Summary financials 2018 2017 Change on an actual exchange rate basis8
Adjusted IFRS operating profit based on longer-term investment returns1 £4,827m £4,699m 3% 6%
4 IFRS profit after tax reflects the combined effects of operating results determined on the basis of longer-term investment returns, together with short-term investment variances, results attaching to disposal of businesses and corporate transactions, amortisation of acquisition accounting adjustments and the total tax charge for the year.
8 Further information on actual and constant exchange rate basis is set out in note A1 of the IFRS financial statements.
At�a�glance 10 Our�business�model 12 Our�distribution 14 Demerger�update 15 Our�performance 16 Our�businesses 18 Chief�Financial�Officer’s�report�on�the�2018�financial�performance 38 Group�Chief�Risk�Officer’s�report�of�the�risks�facing�our�business�
Chairman’s�introduction 88 Board�of�Directors 89 How�we�operate 95 Risk�management�and�internal�control 107 Committee�reports 109 Statutory�and�regulatory�disclosures 128 Index�to�principal�Directors’�report�disclosures 130 04 Directors’ remuneration report 131
Performance and dividend The�Group�delivered�another�year�of� sustainable�operating�and�financial� performance�during�2018.�In�view�of�this� performance,�the�Board�has�decided�to� increase�the�full-year�ordinary�dividend�by� 5�per�cent�to�49.35�pence�per�share.�In�line� with�this,�the�Directors�have�approved� a�second�interim�ordinary�dividend�of� 33.68�pence�per�share.
It�has�been�a�privilege�to�serve�on�the�Board� of�Prudential�plc�since�October�2010,�and� to�have�served�as�Chairman�since�July� 2012.�The�Board�is�mindful�that�the� Corporate�Governance�Code�states�that� a�chair�should�not�remain�in�post�beyond� nine�years�from�the�date�of�first� appointment�to�the�Board.�However,�to� help�provide�Board�stability�during�the� period�covering�the�demerger�of� M&GPrudential,�I�have�agreed�to�remain� as�Chairman�until�May�2021,�subject�to� re-election�each�year.
In�addition,�policy�and�regulatory�change� can�have�a�significant�effect�on�both�our� operating�environment�and�our�customers.� We�are�committed�to�developing� constructive�and�open�relationships�with� all�our�supervisors,�as�well�as�governments� and�civil�society.�We�are�grateful�for�the� constructive�engagement�of�our�regulators� during�the�demerger�process,�and�the� Board�is�committed�to�continuing�to�work� closely�with�them.
A�key�part�of�our�community�contribution�is� made�by�our�people�volunteering�their�time� and�skills�for�the�benefit�of�their�communities,� and�this�makes�me�particularly�proud.� I�support�this�activity�personally�through� the�Chairman’s�Challenge,�our�flagship� international�volunteering�programme,� which�brings�together�people�from�across�the� Group�to�get�involved�in�their�communities.� In�2018,�more�than�9,000�of�our�colleagues� around�the�world�took�part�in�the�Chairman’s� Challenge,�volunteering�over�49,000�hours�to� support�33�different�projects.
Bringing Money Smarts to kids across the US Since�2017,�the�Jackson�Charitable�Foundation� has�been�helping�American�students�to�form� better�financial�habits�from�the�youngest�ages.� Cha-Ching Money Smart Kids�music�videos� and�activities,�originally�developed�by� Prudential�Corporation�Asia,�are�now�used� in�elementary�schools�across�the�US�with� programmes�led�by�classroom�teachers�and� community�volunteers.�
Our�purpose�is�to�help�people�de-risk�their� lives�and�deal�with�their�biggest�financial� concerns.�Whether�they�are�starting�a� family,�saving�for�a�child’s�education�or� planning�for�old�age,�we�provide�them� with�the�freedom�to�face�the�future�with� confidence�through�our�long-term�savings� and�protection�products,�retirement� income�solutions�and�asset�management� capabilities.�At�the�same�time,�we�invest� our�customers’�savings�in�the�real�economy,� helping�to�drive�the�cycle�of�growth�and� build�stronger�communities.
We�are�making�good�progress�towards�the� demerger.�On�the�structural�side,�we�have� established�the�holding�company�for� M&GPrudential,�and�we�have�completed� the�first�stages�at�the�High�Court�of�England� and�Wales�for�the�transfer�of�part�of�the� M&GPrudential�annuity�book�to�Rothesay.� On�the�operational�side,�we�are�moving� forward�with�separating�the�functions�of� the�two�businesses�and�building�new�ones� to�prepare�M&GPrudential�for�its�postdemerger �future.�We�have�also�raised� £1.6�billion�of�subordinated�debt,�with� substitution�clauses�to�be�activated�on� demerger,�supporting�the�capital� rebalancing�of�the�two�businesses,�and� we�continue�to�work�with�our�regulators.
The�Group�remains�robustly�capitalised,� with�a�2018�year-end�shareholder� Solvency�II�cover�ratio7,8�of�232�per�cent.� Over�the�period,�IFRS�shareholders’�funds� increased�by�7�per�cent�to�£17.2�billion,� reflecting�profit�after�tax�of�£3,013�million� (2017:�£2,390�million�on�an�actual� exchange�rate�basis)�and�other�movements� that�included�dividend�payments�to� shareholders�of�£1,244�million�and� favourable�foreign�exchange�movements� of�£348�million.�EEV�shareholders’�funds� increased�by�11�per�cent�to�£49.8�billion,� equivalent�to�1,920�pence�per�share2,9.
In�the�US,�Jackson�remains�focused�on� providing�financial�security�to�increasing� numbers�of�individuals�approaching�or�in� retirement,�broadening�its�product�range� and�extending�its�distribution�network,� including�new�relationships�announced� with�State�Farm,�Envestnet�and�DPL� Financial�Partners.�In�2018,�higher�charges� for�deferred�acquisition�costs�amortisation,� largely�as�a�result�of�equity�market� movements�in�the�year,�contributed�to� Jackson’s�operating�profit�being�11�per�cent� lower.�US�new�business�profit�increased�by� 5�per�cent,�as�favourable�movements�in� interest�rates�and�spread�assumptions� balanced�a�reduction�in�APE�sales.� Jackson’s�hedging�programmes�performed� as�expected�in�the�period�of�equity�market� weakness�experienced�towards�the�end� of�2018,�contributing�to�an�increased� risk-based�capital�ratio�at�year-end�of� 458�per�cent�(2017:�409�per�cent).
of�£8.5�billion�and�the�PruFund�contribution� to�shareholder�operating�profit�increasing� 30�per�cent�to�£55�million.�New�business� profit�increased�by�3�per�cent,�broadly�in� line�with�the�increase�in�APE�sales.� M&GPrudential�asset�management�saw�net� outflows�of�£9.9�billion�from�external�clients,� including�the�expected�redemption�of�a� single�£6.5�billion�low�margin�institutional� mandate.�Overall�M&GPrudential�assets� under�management10�were�£321�billion� (2017:�£351�billion),�reflecting�net�outflows�at� M&GPrudential�asset�management�and�the� impact�of�the�£12�billion�annuity�reinsurance� agreement�announced�in�March�2018.�
Our�financial�Key�Performance�Indicators� (KPIs)�continue�to�reflect�the�outcome� of�the�Group’s�strategy.�Our�Asia�life� businesses�are�driven�by�growth�in�our� recurring�premium�base�and�focus�on� health�and�protection�business.�Elsewhere� we�are�benefiting�from�our�prioritisation�of� fee-generating�products�across�our�Asia� asset�management,�US�variable�annuity� and�UK�and�European�savings�and� investment�activities.
