US In�the�US,�our�product�innovation�and� distribution�leave�us�well�positioned�to� provide�an�ageing�population�with�financial� strategies�for�stable�retirements.�The�US�is� the�world’s�largest�retirement�savings� market11,�with�approximately�four�million� Americans�reaching�retirement�age�every� year12.�This�transition�continues�to�trigger� the�unprecedented�shift�of�trillions�of� dollars�from�savings�accumulation�to� retirement�income�generation13.�
Notes 1 United Nations, Department of Economic and Social Affairs, Population Division (2019).
3 ©2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar www.AnnuityIntel.com Total sales by company and channel 3Q YTD 2019. Jackson ranks #1 out of 25 companies in the Independent NASD channel, #1 out of 19 companies in the Bank channel, #1 out of 15 companies in the Wirehouse channel, and #3 out of 19 companies in the Regional Firms channel.
Our productive distribution footprint across Asia is diversified across a substantial agency force and bank partner network. Recent developments include the renewal of our UOB partnerships for 15 years, and a new partnership with OVO in Indonesia.
Africa We continue to grow and develop our footprint through our agency network and bancassurance partners. We are harnessing technology to improve customer service, innovate in distribution and build a business which is scalable.
Investors We aim to build long‑term shareholder value, exhibited in growing dividends and share price performance.
This alternative performance measure is reconciled to IFRS profit for the period in note B1.1 of the IFRS financial statements.
Operating free surplus from continuing operations was $2,861 million in the year. This comprises $4,958 million generated from the in‑force business and asset management, up 12 per cent, before allowing for $(903) million of US EEV hedge modelling enhancements, new business strain of $(1,158) million, up 22 per cent following the planned diversification of sales in the US towards higher strain fixed index and fixed annuities, and restructuring costs of $(36) million.
5 Cash remitted to the Group forms part of the net cash flows of the holding company. A full holding company cash flow is set out in note I(iii) of the Additional unaudited financial information. This differs from the IFRS consolidated statement of cash flows which includes all cash flows relating to both policyholders’ and shareholders’ funds. The holding company cash flow is therefore a more meaningful indicator of the Group’s central liquidity.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 23
Business outlook Asia’s growth fundamentals and demographic trends remain robust and we expect will continue to support strong growth for the insurance and asset management industries in Asia.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 33
Products Jackson’s products provide access to equity market growth, protection of principal, and a way of converting retirees’ savings into retirement income with a degree of certainty. With a long history of disciplined product design and prudent risk management, Jackson has earned and continues to earn trust from its key stakeholders.
During 2019 our head office activities incurred costs of $(460) million (2018: $(490) million2). The demerger of M&G plc provides us with the opportunity to optimise the operating model of our Group functions across our head office. We are well advanced in developing and executing plans that will deliver total savings of circa $180 million3, targeting a revised run-rate from 1 January 20214. We have already completed the first phase of this work which will deliver annual savings5 of $55 million.
Adjusted operating profit before tax from continuing operations Prudential’s adjusted IFRS operating profit based on longer-term investment returns (adjusted operating profit) from continuing operations increased in 2019 to $5,310 million (20 per cent higher on a constant and actual exchange rate basis). This increase was driven by higher earnings from our Asia life insurance and asset management operations, and by lower market-related DAC amortisation charges compared with the prior year in the US, as a result of the strong equity market returns achieved in 2019. Other income and expenditure generated a net cost of $(926) million (2018: $(967) million2). Of this, $(179) million related to interest costs in respect of debt instruments transferred to M&G plc on 18 October 2019 prior to completion of the demerger. Excluding these amounts, interest costs for the continuing Group would have been $(337) million, lower than 2018 following the redemption of debt in the first half of 2019.
IFRS effective tax rates In 2019, the effective tax rate on adjusted operating profit based on longer-term investment returns from continuing operations was 15 per cent. This was unchanged from 2018.
Total tax contribution from continuing operations The Group continues to make significant tax contributions in the jurisdictions in which it operates, with $2,168 million remitted to tax authorities in 2019. This increased from the equivalent amount of $1,829 million2 remitted in 2018, primarily due to the timing of when various tax payments became due.
Cash remittances were used to meet central costs of $(522) million, pay dividends of $(1,634) million and meet other expenditure of $(1,999) million. Corporate expenditure includes net interest paid of $(527) million of which $(231) million relates to that expended on debt substituted to M&G plc. Corporate expenditure is net of receipts of $265 million in 2019 from tax received. The level of tax receipts is expected to decline sharply in 2020, and then is not expected to recur going forward given the demerger of UK operations and the level of UK income which can be used to offset central UK expenditure.
Profit after tax for the year9 783 4,019 (645) 6,122 Exchange movements, net of related tax 2,943 (714) 666 (1,574) Unrealised gains and losses on US fixed income securities classified as available-for-sale 2,679 (1,446) – – Demerger dividend in specie of M&G plc (7,379) – (7,379) –
Operating free surplus generated from continuing operations before the adjustments to reflect hedge modelling changes and restructuring costs increased to $3.8 billion (2018: $3.5 billion1). This was after $(1,158) million of investment in new business (2018: $(946) million1).
Operating free surplus generated before US EEV hedge modelling enhancements 3,764 3,410 10 3,415 10
The Board considers dividends to be an important component of total shareholder return and adopted a progressive dividend policy for the Group following the demerger. The level of dividend growth will be determined after taking into account the Group’s capital generation capacity, financial prospects and investment opportunities, as well as market conditions. The Group’s 2020 dividend under the new progressive dividend policy will be determined from a 2019 US dollar base of $958 million15 (36.84 cents per share), equivalent to the circa £750 million previously disclosed in the Circular.
This led to a 14 per cent increase in overall Asia adjusted operating profit with eight insurance markets delivering double-digit growth. These drivers are also reflected in the EEV operating profit of $6,138 million (2018: $6,052 million1), driving a 23 per cent increase in embedded value to $39.2 billion. At the same time, a 13 per cent increase in operating free surplus generation14 supported a higher cash remittance of $950 million for the year.
