of our businesses
Solvency II: Capital management implications Capital dynamics unchanged for majority of our businesses Regulatory capital basis Pre 1 Jan 2016 From 1 Jan 2016 Asia Local No change US RBC No change (equivalent) M&G Capital Requirements Directive (CRD) No change UK Life1 Solvency I (Pillar 1 / Pillar
Slide 21: Expected free surplus profiles are largely unaffected
Solvency II: Capital management implications Expected free surplus profiles are largely unaffected Estimated impact of Solvency II on in-force free surplus generation1, £m 1,000 1,200 800 1,000 Asia Life US Life 800 600 600 400 400 200 200 0 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2
Slide 22: No material overall impact on life in-force free surplus generation projections
Solvency II: Capital management implications Group No material overall impact on life in-force free surplus generation projections Expected life in-force free surplus generation1,2, £m As previously published Restated for impact of Solvency II on UK 3,000 3,000 • Asia and US not impacted • UK modest
Slide 23: Capital dynamics and dividend philosophy are unchanged
Solvency II Capital dynamics and dividend philosophy are unchanged Remittances Dividend Central costs dashboard Asia US UK M&G 2.0x 1.5x 2.5x New business New business New business Retained as investment investment investment buffer Dividends to shareholders IFRS operating Market Market Market profi
Slide 24: Key messages
Solvency II Key messages • Solvency II approvals successfully address areas most critical to Prudential • Solvency II outcome confirms strength and resilience of the Group’s capital position • Drivers of capital generation and consumption for Asia, US and M&G are unaffected • UK in-force expected ca
Slide 25: Group credit portfolio remains high quality and defensively positioned
Other items Group credit portfolio remains high quality and defensively positioned Breakdown of invested assets, HY15, £bn Continued balance sheet conservatism Shareholders • Total group assets of £343bn; shareholder exposure of £91.0bn • Conservative asset mix: 94% credit portfolio is rated investm
Slide 26: Reporting considerations
Other items Reporting considerations Solvency II reporting • Solvency II specific disclosures from FY2015 (updated half-yearly) • Continued use of EEV and free surplus generation Unchanged for Asia, US and M&G Restated for UK to reflect Solvency II capital (with effect from HY2016) Other reporti
Slide 27: Appendix
Appendix ieizia ‘f PRUDENTIAL
Slide 28: Group credit position: Oil and gas exposure
Group credit position Oil and gas exposure Breakdown of the shareholder debt securities portfolio, HY15 Breakdown by credit rating and sub-sector, £m Exploration Pipeline Integrated Refining & Oil & gas Total & / Mid- Oils Marketing Services (£m) Production stream Investment grade 807 833 215 334 76