Innovation through partnership In�2017,�Prudential�Singapore�announced� a�commitment�to�the�Monetary�Authority� of�Singapore�to�be�a�Grand�Sponsor�of�the� Singapore�FinTech�Festival�from�2018�to�2022,� demonstrating�our�dedication�to�fostering� a�culture�of�innovation,�collaboration�and� co-creation�among�financial�institutions,� fintech�companies�and�regulators�globally.� The�Singapore�FinTech�Festival�is�the�largest� festival�of�its�kind�in�the�world,�with�the�2018� event�hosting�more�than�250�speakers,�more� than�400�exhibitors�and�16�international� pavilions,�and�drawing�close�to�45,000� participants�from�almost�130�countries.
Singapore�is�a�key�innovation�test-bed�for� Prudential�as�it�harnesses�technology�to� make�insurance�simpler�and�more�accessible.� Recognising�that�customers�are�demanding� greater�speed,�seamlessness,�convenience� and�control�over�their�finances,�we�have�been� investing�in�understanding�customers’�needs� more�deeply�and�in�creating�a�distinctive� Prudential�customer�experience�across� multiple�touchpoints.�We�are�also�creating� digital�tools�to�help�our�more�than�4,900� financial�consultants�in�Singapore�work� more�efficiently�and�serve�our�customers� even�better.
We�are�also�developing�our�businesses� in�our�newer�markets�in�Africa,�which�is� one�of�the�world’s�most�underserved�life� markets,�and�where�the�population�is� forecast�to�grow�by�a�billion�by�20451.� We�are�now�operating�in�five�countries�in� Africa�–�Ghana,�Kenya,�Nigeria,�Uganda� and�Zambia�–�which�will�increase�further� with�the�announced�acquisition�of�a� majority�stake�in�Group�Beneficial,� and�we�are�excited�about�the�growing� opportunities�in�this�dynamic�region.
In�Asia,�we�are�continuing�to�develop�and� expand�our�products,�distribution� capabilities�and�footprint�and�to�meet�the� evolving�needs�of�our�customers.�During� 2018,�we�broadened�our�product�suite�to� include�tailored�propositions�for�the� high-net-worth�and�corporate�segments� and�developed�new�products�for�customers� with�specific�needs,�such�as�pre-existing� medical�conditions.�Our�distribution� capabilities�were�enhanced�by�new�digital� technology�and�provide�a�seamless�and� differentiated�customer�experience�from� point�of�sale�through�to�making�a�claim.� At�Eastspring,�we�also�continued�to�roll� out�BlackRock’s�Aladdin�system�across� our�markets�to�improve�efficiency.�We� broadened�our�reach�through�new� partnerships�with�leading�banks�in� several�markets,�including�Thailand�and� the�Philippines.�Meanwhile,�Eastspring� consolidated�its�position�as�the�leading� retail�asset�manager�in�Asia�(excluding� Japan)�by�establishing�an�on-the-ground� presence�in�China�and�Thailand.�Early�in� 2019,�we�also�renewed�our�successful� regional�strategic�alliance�with�United� Overseas�Bank�(UOB),�one�of�our�most� successful�distribution�relationships�in� South-east�Asia,�until�2034�and�added� Vietnam�and�UOB’s�digital�bank�to�an� existing�partnership�presence�in�Singapore,� Malaysia,�Thailand�and�Indonesia.�
A dditional inform ation offering�continues�to�impress�customers� with�its�combination�of�clarity,�capital� growth�and�lower�volatility.�We�are� investing�to�transform�the�experience�of� our�fast-growing�digital�platform,�launched� in�2016,�to�ensure�it�offers�a�comprehensive� range�of�solutions�for�customers.�In�our� investment�management�business,�we� continue�to�develop�our�private�asset� capacity�and�now�have�£59�billion�of� private�assets�under�management,�making� us�one�of�the�largest�private�credit�investors� in�the�world,�and�we�are�looking�to�expand� our�differentiated�capabilities�across� geographies�and�asset�classes.�In�2018,� M&GPrudential�also�signed�a�new� partnership�with�Tata�Consultancy� Services�(TCS),�a�global�leader�in�IT,� business�process�and�digital�services,�to� enhance�service�for�our�UK�and�Europe� savings�and�retirement�customers.
Throughout�our�businesses,�we�are� continuing�to�develop�our�digital� capabilities.�In�Asia,�such�initiatives�are� enabling�us�to�provide�valuable�and� innovative�services�to�our�customers.� In�August,�we�announced�our�exclusive� partnership�agreement�with�the�UK-based� healthcare�technology�and�services� company�Babylon�Health.�Through�the� deployment�of�cutting-edge�artificial� intelligence�technology,�this�partnership� will�offer�customers,�in�up�to�12�of�our� markets�in�Asia,�access�to�a�comprehensive� set�of�digital�health�tools,�complementing� Prudential�Corporation�Asia’s�existing�suite� of�world-class�protection�products�and� strengthening�our�digital�future.�Similarly,� at�Eastspring,�our�robo-advice�platform�in� Taiwan,�in�partnership�with�Alkanza,�helps� our�clients�meet�their�savings�goals.�We� recognise�that�technology�continually�
insurance�and�asset�management�industries,� and�our�presence,�scale�and�distribution� reach�position�us�well�to�participate�strongly� in�this�growth.�In�the�US,�we�continue�to� provide�Americans�with�the�retirement� strategies�they�need,�and�we�are�confident� that�this�will�enable�us�to�capture�additional� growth�into�the�future.�In�the�UK�and�Europe,� we�will�continue�to�improve�service�levels�and� launch�new�offerings,�and�we�are�making� good�progress�towards�the�intended� demerger�of�M&GPrudential�from�the�Group,� which�will�result�in�two�distinct�businesses� that�are�able�to�focus�more�clearly�on�the� opportunities�open�to�us.�We�have�an� established�track�record�of�delivering� important�benefits�to�our�customers�and� profitable�growth�to�our�shareholders.� I�am�confident�that,�post�demerger�as� independent�companies,�both�Prudential�plc� and�M&GPrudential�will�be�positioned�to� continue�to�do�well�in�the�future.
Our purpose Prudential helps people de-risk their lives and deal with their biggest financial concerns.
The demerger will enable both businesses to continue to deliver on our customer and stakeholder commitments, but without the requirement to compete for resources and capital internally.
We meet the long-term savings and protection needs of a growing middle-class and ageing population. We focus on markets where the need for our products is strong and growing and we use our capabilities, footprint and scale to meet that need.
United States Jackson provides retirement savings and income strategies aimed at the large number of people approaching retirement in the United States. Jackson’s pursuit of excellence in product innovation and distinctive distribution capabilities has helped us forge a solid reputation for meeting the needs of customers. Jackson’s variable annuities offer a distinct retirement solution designed to provide a variety of investment choices to help customers pursue their financial goals.
Our trusted brands and strong distribution channels enable us to understand the growing needs of our customers for long-term savings and financial security, and to design innovative products that meet those needs. By helping to build better lives and stronger communities and to fuel the growth cycle, we create long-term value for both our customers and our shareholders.
Asia — Low life insurance and mutual fund penetration — Significant health and protection gap — Growing working age population — Increasing consumer affluence
United States — Increase in retirement age population — Large and growing retirement asset pools — Growing demand for guaranteed income
Investment for growth We focus on strategic investment in long-term opportunities and capabilities to drive future growth and value for our stakeholders. We invest to improve relationships with our customers and distributors, to create innovative products, to improve our operating platforms and to capture new opportunities and build new relationships. We invest in digital capabilities to empower our distributors and improve customer service.