Life insurance new business APE sales increased by 4 per cent to $5,161 million and related new business profit increased by 2 per cent with eight markets achieving double-digit growth in new business profit.
In Indonesia, the benefits of a recent restructuring of our agency channel and successful new product launches supported a 23 per cent increase in APE sales and this growth accelerated to 41 per cent in the second half from 4 per cent in the first half. The 39 per cent increase in new business profit reflected the benefit of increased volumes, as well as operational improvements from new product launches in the year.
Overall Asia segment embedded value increased by 23 per cent to $39.2 billion (2018: $32.0 billion). Of this, $37.8 billion (2018: $31.0 billion) relates to the value of the long-term business. The remainder represents Asia asset management and goodwill which are carried at IFRS net asset value under the EEV framework.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 43
In the US, Jackson provides certain guarantees on its annuity products, the value of which would typically rise when equity markets fall and long-term interest rates decline. Jackson charges fees for these guarantees which are in turn used to purchase downside protection, in particular options and futures to mitigate the effect of equity market falls. Under IFRS, accounting for the movement in the valuation of these derivatives, which are all fair valued, is asymmetrical to the movement in guarantee liabilities, which are not fair valued in all cases. Jackson designs its hedge programme to protect the economics of the business from large movements in investment markets and accepts the variability in accounting results. Non-operating losses of $(3,795) million in the year mainly reflect the effect of lower interest rates on guarantee liabilities and the impact of higher equity markets on both guarantee liabilities and associated derivatives given that the S&P 500 index ended the year 28.9 per cent higher than at the start of the year. While the resulting negative mark-to-market movements on these hedging instruments are recorded in the current year, the related increases in fee income that arise from the higher asset values managed, will be recognised and reported in future years.
EEV operating profit from the long-term business reduced to $1,757 million (2018: $2,824 million) reflecting lower new business profit in the period and a reduction in the level of expected return on business in force.
The investment return variances are driven by the benefit of strong capital market performance in the period leading to separate account returns materially in excess of those assumed, more than offsetting hedging losses on instruments held for risk management purposes.
Non-operating assumptions and variances related to free surplus development were $(1,763) million (2018: $(1,124) million) and reflect higher losses on hedge instruments compared with those assumed under the new basis. Circa $395 million of these hedge losses were incurred in managing the risk profile of the business as Jackson transitioned from the previous US statutory and reserving framework to the new framework following updates made by the NAIC which is further discussed below.
2 On an actual exchange rate basis. 3 As compared with 2018 and before a planned $10 million increase in Africa costs as business grows.
2 Key internal, regulatory, economic and (geo)political events over the past 12 months
M onitor and report Manage an d co nt ro l
Stress and scenario testing Stress�and�scenario�testing�is� performed�to�assess�the�robustness� of�capital�adequacy�and�liquidity,� and�the�appropriateness�of�risk�limits.� Recovery�planning�assesses�the� effectiveness�of�the�Group’s�recovery� measures�and�the�appropriateness� of�activation�points.
Bank debt exposure and counterparty credit risk Prudential’s�exposure�to�banks�is�a�key�part� of�its�core�investment�business,�as�well�as� being�important�for�the�hedging�and�other� activities�undertaken�to�manage�its�various� financial�risks.�Given�the�importance�of� its�relationship�with�its�banks,�exposure� to�the�sector�is�considered�a�material�risk� for�the�Group.�
Social�risks�that�could�impact�Prudential� include�the�emerging�population�risks� associated�with�public�health�trends�(such� as�an�increase�in�obesity)�and�demographic� changes�(such�as�population�urbanisation)� which�may�impact�customer�lifestyles�and� therefore�may�impact�claims�against�the� Group’s�insurance�product�offerings.�As�a� life�and�health�insurer,�we�are�committed� to�playing�a�greater�role�in�preventing�and� postponing�illness�in�order�to�protect�our� customers.�Further�information�about�how� we�are�investing�in�artificial�intelligence� technology�to�enable�access�to�an� affordable�and�quality�healthcare�digital� offering�can�be�found�within�the�Pulse� case�study�included�in�the�ESG�Summary.� Other�social�risks�may�arise�from�a�failure� to�consider�the�rights,�diversity,�well-being,� and�interests�of�people�and�communities� in�which�the�Group,�or�its�third�parties,� operates.�These�risks�are�increased�as� Prudential�operates�in�multiple�jurisdictions� with�distinct�local�cultures�and� considerations.�As�an�employer,�the�Group� is�also�exposed�to�the�risk�of�being�unable� to�attract,�retain�and�develop�highly-skilled� staff,�which�can�be�increased�where� Prudential�does�not�have�responsible� working�practices.�
Viability statement prepared in accordance with Provision 31 of the UK Corporate Governance Code
summary provides an overview of our activities and progress in 2019 across a range of areas in which we have helped to provide benefits to stakeholders throughout the markets in which we operate. For us, ESG means: — What we do – the products we offer, our customer service, our human capital and the assets we own and operate; and
People Overview, relevant risks and associated management practices – page 82
During 2019, as well as making decisions on markets, products and platforms provided by the business, the Board paid close attention to the effect on customers of the progress towards and conclusion of the demerger of M&G plc, including steps to ensure that customers were not disadvantaged and ensuring that they were fully informed of developments and prepared for the demerger when it was concluded. Other concerns raised by customers during the year included service delivery and issues with business processing, and these were dealt with through the business units, applying the highest standards of professional care and service in line with our Customer Commitments Policy.
Civil society We respond to ad hoc requests from NGOs and hold meetings with them throughout the year. Our AGM provides the Board with an opportunity to engage with a range of NGOs that are shareholders, and the Board also receives an annual update on our community investment activity. During 2019, NGOs were primarily concerned with our climate impact, and in response we have proceeded with our work around meeting the recommendations of the TCFD, as well as closely monitoring our impact on the environment. In response to questions about our modern slavery risk, we conducted an analysis of all supplier spend in our London head office against the Walk Free Foundation’s Global Slavery Index. Further details will be available in our 2019 Modern Slavery Statement,
Customers Customer Commitments Policy covers our five key commitments to our customers and how we assess, manage and report on these: 1 Treat customers fairly, openly and honestly; 2 Provide and promote a range of products and services that meet customer needs, are easy to understand and that deliver real value; 3 Maintain the confidentiality of our customer information (except where the law requires disclosure); 4 Provide and promote high standards of customer service and monitor these standards rigorously; and 5 Ensure that our complaints processes provide an effective and fair means of arbitration between the Group’s businesses and customers.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 77
Whistleblowing Our Group-wide whistleblowing procedures apply to all our colleagues and are supported by Speak Out, our Group-wide whistleblowing programme. Speak Out is available both internally and externally to staff, contractors, vendors,
Technology In the face of technological advancements and evolving customer needs, we actively embrace the latest technology and embed digital capabilities in our business model. We continually increase the automation of our operations in order to improve both business efficiency and customer satisfaction.
During his leadership of Jackson, Mike was responsible for the development of Jackson’s market-leading range of retirement solutions. He was also part of the Jackson teams that purchased and successfully integrated a savings institute and two life companies.
Commission international advisory board — China Securities Regulatory Commission international advisory board (chairman) — Institut d’Études Politiques (Sciences Po) — Millennium LLC regulatory advisory board
Board: January 2013 Audit : January 2013 N&G : January 2013 Rem : January 2013
Other appointments — Clifford Capital Pte. Ltd (chair) — Credit Suisse Group AG — PSA International Pte Ltd — Co-Chair of Sustainable Finance Steering
Tom started his career at Aetna Life and Casualty before joining Conning & Company, an investment and asset management provider, where he became a partner in the consulting and private capital areas. He joined Morgan Stanley in 1987, and became a managing director in its insurance practice.
Subsidiary governance Following the demerger of M&G plc, the Group is reviewing subsidiary governance to ensure this remains appropriate to the business and regulatory environment in which the Group operates. Reflecting changes in that environment, the composition of the Prudential Corporation Asia Limited board of directors now mirrors the Prudential Board and Board meetings are held concurrently. As part of demerger preparations, Prudential Corporation Asia Limited became the intermediate holding company for the Group’s subsidiaries in the US and Africa.
Specific matters are reserved for decision by the Board, including: — Approving dividend policy and determination of dividends; — Approval of strategic projects; — Approval of the three-year business and financial plan; — Approval of the Group’s full and half-yearly results announcements and any other periodic financial reporting; — Responsibility for an effective system of internal control and risk management; — Overseeing the Group’s corporate social responsibility programmes; and
Key areas of focus – how the Board spent its time The Board held 10 meetings during 2019. The table below gives an indication of the key topics considered at each meeting.
— Serving on at least one of the Board’s principal Committees
— Monitors the effectiveness of internal control and risk management systems
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 107
A significant part of the Committee’s activities over 2019 was focused on determining the most appropriate combination of skills and experience needed by the Board to drive the strategic focus of the Group post-demerger as well as supporting the creation of the M&G plc board prior to demerger. This included consideration of my successor as Chair of the Board and as Committee Chair. Philip Remnant led discussions on my succession in his capacity as Senior Independent Director culminating in the announcement of the appointment of Shriti Vadera. A separate report from Philip is set out below. As a member of the Committee and ultimately as the new Chair of the Group, Shriti will have an opportunity to shape the future composition of the Board.
I am delighted that Prudential has been able to secure such a high calibre individual to succeed Paul. Shriti was the unanimous choice of the Board following a rigorous assessment of internal and external candidates from around the world. She has senior boardroom experience at complex organisations with extensive international operations, and strong strategic and financial services experience.
Non-executive Directors, independence, time commitment and terms of appointment Independence Monitoring and safeguarding the independence of the Non-executive Directors is essential to comply with their statutory and regulatory obligations.
Kai Nargolwala, Anthony Nightingale, Philip Remnant and Alice Schroeder have all been in office for six years or more. When considering their re-election at the next AGM, the Committee considered their continuing appointment particularly carefully. The Committee recommended that they each serve for a further term of one year, subject to shareholder re-election.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 117
Under the relevant audit tender rules the Group is required to change audit firm no later than the 2023 financial year end. The Committee has previously agreed that in light of the significant change to the Group being undertaken, with the demerger of M&G plc, and the introduction of a new insurance accounting standard (IFRS 17) in the near term, that a new auditor should be engaged for the 2023 year end but that a competitive tender for the 2023 audit should commence in the first half of 2020. Planning for the tender has commenced and meetings with audit firms (not restricted to the ‘Big-Four’) have been held to assess their ability to tender in relation to the complexity of Prudential’s geographically diverse business and their barriers to becoming independent. A formal tender process to identify KPMG’s successor will be undertaken in the first half of 2020 and a Board decision is expected in July.
The Committee reviewed the key assumptions and judgements supporting the Group’s IFRS results, including those made in valuing the Group’s investments, insurance liabilities and deferred acquisition costs under IFRS, together with reports on the operation of internal controls to derive these amounts. It also reviewed the assumptions underpinning the Group’s European Embedded Value (EEV) metrics.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 121
Reappointment Based on the outcome of the effectiveness evaluation and all other considerations, the Committee concluded that there was nothing in the performance of the auditor which would require a change. The Committee therefore recommended that KPMG be reappointed as the auditor. A resolution to this effect will be proposed to shareholders at the 2020 Annual General Meeting.
The CRCO briefed the Committee regularly on developments in systemic risk regulation and the Insurance Capital Standards (ICS). We considered the results of ICS field testing in July and the implications of the IAIS announcement in November of a unified path to convergence of comparable group capital standards across jurisdictions. During the year, the Group remained subject to the policy requirements resulting from its prior designation in 2016 as a Global Systemically Important Insurer (G-SII). The Committee therefore considered and approved the Group’s 2019 Systemic Risk Management Plan, Liquidity Risk Management Plan and Recovery Plan.