Group Chief Risk Officer’s report of the risks facing our business and how these are managed page 52
We respond to the needs of our global customers through diverse and robust distribution channels in all our markets.
Eastspring Investments are present in 11 Asia markets and distribution offices in US and Europe
Notes 1 Independent research and Market Metrics, a Strategic Insight Business: U.S. Advisor Metrics 2018, as of 30 September 2018.
2 The Cerulli Report Adviser Metrics 2018 and Jackson research. 3 ©2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to
We are aiming to create two separately listed companies with distinct investment prospects, capital allocation priorities and customer needs.
M&GPrudential, one of the leading savings and investments businesses in the UK and Europe, will be an independent, capital-efficient business, headquartered and premium-listed in London.
Prudential plc will continue to combine the exciting growth potential of our Asia, US and Africa businesses, as a leading international insurance and asset management group. We will also remain headquartered and premium listed in London.
Chief Executive Officer: John Foley Headquarters: London Premium listing (intended): London Stock Exchange
— We completed the transfer of the legal ownership of our Hong Kong insurance subsidiaries from The Prudential Assurance Company Limited (M&GPrudential’s UK-regulated insurance entity) to Prudential Corporation Asia Limited.
What will happen to your shares? Shareholders will retain their shares in Prudential plc and, if the demerger completes, receive shares in a separately listed M&GPrudential.
CAGR +11% The Group’s business involves entering into long-term contracts with customers, and hence the Group manages its associated assets and liabilities over a longer-term time horizon. This enables the Group to manage a degree of short-term market volatility. Therefore operating profit based on longer-term investment returns gives a more relevant measure of the performance of the business. Other items are excluded from operating profit to allow more relevant period-on-period comparisons of the trading operations of the Group, eg the effects of corporate transactions are excluded.
Group operating profit in 2018 is 6 per cent higher on a constant exchange rate basis (3 per cent on an actual exchange rate basis), compared with 2017. Operating profit from Asia life and asset management operations was up 14 per cent on a constant exchange rate basis (10 per cent on an actual exchange rate basis), and M&GPrudential was up 19 per cent. In the US, operating profit was down 11 per cent on a constant exchange rate basis (14 per cent on an actual exchange rate basis) reflecting higher market-related deferred acquisition costs amortisation.
CAGR +18% Life insurance products are, by their nature, long term and generate profit over a number of years. Embedded value reporting provides investors with a measure of the future profit streams of the Group. EEV new business profit reflects the value of future profit streams which are not fully captured in the year of sale under IFRS reporting.
EEV new business profit in 2018 increased by 11 per cent on a constant exchange rate basis (7 per cent on an actual exchange rate basis) compared with 2017, driven by increases in health and protection business and pricing actions in Asia, higher interest rates and spread assumption changes in the US and M&GPrudential PruFund based Retirement Account sales.
Total remittances to the Group decreased by 3 per cent in 2018, compared with 2017. Remittances from Asia, increased, demonstrating the quality and scale of its growth. Remittances from the US were £342 million. Remittances from M&GPrudential increased by 2 per cent.
The high quality and recurring nature of our operating capital generation, beneficial effects of debt issued and disciplined approach to managing balance sheet risks are reflected in the solvency capital surplus, which increased to £17.2 billion at 31 December 2018.
2 Adjusted IFRS operating profit based on longer-term investment returns is management’s primary measure of profitability and provides an underlying operating result based on longer-term investment returns and excludes non-operating items. See note III of Additional unaudited financial information for definition and reconciliation to IFRS balances.
— Continued expansion in China, following entry into Hunan province and 10 new cities — Retained Eastspring’s ‘Best Asia Fund House’ accolade in the AsianInvestor Asset
Our business It is 95 years since we established our first operations in Asia. Our long heritage and strong brand awareness form the foundations of our business and today our footprint spans 14 markets and encompasses 3.6 billion people. We have a top three position in eight out of our 12 insurance markets3 and Eastspring, our asset management business, remains the largest pan-regional retail asset manager in Asia, excluding Japan. In addition, Eastspring retained the prestigious ‘Best Asia Fund House’ accolade in 2018, a feat that has now been achieved in three of the past four years.
We are also able to translate these hallmarks of our business into financial success, with our strong performance in 2018 building upon our existing excellent track record. Our gross premium earned grew4 by 9 per cent1 to £16.5 billion, and renewal premiums5 grew by 16 per cent1. This helped deliver a 14 per cent1 increase in operating profit6 to £2.2 billion and grow our total assets by 11 per cent7 to £94.2 billion. We also delivered 14 per cent1 growth in new business profit8 to £2.6 billion and the total embedded value of the business grew 16 per cent7 to £24.3 billion. At Eastspring, we managed funds totalling £151 billion at the end of 2018, invested in over 1,600 funds.
Market opportunity In Asia, we provide insurance and asset management solutions that enable customers of all ages to address their health, protection and savings needs. Demand for our products is underpinned by low levels of existing coverage and is further supported by economic and demographic tailwinds that look set to persist over the coming decades.
This is evident from the significant gap in life insurance penetration rates compared with developed markets. Furthermore, the limited welfare social safety net in many of our markets means that out-of-pocket healthcare spend by people in Asia is three to four times the proportion seen in the US and UK. Collectively, these dynamics resulted in an estimated health protection gap of US$1.8 trillion in 2017 across the Asia region9.
The economic growth potential of the region is widely recognised and is expected to translate into rising levels of affluence, with 88 per cent of the next billion entrants into the middle class predicted to be based in Asia10. Entering the middle class is typically the trigger for individuals to protect their health and that of their families, while also seeking to manage and grow their wealth. Indeed, total annual expenditure by Asia’s middle class is forecast to reach US$37 trillion in 203010, more than double the current amount.
This focus on value is supported by four strategic priorities that we believe align with the evolving sources of demand across the region and hence will position our business for continued future growth. We seek to enhance the core of our existing business by improving our customers’ experience. Significantly, we have extended our exclusive partnership with UOB until the end of 2034 and, due to its success to date, agreed to expand its scope to include Vietnam and UOB’s digital bank. We also continued to expand and diversify our distribution reach with nine new bank partnerships across six of our markets being successfully activated during 2018, including Siam Commercial Bank in Thailand and O-Bank, the first digital bank in Taiwan. The success of these partnerships is underpinned by the quality and competitiveness of our products, the additional value-added services we offer to customers and the digital tools and training we provide to sales teams.
We simplify the process of purchasing a policy by embracing the latest technology and embedding this within proprietary tools used by our agents and bank partners. For example, over 70 per cent of all new business was submitted through e-point-of-sale technology. Our smart underwriting tool, which is now used in 59 per cent of all sales, provides dynamic underwriting that streamlines the application process, while also communicating instant underwriting decisions to customers.
Asia middle class population Middle class population of the rest of the world 4,617m 3,766m 3,030m 5,412m 2,784m 2,023m 1,380m 3,492m
Thirdly, we plan to accelerate Eastspring by expanding its existing investment offering and enhancing its distribution capabilities. We have continued to strengthen our in-house investment teams, which helped us launch 51 new products in 2018. In September, we also entered Thailand, the largest mutual fund market in the Association of Southeast Asian Nations (ASEAN)13, with the acquisition of TMB Asset Management. Our on-the-ground team recently launched an Asia Pacific Property Flexible Fund that obtained inflows totalling US$91 million during the week-long initial public offering period.
PRUconnect PRUconnect, one of Prudential Thailand’s latest offerings, is aimed at extending online customer service via LINE, a popular instant-communication mobile application in Thailand with more than 44 million active users. Launched in January 2018, PRUconnect provides policyholders with a dedicated web portal where they can access policy information, make premium payments, download premium certificates and locate nearby network hospitals, as well as a range of other self-service options.