As part of its review of the risk assessment of the Business Plan, the Committee approved proposed changes to Group Approved Limits.
In April, in a joint session of the Risk and Audit Committee, an update on cyber security was provided on the latest regulatory expectations, an assessment of the threats facing the Group and the means to enable appropriate oversight.
US regulation and legislation As a result of its listing on the New York Stock Exchange, the Company is required to comply with the relevant provisions of the Sarbanes-Oxley Act 2002 as they apply to foreign private issuers and have adopted procedures to ensure such compliance. In particular, in relation to Section 302 of the Sarbanes-Oxley Act 2002 which covers disclosure controls and procedures, a Disclosure Committee has been established, reporting to the Group Chief Executive, chaired by the Chief Financial Officer and comprising members of head office management. The work of the Disclosure Committee supports the Group Chief Executive and Chief Financial Officer in making the certifications regarding the effectiveness of the Group’s disclosure procedures.
Demerger-related decisions The M&G plc business demerged from the Group with effect from 21 October 2019. As I described last year, the Committee established a set of principles to underpin decisions on remuneration relating to the demerger, including: — Executives should not be advantaged or disadvantaged by the demerger; the value of outstanding awards and their key terms (release dates, holding periods, malus and clawback provisions) should be unaffected; — Where performance conditions need to be revised, the new conditions should be no more or less stretching than those originally attached to the awards; and
A cash flow measure was used to determine 20 per cent of the Group financial bonus targets.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 141
James Turner2 Group Chief Risk and Compliance Officer £678,000 £507,000 £1,052,000 £303,000 £2,540,000 £1,913,000
No change to opportunity levels2, payment scale, level of deferral or malus and clawback
Awards are subject to malus and clawback provisions 2019 awards have relative TSR and sustainability scorecard targets only
The proportion of 2019 awards which will vest for threshold performance was reduced to 20% (from 25% for previous awards)
Introduce a requirement that Executive Directors leaving the Board hold the lower of their actual shareholding at their retirement date and their in-employment share ownership guideline for a period of two years, subject to Remuneration Committee discretion
Role and responsibility The role and responsibilities of the Committee are set out in its terms of reference, which are reviewed by the Committee and approved by the Board on an annual basis, and which can be found on the Company’s website. The Committee’s role is to assist the Board in meeting its responsibilities regarding the determination, implementation and operation of the overall remuneration policy for the Group, including the remuneration of the Chairman, Executive Directors, Group Executive Committee and Company Secretary, as well as overseeing the remuneration arrangements of other staff within its purview.
— Had no adjustment made to the Options they hold under the all-employee UK sharesave plan, in line with the rules laid out by the UK tax authorities.
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Demerger share calculation The demerger of M&G plc from Prudential plc was accomplished through a dividend in specie (the ‘demerger dividend’); with shareholders receiving one share in M&G plc for every share they hold in Prudential plc at the record time and date. The Committee approved the approach to converting the demerger dividend into additional Prudential plc shares and ADRs for those with outstanding awards at the date of the demerger. Prudential plc employees who held awards over Prudential shares or ADRs received the value of the demerger dividend in the form of additional Prudential plc shares or ADRs respectively. These additional shares/ADRs are managed in the same way as other dividend equivalents, that is they will vest on the same timetable and to the same extent as the original award.
Mike Wells Group Chief Executive — FTSE 40 — International insurance companies
Lead Group Strategy formulation and execution ensuring opportunities to evolve the business continue to be explored.
Following the merger of Standard Life and Aberdeen Asset Management during the three-year performance period, the Committee determined that Standard Life would be retained in the peer group for the pre-merger period and the combined entity would be included in the peer group from the date of the merger for all outstanding PLTIP awards. In addition, following the demerger of Quilter from Old Mutual and Old Mutual’s delisting from the FTSE on 26 June 2018, the Committee determined that Old Mutual be retained as a TSR peer with no adjustment to its performance during the period prior to its demerger and delisting, and that Old Mutual’s TSR performance from the date of its demerger and delisting would track an index of the peers (excluding Prudential plc) for all outstanding PLTIP awards.
TSR performance Prudential’s TSR performance during the performance period (1 January 2017 to 31 December 2019) was ranked below median of the peer group. The portion of the awards related to TSR will therefore lapse.
Capital measure – Group Solvency II operating capital generation/Group operating free surplus generation The vesting profile for the Group Solvency II operating capital generation and Group operating free surplus generation measure is binary, awarding full vesting for achieving plan and no vesting for any level of performance below plan. The weighted average of the adjusted Group Solvency II operating capital generation from 1 January 2017 to 30 June 2019 (target $7.4bn) and the Group operating free surplus generation from 1 July 2019 to 31 December 2019 (target $2.2 bn), which excludes M&G plc performance from the point of demerger, was in excess of the cumulative target and therefore generated 100 per cent vesting on this element.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 165
Non-executive Directors Philip Remnant 1 January 2013 6 months 7 years 4 months Howard Davies 15 October 2010 6 months 9 years 7 months David Law 15 September 2015 6 months 4 years 8 months Kai Nargolwala 1 January 2012 6 months 8 years 4 months Anthony Nightingale 1 June 2013 6 months 6 years 11 months Alice Schroeder 10 June 2013 6 months 6 years 11 months Thomas Watjen 11 July 2017 6 months 2 years 10 months Fields Wicker-Miurin 3 September 2018 6 months 1 year 8 months Amy Yip 2 September 2019 6 months 8 months
Diversity measure: Percentage of the Leadership Team that is female at the end of 2022. The target for this metric will be based on progress towards the goal that the Company set when it signed the Women in Finance Charter, specifically that 30 per cent of our Leadership Team will be female by the end of 2021.