We maintain this advantage by constantly striving to improve the experience of our customers, with whom we have over two million interactions every month, including over 300,000 calls. Our customers typically need us most when they want to submit a claim as this can signify the death or illness of a family member. Consequently, we strive to provide a frictionless claims process at this sensitive time. To facilitate this, our new Jet claims tool, which is currently being used in Hong Kong and Indonesia, can automatically review, assess and pay a claim on the same day. We now have e-claims capability in six of our businesses and have already attained submission rates of almost 40 per cent. We also leverage technology in our more regular dealings with customers. For example, our new Virtual Assistant in Hong Kong, which builds upon the success of our askPRU chatbot that was launched in Singapore in 2017 and reduced call centre volumes by 40 per cent, already has answers to many frequently asked questions from agents and policyholders.
At Eastspring we use digital tools to help our retail clients set and achieve their savings goals. Our partnership with Alkanza has enabled us to build a roboadvisory platform in Taiwan that can suggest portfolio rebalancing if performance is off track and has the functionality to show the impact of changes in parameters, such as retirement age and contribution amount.
Products We offer our customers a broad range of health, protection and savings solutions that are tailored to local market requirements and individual needs. Key to our ongoing success is our focus on upgrading our product suite to add innovative new features. Indeed, last year nearly half of new business profit arose from the 160 products that were developed in 2018. For example, in Hong Kong we launched a new critical illness product with extended protection for cancer, heart attacks and strokes, three common causes of death, and was instrumental in generating the 17 per cent growth in Hong Kong’s new business profit. Similarly, we enhanced our protection product for mothers and unborn children in Malaysia, PRUmy child, by expanding the range of pregnancy complications included and extending the coverage period for congenital illnesses. We are also actively developing products to meet the upcoming needs of Asia’s ageing populations and were amongst the first group of insurers to be granted approval to offer a tax-deferred pension product in China.
In addition, we develop products with specialist characteristics that broaden our offering and appeal. We have been proponents of products that comply with the requirements of Islamic law for many years. Indeed, we offer such products by default, and sales of our Syariah products in Indonesia grew by 17 per cent in 2018 to over £50 million, equivalent to over 20 per cent of our APE in this market. This positions us as market leaders in Indonesia’s Syariah market, in addition to Malaysia’s Takaful market, with market shares of approximately 30 per cent in both cases. We have also launched PRUvital cover in Singapore, a first-in-the-market protection plan for customers with four types of common pre-existing chronic medical condition that previously could act as barriers in obtaining insurance coverage.
Historically our products were targeted at the mass and affluent market segments. We are purposefully developing new products to meet the needs of other segments. In Singapore we recently launched Opus, a proposition specifically tailored for high-net-worth customers. This brings a differentiated experience for our customers and includes a dedicated service team, wealth planners and external experts covering trust and legal matters. We also launched PRUworks, our new insurance proposition for the corporate segment to target small and medium enterprises. Our PRUworks platform is an all-inclusive platform that comes with a digitally enabled HR solution for business owners and their employees, which provides access to employee benefits and services alongside additional services such as lifestyle programmes.
Accelerate Asia Compounding revenues and profits Prudential Corporation Asia is a business with compounding revenues underpinned by high quality recurring income that is uncorrelated to investment markets. The current scale and profitability has been achieved by increasing our customer base and penetration across the continent. Growth is driven by our ability to meet customer needs through the breadth of markets we operate in, the scale and innovation of our operations, the capabilities of Eastspring Investments, our pan-Asia asset manager, and our diverse and talented workforce.
Life insurance Market ranking3 5th Population 1.4bn Penetration16 2.7% Average health protection gap per household9 US$1,724
Hong Kong Life insurance Market ranking3 3rd Population 7m Penetration16 14.6% Average health protection gap per household9 US$9,156
Life insurance Market ranking3 2nd Population 1.4bn Penetration16 2.8% Average health protection gap per household9 US$1,382
Life insurance Market ranking3 2nd Population 6m Penetration16 6.6% Average health protection gap per household9 US$13,776
Thailand Life insurance Market ranking3 9th Population 69m Penetration16 3.6% Average health protection gap per household9 US$287
Distribution Our diversified mix of tied agents and bank partners creates one of the strongest distribution networks across the region with non-traditional partnerships further broadening our reach. Our experience shows customers have an overarching preference for face-to-face advice from a trusted financial adviser while also increasingly demanding the flexibility to conduct basic research and fact-finding themselves digitally. Thus, whilst our tied agents and in-branch bank staff remain our primary distribution channels, customers are now more actively engaging with us through our online platforms.
Prudential has over 600,000 licenced tied agents across our 12 life markets in Asia. This proprietary distribution channel is a core component of our success, accounting for 84 per cent of new business profit, having grown by 14 per cent in 2018. The value provided by our tied agents makes it paramount for us to continue expanding their reach and enhancing their capabilities. We place great emphasis on the professionalism and productivity of our agency force, and facilitate this by continually providing new and upgraded tools. This creates a culture whereby our agents aspire to attain membership of the ‘Million Dollar Round Table’, an industryrecognised indicator of quality. We currently have over 7,000 such qualifiers, which would represent annual growth in members of approximately 20 per cent23 and reflects our focus on the recruitment, training and productivity of our agents, the emphasis on which varies by market. In our younger markets we are typically still accelerating recruitment. For example, we added over 1,100 new agents per month in the Philippines on average during 2018, which was more than 40 per cent higher than in 2017, and helped expand our agency force to around 28,000 agents. As markets mature the emphasis starts to shift towards the other factors. We have designed an entrepreneur development programme to fast-track our successful professional agents into leaders, which in turn supports our activation of new recruits. This programme has already been launched in China, where the number of active agents grew by 12 per cent in 2018.
The review demonstrated that we are well positioned in the traditional life insurance segment, with a market share of approximately 25 per cent24. We forecast that this market has the potential to continue growing at a double-digit rate over the coming five years, due to the underlying structural drivers of demand in the region. Our presence, scale and broad product and distribution reach position us well to participate strongly in this expected growth.
We also anticipate strong growth in the medical reimbursement segment in our current markets, which we believe will more than double in the next five years due to increasing consumer demand. We have estimated that our share of the value pool in this segment is currently 9 per cent, which gives us significant scope to expand. This ambition is reflected in our strategic priorities with recent investments, such as Babylon, transforming our offering.
Sources include formal (eg competitors results release, local regulators and insurance association) and informal (industry exchange) market share data. Ranking based on new business (APE sales, weighted full year premium or full year premium depending on availability of data).
7 Growth rate on an actual exchange rate basis. 8 New business profit on business sold in the year, calculated in accordance with EEV principles. 9 Swiss Re Institute: The health protection gap in Asia,
14 Weighted premium income comprises gross earned premiums at 100 per cent of renewal premiums, 100 per cent of first year premiums and 10 per cent of single premiums.
15 Comparatives have been stated on a constant exchange rate basis. Historic results have been restated to exclude sales from the Korea and Japan life businesses, which have been disposed of. 2014 excludes intra-group reinsurance contracts between the UK and Asia with-profits businesses.
16 Market penetration: Swiss Re (Sigma) – based on insurance premiums as a percentage of GDP in 2017 (estimated).
19 IFRS gross premiums earned for Asia segment. 20 Excludes Jiwasraya.
Products We listen to our customers to help us understand their changing needs and tailor our design of product solutions and services.
Now in 87 cities in China 9 new bank partners across 6 markets
— New collaboration to offer advisory annuities on the Envestnet® Insurance Exchange
— Awarded ‘Contact Center World Class CX Certification’ and ‘Highest Customer Service for the Financial Industry’ awards by The Service Quality Measurement Group, Inc.
In response to this demand and the ongoing shift to fee-based solutions, Jackson has positioned itself with product innovation and distribution strategies to further enhance our market-leading VA position in the brokerage market and grow in the advisory retirement solutions market.
Customers and products Through its distribution partners, Jackson provides products that offer Americans the retirement strategies they need, including variable, fixed and fixed index annuities. Each of these products offer a unique range of features tailored to meet the individual needs of the retiree: Variable annuity A Jackson variable annuity, with investment freedom, represents an attractive option for retirees, providing both access to equity market appreciation and guaranteed lifetime income as an add on benefit.
Jackson has a proven track record in this market with its market-leading flagship product1, Perspective II. Jackson’s success has been built on its quick-to-market product innovation, as demonstrated by the development and launch of Elite Access, our investment-only variable annuity. Further demonstrating Jackson’s flexibility and manufacturing capabilities, and in response to the trend in financial services toward fee-based solutions, Jackson has launched Perspective Advisory II and Elite Access Advisory II to serve advisers and distributors with a preference for advisory products.
In March 2018, Jackson launched MarketProtector and MarketProtector Advisory, two new fixed annuities with index-linked interest. These products provide consumers with the sought-after combination of tax-deferred investment growth, protection from market risk and the flexibility to adapt to changing needs in retirement. Both products offer an add-on living benefit that allows customers to safeguard their financial futures with income for life.
Jackson’s distribution strength also sets us apart from our competitors. Our wholesaling force is the largest3 in the variable annuity industry and is instrumental in supporting the independent advisers who help the growing pool of American retirees develop effective retirement strategies. Our wholesalers provide extensive training to thousands of advisers about the range of products and the investment strategies that are available to support their clients. Based on the latest available data, Jackson is the most productive variable annuity wholesale distribution force in the US3.
Regulatory landscape The industry has continued to manage through an ever-changing regulatory landscape. In 2016, the US Department of Labor (DoL) released a final version of its Fiduciary Duty Rule (Rules), which sought to eliminate conflicts of interest in investment advice, in order to protect and encourage savings and investment for working Americans. These Rules were rescinded in 2018. However, other alternative proposals, such as the US Securities and Exchange Commission’s (SEC) best interest standard, remain pending.
Regardless of the outcome of the SEC best interest standard, the regulatory disruption caused by the now rescinded DoL Rules has challenged the industry to review the ways in which investment advice is provided to American investors. Manufacturers will need to have the ability to provide product and system adaptations in order to support the success of various distribution partners in their delivery of invaluable retirement strategies that investors need. Because of its strong distribution, leadership in the annuities market, best-in-class service and a low-cost efficient operation, we believe that Jackson is well positioned to take advantage of this opportunity.
Furthermore, in late 2018, the US National Association of Insurance Commissioners (NAIC) concluded an industry consultation with the aim of reducing the non-economic volatility in the variable annuity statutory balance sheet and enhancing risk management. The NAIC is targeting a January 2020 effective date for the new framework in order to allow adequate time for the drafting and implementation of the revised regulations and instructions with a potential three-year phase-in. The NAIC also has an ongoing review of the C-1 bond factors in the required capital calculation, on which further information is expected to be provided in due course. Despite these regulatory challenges, we believe that Jackson is well positioned to manage the impact of these regulatory changes.
The acquisition of John Hancock’s group payout annuity business in late 2018 represents a reaffirmation of Jackson’s growth bolt-on strategy and continuing commitment to deploy capital at attractive return levels. This transaction further diversifies Jackson’s risk portfolio and revenue sources in relation to both general and separate account businesses.
With the ever-changing regulatory environment described earlier, Jackson has made and continues to consider changes to its product offerings, entered into new selling agreements with advisory providers, and is working with its distributors to support implementation of the anticipated SEC best interest standard.
Talking to Americans about bridging the retirement income gap Last year, Jackson reintroduced the idea of ‘protected lifetime income’ into American retirement planning conversations by publishing ‘The Return of Lifetime Income’ in The Wall Street Journal, reaching millions of consumers. Recognising the need for a unified industry voice around this critical issue, Jackson also co-founded The Alliance for Lifetime Income, an innovative industry coalition to raise awareness among Americans about the financial risks and income gaps they may face in retirement and the importance of protected lifetime income solutions in helping bridge those potential gaps.
Notes 1 ©2019 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 Contract 3Q YTD 2018. Jackson’s Perspective II for base states ranks #1 out of 973 VA contracts with reported sales to Morningstar’s quarterly sales survey as of 3Q YTD 2018.
4 LIMRA/Secure Retirement Institute, US Individual Annuity Participants Report 3Q YTD 2018.
7 US Department of Health and Human Services, ‘Health, United States, 2017.
Distribution Jackson’s distribution teams set us apart from our competitors. Jackson’s variable annuity wholesaling force is the largest and most productive in the industry, supporting thousands of advisers across multiple channels and distribution outlets.
Investment for growth Jackson continues to invest in technology and innovative products to efficiently and effectively adapt to what our customers and regulatory environment require. Jackson has recently launched an advisory version of our flagship product Perspective II, our innovative Elite Access product and our fixed index MarketProtector product to allow for penetration into untapped distribution. Jackson also announced a technology integration collaboration with Envestnet® allowing Jackson to offer its complete product suite of advisory annuities on the Envestnet Insurance Exchange.
— Total M&GPrudential operating profit up 19 per cent to £1.6 billion, including the effect of updated longevity assumptions
Our business manages total assets of £321 billion1 and serves more than six million customers worldwide. M&GPrudential offers savings and investment products for individuals who want to build and protect their life savings. We provide innovative asset management and customer solutions, supported by strategic asset allocation, an international distribution network and two strong brands.
We see a huge opportunity in the growing savings gap across Europe. As support from the state diminishes and employers gradually retreat from guaranteed retirement provisions, more and more people need to make their own preparations for retirement and other life goals. At the same time, many people with sizeable asset pools, who want to grow or protect their value, seem to be keeping their money in cash despite the negative real return. Across the EU there is an estimated ¤10 trillion2 of cash sitting, largely idle, in bank deposits at very low interest rates.
Understanding our markets M&GPrudential serves the world’s largest savings and investments markets, with a focus on UK and Europe. Across the region, people increasingly need help to meet their long-term financial goals as responsibility for retirement savings passes from state and employer to the individual.
Customers We serve a wide range of customers: individuals saving for retirement and other life goals; retirees who want to draw down on their accumulated savings; professional intermediaries who manage the savings of their own customers; pension funds; and other institutional clients with future, long-term financial commitments.
Our customers fall into five broad categories: — UK retail advised customers who are saving for retirement or who want to draw down on their accumulated savings. They typically invest in our market-leading PruFund, which offers smoothed, long-term returns adjusted for different risk tolerances; — UK retail advised and direct customers who invest for the long term through our range of M&G-branded mutual funds. This group includes about 160,000 customers who invest directly with our fund management business; — Customers of our traditional insurance business in the UK. Numbering six million, these customers typically hold a Prudential annuity, which pays an income for life, or an insurancewrapped savings bond; — Wholesale clients in Europe and Asia. These include retail banks, private banks, wealth managers, independent advisers and fund platforms. We manage £38 billion on behalf of these clients’ own customers; and
— Pension funds and other institutional clients, who invest on behalf of their scheme members. We have nearly 900 such relationships, including 70 per cent of the UK’s largest pension schemes4.