Executives normally have five years from the later of the date of their appointment or promotion, or the date of an increase in these guidelines, to build this level of ownership. Shares earned and deferred under the AIP are included in calculating the Executive Director’s shareholding for these purposes, as are shares held by members of an Executive Director’s household. Unvested share awards under long-term incentive plans are not included but vested share awards under long-term incentive plans which are subject to the holding period are included.
Where any matter arises which the Committee believes affects or may affect the reputation of the Company or any member of the Group.
— A sustainability scorecard was selected to ensure an alignment with the Group’s strategic objectives, which are approved by the Board each year, and to reflect Prudential’s cultural values.
Scenarios of total remuneration The chart below provides an illustration of the future total remuneration for each Executive Director in respect of their remuneration opportunity for 2020. Four scenarios of potential outcome are provided based on underlying assumptions shown in the notes to the chart.
The fourth scenario below illustrates the maximum potential remuneration (shown in the third scenario) on the assumption that the Company’s share price grows by 50 per cent over three years.
Notes The scenarios in the chart above have been calculated on the following assumptions: Minimum In line with expectations Maximum Share price growth
Approach to recruitment remuneration The table below outlines the approach that Prudential will take when recruiting a new Executive Director. This approach would also apply to internal promotions.
In agreeing the terms of departure for any Executive Director, other than on death or disablement, the Company will have regard to the need to mitigate the costs for the Company, which would be reduced or cease if departing Executives secure alternative paid employment during the notice period.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 185
Prior to release, awards remain subject to the malus and clawback terms originally applied to them.
Risk The Group Risk Committee formally provides advice to the Committee on risk management considerations to inform decisions over bonus payments and long-term incentive vesting levels.
Since 2014 participants have been able to elect to enter into savings contracts of up to £500 per month for a period of three or five years. At the end of this term, participants may exercise their options within six months and purchase shares. If an option is not exercised within six months, participants are entitled to a refund of their cash savings plus interest if applicable under the rules. Shares are issued to satisfy those options which are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and any other option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at the proposed date of grant. In anticipation of the demerger of the M&G plc business the Company did not operate the SAYE in 2018 and it was relaunched in November 2019.
B6.1 Demerger dividend in specie of M&G plc 238 B6.2 Other dividends 238
C9 Defined benefit pension schemes 290 C10 Share capital, share premium and own shares 290 C11 Provisions 292 C12 Capital
Treasury shares Movement in own shares in respect of share-based payment plans – – 38 – – 38 – 38 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS – – 55 – – 55 – 55
Net unrealised valuation movements net of related change in amortisation of deferred acquisition costs and related tax – – – – (1,446) (1,446) – (1,446)
Deferred acquisition costs and other intangible assets C5.2 17,476 15,185 14,896 Property, plant and equipment note (i) C13 1,065 1,795 1,067 Reinsurers’ share of insurance contract liabilities C4.1(iv) 13,856 14,193 13,086 Deferred tax assets C8.2 4,075 3,305 3,554 Current tax recoverable C8.1 492 787 829 Accrued investment income C1 1,641 3,501 3,620
Investment income and interest payments included in profit before tax (4,803) (4,148) Operating cash items: Interest receipts and payments 4,277 3,912 Dividend receipts 978 744 Tax paid (717) (477)
Total segment profit from continuing operations 6,346 5,451 5,435 16% 17%
(c) US variable annuity and fixed index annuity business This�business�has�guarantee�liabilities�which�are�measured�on�a�combination�of�fair�value�and�other�US�GAAP�derived�principles.�These� liabilities�are�subject�to�an�extensive�derivative�programme�to�manage�equity�and�interest�rate�exposures�whose�fair�value�movements� pass�through�the�income�statement�each�period.�
B2.2 Share-based payment The Group offers discretionary share awards to certain key employees and all-employee share plans for all UK and a number of Asian locations.
�— Loans and receivables – except for those designated as at fair value through profit or loss or available-for-sale, these instruments comprise non-quoted investments that have fixed or determinable payments. These instruments include loans collateralised by mortgages, deposits, loans to policyholders and other unsecured loans and receivables. These investments are initially recognised at fair value plus transaction costs. Subsequently, these instruments are carried at amortised cost using the effective interest method.
(a) Fair value measurement hierarchy of Group assets and liabilities Assets and liabilities carried at fair value on the statement of financial position The�table�below�shows�the�assets�and�liabilities�carried�at�fair�value�analysed�by�level�of�the�IFRS�13�‘Fair�Value�Measurement’�defined�fair� value�hierarchy.�This�hierarchy�is�based�on�the�inputs�to�the�fair�value�measurement�and�reflects�the�lowest�level�input�that�is�significant�to� that�measurement.�
Most fixed index annuities are subject to early surrender charges for the first five to 12 years of the contract. During the surrender charge period, the contract holder may cancel the contract for the surrender value. Jackson offers a fully liquid fixed index annuity product that has no surrender charges.
† PVIF and other intangibles comprise present value of acquired in-force (PVIF), distribution rights and other intangibles such as software rights. Distribution rights relate to amounts that have been paid or have become unconditionally due for payment as a result of past events in respect of bancassurance partnership arrangements in Asia. These agreements allow for bank distribution of Prudential’s insurance products for a fixed period of time. Software rights include additions of $51 million, amortisation of $(33) million, disposals of $5 million, foreign exchange of $2 million and closing balance at 31 December 2019 of $85 million (31 December 2018: $70 million for continuing operations).
Prudential plc’s short-term debt is rated as P-1 by Moody’s, A-1 by Standard & Poor’s and F1 by Fitch. Jackson National Life Insurance Company’s financial strength is rated AA- by Standard & Poor’s and Fitch, A1 by Moody’s and A+ by A.M. Best. Prudential Assurance Co. Singapore (Pte) Ltd.’s (Prudential Singapore) financial strength is rated AA- by Standard & Poor’s. All the Group’s ratings are on a stable outlook.
A 10 or 20 per cent increase in equity and property values would have an approximately equal and opposite net effect on profit and shareholders’ equity to the sensitivities shown above. The impacts at 31 December 2019 are similar to those at 31 December 2018, and reflect the growth in the business.