In 2019, we will continue to improve service levels and launch new offerings. In the UK retail market, we will broaden the choice of tax wrappers and products on our own adviser platform. In November, we made M&G’s range of mutual funds available for the first time on the Prudential adviser platform and in January, we launched PruFolio, a new range of passive, active and smoothed return funds.
Our investment solutions The core engine of our business is a long-standing collaboration between our fund managers and the strategic asset allocators who oversee the investment of the Prudential life funds. This symbiotic relationship enables us to diversify our investment capabilities and to innovate by developing high-quality products for all customers.
This breadth of our investment capability underpins many of our customer offerings. It reinforces the reliability of the returns from our £131 billion With-Profits Fund, which is one of Europe’s largest multi-asset portfolios for retail savers5. The With-Profits Fund has produced a cumulative gross return of 129.5 per cent over 10 years6 before tax and charges compared with a 121.4 per cent return from the FTSE 100 Index over the same period, not allowing for any management fees. A key component of this performance is PruFund. Launched over 10 years ago, PruFund is a transparent and modern way of with-profits investing in the UK, which has since become the fastestgrowing savings and investment proposition across the Group.
Mutual fund investment performance, net of fees, weighted by: assets under management8
Improving the service for our M&GPrudential customers When Prudential UK customers want to withdraw their funds from a bond they expect the speed and simplicity they’d receive from online shopping. So the challenge was to simplify a complex, manual process and enable customers to get access to their money more quickly.
As a result, they’ve made significant improvements. The time customers have had to wait for us to send them their funds has been cut from more than two weeks to just over three days. And the online journey is now much easier to use than the old one. In fact, 33 per cent of customers making a withdrawal have already adopted it after just four months. But even vastly improved journeys are only as good as customers’ experience of them and, so far, they like it and tell us it’s easy to use.
PruFund offers individuals different rates of smoothed return aligned with their tolerance for risk. In 2019, we aim to enhance advisers’ access to PruFund by significantly upgrading our digital services across a range of tax wrappers. We are also exploring with European distributors, how we might make the benefits of PruFund available to savers in their markets. Today, assets under management in PruFund top £43 billion after attracting £8.5 billion of net inflows during 2018.
We are seeing strong demand from pension funds for our private asset products because they are seeking higher yields to manage long-term liabilities. These types of investment strategy remain comparatively resilient to fee pressure because they are not easy for passive investment managers to replicate as they involve securing real and private assets.
Responding to the growing institutional client demand for social and environmental investment strategies, we also launched the M&G Impact Financing Fund, which was awarded Best New Entrant (Fund) at the Sustainable and ESG Investment Awards 2018. Total assets under management at 31 December 2018 were £321 billion1 (31 December 2017: £351 billion), reflecting inflows to PruFund products, multi-asset wholesale offerings and other institutional business, more than offset by the expected redemption of a single low-margin institutional mandate and outflows from bond and equity funds in volatile financial markets.
Distribution At M&GPrudential, we have two outstanding complementary brands, both of which share a common philosophy of aiming to deliver excellent long-term customer outcomes.
Each day, we move closer to our model of a simpler, lower-cost, digital organisation. The impact on customer outcomes is already evident. Examples include: a new digital service for investment bond customers that has reduced cash withdrawal waiting times by almost 80 per cent; changes to our bereavements processes, which are saving our customers 200,000 days of their time each year; and delivery of simplified annual benefit statements for more than one million Prudential customers. M&GPrudential remains on track to deliver the announced annual shareholder cost savings of circa £145 million by 2022 for a shareholder investment of circa £250 million.
Notes 1 Represents M&GPrudential asset management external funds under management and internal funds included on the M&GPrudential long-term insurance business balance sheet.
S&P Money Market Directory, June 2018. 5 M&GPrudential analysis comparing our largest with-profits fund with other European mixed asset funds with data from Financial Express.
6 Performance data for Prudential with-profits fund excludes hypothecated asset pools of Optimum Bonus fund and Risk-Managed PruFunds. Returns are shown before charges.
7 ABI Mixed Investment 20 per cent – 60 per cent Shares (performance is net of charge). PruFund returns are also net of charge (0.65 per cent). Growth rate calculated across the period August 2006 to December 2018.
+6 million customers £321 billion total assets under management1 across a broad range of strategies and asset classes
Products Market-leading propositions, including PruFund and the M&G Optimal Income Fund, available in a number of saving and investment wrappers; and a range of strategies to help institutional customers meet their long-term commitments.
Distribution Multi-channel distribution, based on strong relationships with institutional investors, advisers and intermediaries, and direct-to-customer franchises, including Prudential Financial Planning.
Extensive distribution relationships across financial advisers, high-street banks, wealth managers, institutional investment managers and pension funds
On track to deliver the announced annual shareholder cost savings of circa £145 million by 2022
I am encouraged that our financial performance has been accomplished at the same time as the Group has made good progress in the complex preparations for the intended demerger of M&GPrudential from Prudential plc, which we announced in March 2018. We have achieved a number of important milestones, including the reinsurance of £12 billion of UK annuity policies to Rothesay Life, the transfer of the Hong Kong insurance subsidiaries to Prudential Corporation Asia, the issuance of £1.6 billion of substitutable debt as part of the necessary rebalancing of capital across the two businesses, the establishment of a new holding company for M&GPrudential and the transfer of UK operating subsidiaries to that company.
Our financial performance was led by our Asia business which delivered double digit growth in new business profit (up 14 per cent1), adjusted IFRS operating profit based on longer-term investment returns (‘operating profit’) (up 14 per cent1) and underlying free surplus generation2 (up 14 per cent1). This performance is both broad-based, with 10 markets achieving double-digit growth1 in new business profit, and high-quality, with health and protection new business profit growing by 15 per cent1. Our Asia asset manager, Eastspring, has grown operating profit by 6 per cent amidst a challenging external environment. Our broad-based portfolio of life insurance and asset management businesses, high-quality products with distinctive value-added services and multi-channel strategy ensure that we continue to benefit from the growing customer demand in Asia for health, protection and savings solutions that we provide.
M&GPrudential delivered operating profit of £1,634 million, up 19 per cent (2017: £1,378 million). This included £519 million (2017: £597 million) from our core3 with-profits and annuity business, with the with-profits contribution up 11 per cent to £320 million, offset by lower annuities earnings following the reinsurance of £12 billion4 of liabilities in March 2018. Other operating profits included the benefit of updated longevity assumptions and an insurance recovery on the costs of reviewing internally vesting annuity sales. M&GPrudential remains on track to deliver the announced annual shareholder cost savings of circa £145 million by 2022 for a shareholder investment of circa £250 million.
Sterling weakened over the course of 2018, compared with most of the currencies in our major international markets. However, average exchange rates remained above those in 2017, leading to a negative effect on the translation of the results from non-sterling operations. To aid comparison of underlying progress, we continue to express and comment on the performance trends in our Asia and US operations on a constant exchange rate basis.
The performance of many equity markets was subdued in 2018, and was characterised by higher levels of volatility. The S&P 500 closed the year 6 per cent lower than 2017, the FTSE 100 index was down 12 per cent and the MSCI Asia excluding Japan index down 16 per cent. However, average balances, which have the most material impact on our fee-based earnings during the year, were mostly higher, reflecting the concentration of equity market weakness in the fourth quarter. Long-term yields increased favourably in the US and our larger Asia markets, but were only slightly higher in the UK.
The key financial highlights in 2018 were as follows: — New business profit was 11 per cent higher at £3,877 million (7 per cent on an actual exchange rate basis), while APE sales were up 1 per cent (down 2 per cent on an actual exchange rate basis). In Asia, new business profit increased 14 per cent with improved new business margins primarily reflecting product mix. Jackson’s new business profit increased by 5 per cent, primarily reflecting the favourable effect of higher US interest rates. UK and Europe life new business profit grew by 3 per cent, driven by a 2 per cent increase in APE sales, supported by continued demand for products offering access to our PruFund investment proposition.
— Asset management net outflows of £11.5 billion reflected external net outflows of £9.9 billion (2017: net inflows of £17.3 billion) within M&GPrudential asset management, the majority of which related to the expected redemption of a single, low margin £6.5 billion institutional mandate, with the remainder reflecting the challenging market environment for equity and fixed income business. Eastspring saw external net outflows, excluding money market funds, of £1.6 billion (2017: net inflows of £3.1 billion on an actual exchange rate basis), also as a result of market conditions.
— Operating profit was 6 per cent higher at £4,827 million (3 per cent higher on an actual exchange rate basis). Continued business momentum helped grow Asia’s operating profit by 14 per cent to £2,164 million and M&GPrudential operating profit was 19 per cent higher, reflecting a number of beneficial impacts, which are not expected to recur at the same level. In the US, operating profit decreased by 11 per cent, as a result of higher market-related DAC amortisation charges.
I am pleased to report that Prudential’s financial performance in 2018 reflects our strategic focus on driving growth in high-quality, recurring health and protection and fee business across our geographies, products and distribution channels.
— EEV basis operating profit, including embedded value in-force profit, increased 19 per cent (15 per cent on an actual exchange rate basis) to £7,563 million. EEV basis shareholders’ equity was up 11 per cent at £49.8 billion.
— Group shareholders’ Solvency II capital surplus5 was estimated at £17.2 billion at 31 December 2018, equivalent to a cover ratio of 232 per cent6 (31 December 2017: £13.3 billion, 202 per cent). The improvement in the period reflects the continuing strength of the Group’s operating capital generation, and a net £1.2 billion increase in qualifying debt.
Total operating profit based on longer-term investment returns before tax and restructuring costs 4,992 4,802 4 4,653 7
Total operating profit based on longer-term investment returns before tax 4,827 4,699 3 4,550 6
Asia total operating profit of £2,164 million was 14 per cent higher than the previous year (10 per cent on an actual exchange rate basis). Operating profit from life insurance operations increased 15 per cent to £1,982 million (10 per cent on an actual exchange rate basis), reflecting the continued growth of our in-force book of recurring premium business, with renewal insurance premiums7 reaching £12,856 million (2017: £11,087 million). Insurance margin was up 15 per cent, driven by our continued focus on health and protection business, now contributing to 70 per cent of Asia life insurance revenues8 (2017: 68 per cent). At a market level, growth was led by Hong Kong up 33 per cent, Singapore 22 per cent and China 20 per cent respectively. Eastspring’s operating profit increased by 6 per cent (up 3 per cent on an actual exchange rate basis) to £182 million reflecting 4 per cent revenue growth which, combined with positive operating leverage, resulted in an improvement in the cost-income ratio7 to 55 per cent (2017: 56 per cent on an actual exchange rate basis).
Life insurance profit drivers We track the progress that we make in growing our life insurance business by reference to the scale of our obligations to our customers, which are referred to in the financial statements as policyholder liabilities. Each period these increase as we write new business and collect regular premiums from existing customers and decrease as we pay claims and policies mature. These policyholder liabilities contribute, for example, to our ability to earn fees on the unit-linked element and indicates the scale of the insurance element, another key source of profitability for the Group.
Spread income Insurance margin Fee income Other margins and expenses Growth vs 2017 on a constant exchange rate basis
Eastspring’s external assets under management, excluding money market funds, increased by 6 per cent (on an actual exchange rate basis) to £49.5 billion, reflecting the acquisition of TMB Asset Management, which added £9 billion, offset by client outflows and adverse market movements. Higher internal assets under management, driven by inflows into the life business and money market funds, lifted Eastspring’s total assets under management to £151.3 billion.
Short-term fluctuations in investment returns on shareholder-backed business are discussed further below.
Asset management external net flows and external funds under management13,14 £m
IFRS basis effective tax rates In 2018, the effective tax rate on operating profit was 16 per cent (2017: 21 per cent), reflecting the reduction in the US federal tax rate from 35 per cent in 2017 to 21 per cent in 2018.
The 2018 effective tax rate on the total IFRS profit was 17 per cent (2017: 14 per cent after excluding the one-off impact of the re-measurement of US deferred tax balances, following the enactment in December 2017 of tax reform in the US). The increase in the 2018 effective tax rate reflects non-tax deductible investment losses in Asia operations.
Tax strategy In May 2018, the Group published its updated tax strategy which, in addition to complying with the mandatory UK (Finance Act 2016) requirements, also included a number of additional disclosures, including a breakdown of revenues, profits and taxes for all jurisdictions where more than £5 million tax was paid. This disclosure was included as a way of demonstrating that our tax footprint (ie where we pay taxes) is consistent with our business footprint. An updated version of the tax strategy, including 2018 data, will be available on the Group’s website before 31 May 2019.
The performance remains broad-based, with 10 markets delivering double-digit percentage growth in new business profit. In Hong Kong, new business profit increased by 17 per cent, driven largely by our ongoing focus on increasing health and protection sales, particularly those with more comprehensive coverage. Hong Kong APE sales increased by 3 per cent overall, with higher sales levels from Mainland China visitors to Hong Kong driving positive momentum over the course of the year, culminating in APE sales growth of 18 per cent in the discrete fourth quarter. In China, new business profit increased by 14 per cent, reflecting positive product mix effects, and APE sales growth of 27 per cent in the fourth quarter. In Singapore, new business profit increased by 15 per cent on higher APE sales (up 5 per cent), driven by our agency and bancassurance channels, pricing actions and favourable product mix shifts. Growth in new business profit in Thailand (up 75 per cent), Vietnam (up 29 per cent) and Malaysia (up 13 per cent) reflects our value focus and favourable shifts in product mix.
Our Indonesia business continues to experience challenging conditions which, compounded by the adverse impact of higher yields, drove new business profit lower by 23 per cent. Despite these headwinds, we are investing in the business to strengthen our distribution capabilities, upgrading our systems and refreshing our product propositions to meet customer needs.
In our UK and Europe life business, new business profit increased to £352 million, up 3 per cent supported by 2 per cent growth in APE sales. New sales continue to be driven by the popular PruFund proposition with APE sales up 3 per cent. Reflecting this performance, total PruFund assets under management of £43 billion as at 31 December 2018 were 20 per cent higher than at the start of the year, driven by positive net flows of £8.5 billion.
Underlying free surplus generated from in-force life business and asset management before restructuring costs 4,987 4,630 8 4,506 11
In 2018, underlying free surplus generation from our life insurance and asset management business, before investment in new business, increased by 10 per cent to £4,862 million (increased by 7 per cent on an actual exchange rate basis), reflecting increased contributions from all our businesses. In Asia, growth in the in-force life portfolio, combined with post-tax asset management profit from Eastspring, contributed to free surplus generation of £1,659 million, up 11 per cent. In the US, in-force free surplus generation increased by 8 per cent reflecting higher in-force values. In the UK and Europe, in-force free surplus generation increased by 13 per cent to £1,684 million, including the positive impact of longevity assumption changes, and the £138 million post-tax insurance recovery for the costs of the UK review of past non-advised annuity sales practices and related potential redress. In 2017 free surplus was reduced by an increase in the related provision of £187 million to cover such costs.