Prior to the demerger of UK and Europe operations in October 2019, the Group consolidated a number of authorised investment funds of M&G plc that hold shares in Prudential plc. In the prior year, at 31 December 2018, the total number of shares held by these funds was 3.0 million and the cost of acquiring these shares of $25 million was included in the cost of own shares. The market value of these shares as at 31 December 2018 was $53 million. These funds were deconsolidated upon the demerger.
Provision in respect of defined benefit pension schemes C9 1 222 Other provisions note 465 1,151
Singapore A risk-based capital framework applies in Singapore. The regulator also has the authority to direct that the insurer satisfies additional capital adequacy requirements in addition to those set forth under the Singapore Insurance Act if it considers such additional requirements appropriate. The available capital is based on assets that are marked-to-market, with policyholder liabilities based on a gross premium valuation method using best estimate assumptions with a suitable margin for prudence. Liabilities are zeroised at a policy level (i.e. negative liabilities are not permitted at a policy level). The updated risk-based capital framework (RBC2) will come into effect on 31 March 2020.
Gain on disposals note (i) 265 – Other transactions note (ii) (407) (107)
Net assets acquired and liabilities assumed (118) Goodwill arising on acquisition* 260
On 21 October 2019, the Group completed the demerger of its UK and Europe operations (M&G plc) from the Group, resulting in two separately listed companies. The Group’s UK and Europe operations have been reclassified as discontinued operations in these consolidated financial statements in accordance with IFRS 5 ‘Non-current assets held for sale and discontinued operations’.
Other comprehensive income for the year from discontinued operations, net of related tax 2,871 (605)
Cash and cash equivalents on the consolidated statement of financial position at end of year – 6,048 * The net cash flows between discontinued and continuing operations represents the net cash paid for dividend and other items from discontinued operations to continuing operations. In 2019, the net cash flows of $(436) million primarily include pre-demerger dividend of $(3,841) million, other dividends of $(684) million offset by payment for the transfer of debt to M&G plc from Prudential plc prior to the demerger of $4,161 million.
The Group’s associates, which are also accounted for under the equity method, include the Indian insurance entity (with the majority shareholder being ICICI Bank). In addition, the Group has investments in collective investment schemes, funds holding collateralised debt obligations, property funds where the Group has significant influence. As allowed under IAS 28, these investments are accounted for on a fair value through profit or loss basis. The aggregate fair value of associates accounted for at fair value through profit or loss, where there are published price quotations, is approximately $0.7 billion at 31 December 2019 (31 December 2018: $0.1 billion from continuing operations).
Other subsidiaries, joint ventures, associates and significant holdings of the Group – no shares held directly by the parent company, Prudential plc or its nominees: Name of entity Classes of shares held Proportion held Registered office address and country of incorporation 95th Avenue Retail Building, LLC MI 100.00% 901 S., Ste. 201, Second St., Springfield, IL, 62704-7909, USA
CITIC-Prudential Fund Management Company Limited MI 49.00% Level 9, HSBC Building, Shanghai IFC, 8 Century Avenue, Pudong, Shanghai, China
Eastspring Investments India Equity Open Limited OS 100.00% 3rd Floor, 355 NEX, Rue du Savoir, Cybercity Ebene 72201, Mauritius
Eastspring Investments Japan Dynamic MY Fund U 27.65% Eastspring Investments Berhad, Level 22, Menara Prudential, Persiaran TRX Barat, 55188 Tun Razak Exchange, Kuala Lumpur, Malaysia
Jackson National Asset Management LLC OS 100.00% 1 Corporate Way, Lansing, MI 48951, USA
PPM CLO 4 Ltd. PS 100.00% PO Box 1093, Queensgate House, Grand Cayman KY1-1102, Cayman Islands
Prudential International Staff Pensions Limited OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom
Prudential Zenith Life Insurance Limited OS 51.00% 13th Floor, Civic Towers, Ozumba Mbadiwe Avenue, Victoria Island, Lagos, Nigeria
Sri Han Suria Sdn. Bhd. OS 51.00% Suite 1005, 10th Floor Wisma Hamzah-Kwong Hing, No. 1 Leboh Ampang, 50100 Kuala Lumpur, Malaysia
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 311 $m Share capital Share premium Profit and loss account Total equity
The Group’s UK subsidiaries each file separate tax returns. In accordance with UK tax legislation, where one domestic UK company is a 75 per cent owned subsidiary of another UK company or both are 75 per cent owned subsidiaries of a common parent, the companies are considered to be within the same UK tax group. For companies within the same tax group, trading losses may be offset against taxable profits arising in the same or future accounting periods for the purposes of determining current and deferred taxes.
Under IFRS 2 ‘Share-based payment’, where the Company, as the parent company, has the obligation to settle the options or awards of its equity instruments to employees of its subsidiary undertakings, and such share-based payments are accounted for as equitysettled in the Group financial statements, the Company records an increase in the investment in subsidiary undertakings for the value of the share options and awards granted with a corresponding credit entry recognised directly in equity. The value of the share options and awards granted is based upon the fair value of the options and awards at the grant date, the vesting period and the vesting conditions. Cash receipts from business units in respect of newly issued share schemes are treated as returns of capital within investments in subsidiaries.
Under UK company law, Prudential may pay dividends only if sufficient distributable reserves of the Company are available for the purpose and if the amount of its net assets is greater than the aggregate of its called up share capital and non-distributable reserves (such as the share premium account) and the payment of the dividend does not reduce the amount of its net assets to less than that aggregate.
Refer to page 118 (Audit Committee report), page 208 (accounting policy) and pages 262 to 275 (financial disclosures)
Subjective valuation This�is�an�area�that�involves�significant�judgement�over� uncertain�future�outcomes,�mainly�the�ultimate�total� settlement�value�of�these�long�term�policyholder�liabilities.� Economic�assumptions,�including�investment�return�and� associated�discount�rates,�and�operating�assumptions� including�mortality,�morbidity,�expenses,�utilisation�of� guarantees�and�persistency�(including�consideration�of� policyholder�behaviour)�are�the�key�inputs�used�to�estimate� these�long�term�liabilities,�in�addition�to�the�appropriate� design�and�calibration�of�complex�reserving�models.
7 Respective responsibilities Directors’ responsibilities As�explained�more�fully�in�their�statement� set�out�on�page�319,�the�directors�are� responsible�for�the�preparation�of�the� financial�statements�including�being� satisfied�that�they�give�a�true�and�fair�view.� They�are�also�responsible�for:�such�internal� control�as�they�determine�is�necessary�to� enable�the�preparation�of�financial� statements�that�are�free�from�material� misstatement,�whether�due�to�fraud�or� error;�assessing�the�Group�and�parent� company’s�ability�to�continue�as�a�going� concern,�disclosing,�as�applicable,�matters� related�to�going�concern;�and�using�the� going�concern�basis�of�accounting�unless� they�either�intend�to�liquidate�the�Group�or� the�parent�company�or�to�cease�operations,� or�have�no�realistic�alternative�but�to�do�so.�
Auditor’s responsibilities Our�objectives�are�to�obtain�reasonable� assurance�about�whether�the�financial� statements�as�a�whole�are�free�from� material�misstatement,�whether�due�to� fraud,�or�other�irregularities,�(see�below),� or�error,�and�to�issue�our�opinion�in�an� auditor’s�report.�Reasonable�assurance�is�a� high�level�of�assurance,�but�does�not� guarantee�that�an�audit�conducted�in� accordance�with�ISAs�(UK)�will�always� detect�a�material�misstatement�when�it� exists.�Misstatements�can�arise�from�fraud,� other�irregularities�or�error�and�are� considered�material�if,�individually�or�in�
Irregularities – ability to detect We�identified�areas�of�laws�and�regulations� that�could�reasonably�be�expected�to�have� a�material�effect�on�the�financial�statements� from�our�general�commercial�and�sector� experience�and�through�discussion�with� the�directors�and�other�management� (as�required�by�auditing�standards),�and� from�inspection�of�the�Group’s�regulatory� and�legal�correspondence�and�discussed� with�the�directors�and�other�management� the�policies�and�procedures�regarding� compliance�with�laws�and�regulations.� We�communicated�identified�laws�and� regulations�throughout�our�team�and� remained�alert�to�any�indications�of� non-compliance�throughout�the�audit.� This�included�communication�from�the� Group�to�component�audit�teams�of� relevant�laws�and�regulations�identified� at�group�level.
Given that the NAIC reform was adopted at 31 December 2019, with the exception of the amounts shown above there are no other impacts from this change recorded in the 2019 EEV consolidated income statement or in the analysis of movement in free surplus. If the changes had been adopted with effect from 1 January 2019, the Group’s 2019 EEV results would not be expected to be materially different.
Value of in-force business before deduction of cost of capital and time value of options and guarantees 32,396 11,417 43,813 27,849 15,043 42,892
Operating free surplus generated before restructuring costs 1,772 1,125 2,897 (923) 1,974
Operating free surplus generated from in-force life business 1,639 2,191 (25)% Investment in new business note (c) (539) (300) (80)%
The 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 (including interest costs on core structural borrowings, corporate expenditure for head office functions in London and Hong Kong, the Group’s treasury function and Africa operations). Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management, as described in note (g) below.
Allowance for non-diversifiable non-market risks The majority of non-market and non-credit risks are considered to be diversifiable. An allowance for non-diversifiable non-market risks is estimated as set out below.
(ii) Accounting presentation (a) Analysis of post-tax profit To the extent applicable, the presentation of the EEV basis profit or loss for the year is consistent with the classification between operating and non-operating results that the Group applies for the analysis of IFRS basis results. Operating results are determined as described in note (b) below and incorporate the following: — New business contribution, as defined in note (i)(b) above; — Unwind of discount on the value of in-force business and other expected returns, as described in note (c) below; — The impact of routine changes of estimates relating to operating assumptions, as described in note (d) below; and — Operating experience variances, as described in note (e) below.
(e) Operating experience variances Operating profit includes the effect of experience variances on non-economic assumptions, such as persistency, mortality, morbidity, expenses and other factors, which are calculated with reference to the assumptions at the end of the reporting period.
(i) Principal economic assumptions The EEV basis results for the Group’s covered business have been determined using economic assumptions where both the long-term expected rates of return on investments and risk discount rates are set by reference to risk-free rates of return at the end of the reporting period. The risk-free rates of return are based on local government bond yields, which are generally assumed to remain constant throughout the projection, and are shown 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 to the risk-free rate based on the Group’s long-term view. In the majority of business units, equity risk premiums were increased during 2019 by 25 basis points from those applied at 2018. The related expected return on equity assets and risk discount rates have been increased accordingly. As described in note 14(i)(h), the resulting risk discount rates incorporate allowances for market risk, additional credit risk and non-diversifiable non-market risks appropriate to the features and risks of the underlying products and markets, after considering risks allowed for explicitly elsewhere in the EEV basis, such as cost of capital and the time value of the cost of options and guarantees.
Notes (1) Total weighted average risk discount rates for Asia shown above have been determined by weighting each business’s risk discount rates by reference to the EEV basis new business contribution and the net closing value of in-force business. The changes in the risk discount rates for individual Asia businesses reflect the movements in the local government bond yields, changes in the equity risk premiums, changes in the allowance for market risk as described in note 14(i)(h) and changes in product mix.
Non-variable annuity: Risk discount rate 3.7 4.4 Additional allowance for credit risk included in risk discount rate note 14(i)(h) 1.0 1.0
Total weighted average: New business 6.1 6.9 In-force business 6.2 6.8
Demographic assumptions Persistency, mortality and morbidity assumptions are based on an analysis of recent experience, and 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. When projecting future cash flows for medical reimbursement business that is repriced annually, explicit allowance is made for expected future premium inflation and separately for future medical claims inflation.
Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 358, the directors have accepted responsibility for the preparation of the supplementary information on the EEV basis in accordance with the EEV Principles.
(iv) Analysis of adjusted IFRS operating profit based on longer-term investment returns by driver from long-term insurance businesses
(vi) Reconciliation of expected transfer of value of in-force business and required capital to free surplus 374
(vii) Reconciliation of APE new business sales to gross premiums earned 385
31 Dec 2019 ($bn) Asia US Unallocated to a segment Group total
Note Total Group funds under management from continuing operations comprise: $bn $bn
Net cash remitted by business units note (a): From continuing operations
Adjusted IFRS operating profit based on longer-term investment returns – asset management 32 11
Analysis of adjusted IFRS operating profit based on longer-term investment returns for US insurance operations before and after acquisition costs and DAC adjustments
Other DAC adjustments – amortisation of previously deferred acquisition costs: Total adjusted IFRS operating profit based on longer-term investment returns 3,602 (1,074) 510 3,038 3,717 (1,013) (152) 2,552
bps * Margin represents operating income before performance-related fees as a proportion of the related funds under management. Monthly closing internal and external funds managed by Eastspring have been used to derive the average. Any funds held by the Group’s insurance operations that are managed by third parties outside the Prudential Group are excluded from these amounts.
(2) Operating income and expense include the Group’s share of contribution from joint ventures (but excludes any contribution from associates). In the consolidated income statement of the Group IFRS basis results, the net post-tax income of the joint ventures and associates is shown as a single line item.
Non-operating and other 2019 expected free surplus generation for years 2020 to 2059 – 3,486 3,533 3,353 3,465 3,469 68,377 85,683
Acquisition costs and other expenditure (7,283) (8,527) (8,649) (7,846) (8,166) Finance costs: interest on core structural borrowings of
(v) The comparative results from 2015 to 2018 have been re-presented from those previously published for the demerger of the Group’s UK and Europe operations, M&G plc, in October 2019 which is reclassified as discontinued operations.
More details on how adjusted IFRS operating profit based on longer-term investment returns is determined are included in note B1.3 of the Group IFRS basis results. A full reconciliation to profit after tax is given in note B1.1.
Net core structural borrowings of shareholder-financed businesses 3,387 5,640 Closing shareholders’ equity 19,477 21,968
(b) Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value total net worth for long-term insurance operations. These also include the mark-to-market value movements of the Group’s core structural borrowings which are fair valued under EEV but are held at amortised cost under IFRS. The most significant valuation differences relate to changes in the valuation of insurance liabilities. For example, in Jackson, 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 reporting is based on expected future cash flows due to the policyholder on a prudent basis, with the consideration of an expense allowance, as applicable, but with no separate deferred acquisition cost asset.
Exposure to such events could impact Prudential’s operational resilience and ability to perform necessary business functions by disrupting its systems, operations, new business sales and renewals, distribution channels and services to customers, or result in the loss of confidential or proprietary data. Such events, as well as any weaknesses in administration systems (such as those relating to policyholder records) or actuarial reserving processes, may also result in increased expenses, as well as legal and regulatory sanctions, decreased profitability, financial loss, customer conduct risk impacts and damage Prudential’s reputation and relationship with its customers and business partners.
IT and operational systems and processes) could result in significant disruption to business operations and customers and may have adverse financial, reputational or conduct risk implications.
Attempts to access or disrupt Prudential’s IT systems, and loss or misuse of personal data, could result in loss of trust from Prudential’s customers and employees, reputational damage and financial loss Prudential and its business partners are increasingly exposed to the risk that individuals or groups may attempt to disrupt the availability, confidentiality and integrity of its IT systems, which could result in disruption to key operations, make it difficult to recover critical services, damage assets and compromise the integrity and security of data (both corporate and customer). This could result in loss of trust from Prudential’s customers and employees, reputational damage and direct or indirect financial loss. The cyber-security threat continues to evolve globally in sophistication and potential significance. Prudential’s increasing profile in its current markets and those in which it is entering, growing customer interest in interacting with their insurance providers and asset managers through the internet and social media, improved brand awareness and the 2016 designation of Prudential as a Global Systemically Important Insurer (G-SII) could also increase the likelihood of Prudential being considered a target by cyber criminals. Further, there have been changes to the threat landscape and the risk from untargeted but sophisticated and automated attacks has increased.
A further factor is the assumption that Prudential makes about future expected levels of the rates of early termination of products by its customers (known as persistency). This is relevant to a number of lines of business in the Group, especially for Jackson’s portfolio of variable annuities and, in Asia markets, the health and protection products in Hong Kong, Singapore, Indonesia and Malaysia. Prudential’s persistency assumptions reflect a combination of recent past experience for each relevant line of business and expert judgement, especially where a lack of relevant and credible experience data exists. Any expected change in future persistency is also reflected in the assumption. If actual levels of future persistency are significantly different than assumed, the Group’s results of operations could be adversely affected. Furthermore, Jackson’s variable annuity products are sensitive to other types of policyholder behaviour, such as the take-up of its GMWB product features.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 395 and disputes, it is possible that an adverse outcome could have an adverse effect on Prudential’s reputation, results of operations or cash flows.
B Bancassurance An agreement with a bank to offer insurance and investment products to the bank’s customers.
Y Yield A measure of the rate of return received from an investment in percentage terms by comparing annual income (and any change in capital) to the price paid for the investment.
Authority to purchase own shares The Directors also require authority from shareholders in relation to the purchase of the Company’s own shares. Prudential seeks authority by special resolution on an annual basis for the buy-back of its own shares in accordance with the relevant provisions of the Companies Act 2006 and other related guidance. This authority has not been used since it was last granted at the AGM in 2019. This existing authority is due to expire at the end of this year’s AGM and a special resolution to renew the authority will be put to shareholders at the AGM on 14 May 2020.
Payment date 15 May 2020 15 May 2020 On or about