Although new business profit increased by 11 per cent, the amount of free surplus invested in writing new life business in the period was lower at £815 million (2017: £886 million) primarily reflecting lower sales in the US and measures taken to optimise capital absorption in the UK and Europe.
After funding cash remittances from the business units to the Group, recognition of the profit attaching to the disposal of businesses, and other movements, which includes market movements, the closing value of free surplus in our life and asset management operations was £8.9 billion at 31 December 2018.
Cash remitted to the Group by business units in 2018 amounted to £1,732 million, driven by higher remittances from Asia, demonstrating the quality and scale of its growth. Jackson made remittances of £342 million, although lower than the prior period. The remittance from M&GPrudential of £654 million was 2 per cent higher than the combined remittance in 2017, with an increase in the with-profits transfer from £215 million in 2017 to £233 million in 2018.
Cash remitted to the Group in 2018 was used to meet central costs of £430 million (2017: £470 million) and pay the 2017 second interim and 2018 first interim dividends. As well as these movements were corporate activities and other cash flows of positive £914 million (2017: negative £521 million), primarily driven by net debt issuance of £1.2 billion within the year. This led to holding company cash increasing from £2,264 million to £3,236 million over 2018.
Corporate activities/other 2017 second interim dividend and 2018 first interim dividend
Jackson’s EEV life operating profit was up 2 per cent to £2,115 million. This reflects a 5 per cent increase in new business profit to £921 million and higher expected returns from the in-force business due to prior period growth and higher interest rates, partially offset by a reduced level of favourable assumption changes and experience variances.
In the UK and Europe, EEV life operating profit increased by 35 per cent to £1,374 million (2017: £1,015 million). This was as a result of a 3 per cent increase in new business profit, and higher in-force profit which included a £330 million benefit from revisions to longevity assumptions and a £138 million insurance recovery related to the costs of reviewing past annuity sales after 1 July 2008, for which a provision of £187 million had been charged in the prior period.
Post-tax operating profit based on longer-term investment returns before restructuring costs 7,719 6,695 15 6,479 19
Post-tax operating profit based on longer-term investment returns 7,563 6,598 15 6,382 19
Non-operating items: Short-term fluctuations in investment returns (3,219) 2,111 n/a 2,057 n/a Effect of changes in economic assumptions 146 (102) n/a (91) n/a Mark to market value on core structural borrowings 549 (326) n/a (326) n/a Impact of US tax reform – 390 n/a 376 n/a (Loss) gain on disposal of businesses and corporate transactions (451) 80 n/a 77 n/a
EEV non-operating items Negative short-term fluctuations of £3,219 million primarily reflect lower than expected returns on equities and other investments held by the Group’s US separate accounts and by the with-profits and unit-linked funds businesses in Asia and the UK. These negative effects have been partly offset by gains on equity derivatives held by the US business to manage market exposures arising from the guarantees provided on its annuity products.
Offsetting short-term fluctuations is a £146 million benefit from economic assumption changes, principally reflecting the impact of higher interest rates on the projected future fund growth rates for certain businesses written in Hong Kong and Singapore and the variable annuity business in the US. These projected higher growth rates increase fund values for policyholders and hence profitability for shareholders.
The high quality and recurring nature of our operating capital generation and our disciplined approach to managing balance sheet risk has resulted in an increase in the Group’s shareholders’ Solvency II capital surplus5 which is estimated at £17.2 billion at 31 December 2018 (equivalent to a solvency ratio of 232 per cent6), compared with £13.3 billion (202 per cent) at 31 December 2017. The increase in surplus was driven by operating capital formation of £4.2 billion and a £1.2 billion net increase in subordinated debt, offset by dividends to shareholders of £1.2 billion.
Debt portfolio The Group continues to maintain a high-quality defensively positioned debt portfolio. Shareholders’ exposure to credit is concentrated in the UK and Europe annuity portfolio and the US general account, mainly attributable to Jackson’s fixed annuity portfolio. The credit exposure is well diversified and 98 per cent of our UK and Europe portfolio and 96 per cent of our US portfolio are investment grade21. During 2018, default losses were minimal and reported impairments across the UK and US portfolios were £4 million (2017: £2 million).
Capital position, financing and liquidity Capital position Analysis of movement in Group shareholder Solvency II surplus18 2018 £bn 2017 £bn
Solvency II surplus at 1 January 13.3 12.5 Operating experience 4.2 3.6 Non-operating experience (including market movements) (1.2) (0.6) M&GPrudential transactions (see below) 0.4 – Other capital movements: Net subordinated debt issuance (redemption) 1.2 (0.2) Foreign currency translation impacts 0.5 (0.7) Dividends paid (1.2) (1.2)
Financing and liquidity The Group had central cash resources of £3.2 billion at 31 December 2018 (31 December 2017: £2.3 billion). Total core structural borrowings increased by £1.4 billion, from £6.3 billion to £7.7 billion, mainly as a result of the capital rebalancing process related to the intended demerger of M&GPrudential. This involved the redemption of US$550 million (equivalent to £432 million at 31 December 2018) 7.75 per cent tier 1 perpetual subordinated debt in December 2018 being more than offset by the issue of US$500 million (£374 million at 31 December 2018) 6.5 per cent tier 2 substitutable subordinated notes, £500 million 6.25 per cent tier 2 substitutable subordinated notes and £750 million 5.625 per cent tier 2 substitutable subordinated notes in October 2018.
Profit after tax for the year22 3,010 2,389 4,585 8,750 Exchange movements, net of related tax 348 (409) 1,706 (2,045) Cumulative exchange gain of Korea life business recycled to profit and loss account – (61) – – Unrealised gains and losses on Jackson fixed income securities classified as available for sale23 (1,083) 486 – –
Mark to market value movements on Jackson assets backing surplus and required capital – – (95) 40
* Net core structural borrowings as proportion of IFRS shareholders’ funds plus net debt, as set out in note III of the Additional unaudited financial information.
The Group’s EEV basis shareholders’ funds also increased by 11 per cent to £49.8 billion (31 December 2017: £44.7 billion on an actual exchange rate basis), On a per share basis the Group’s embedded value at 31 December 2018 equated to 1,920 pence, up from 1,728 pence at 31 December 2017.
Corporate transactions Intention to demerge the Group’s UK and Europe businesses and reinsurance of £12.0 billion4 UK annuity portfolio The Group is making good progress on its previously announced intention to demerge its UK and Europe businesses from Prudential plc, resulting in two separately listed companies. The Group has transferred legal ownership of The Prudential Assurance Company Limited (PAC) and M&G Group Limited to the new holding company for M&GPrudential and completed the transfer of the legal ownership of its Hong Kong insurance subsidiaries from PAC to Prudential Corporation Asia Limited in December 2018.
In March 2018, M&GPrudential reinsured £12.0 billion (as at 31 December 2017) of its shareholder-backed annuity portfolio to Rothesay Life. Under the terms of the agreement, this is expected to be followed by a Part VII transfer of most of the portfolio by 30 June 2019. The reinsurance agreement became effective on 14 March 2018 and resulted in an IFRS basis pre-tax loss of £508 million.
The above transactions reduced the Group’s EEV by £376 million which primarily reflects the loss of profits on the portion of the annuity liabilities reinsured and increased the Group’s shareholder Solvency II capital position by £0.4 billion.
At the time of the demerger, Prudential expects M&GPrudential to be holding around £3.5 billion of subordinated debt. This expectation is subject to the M&GPrudential capital risk appetite being approved by the Board of the ultimate holding company of M&GPrudential, once fully constituted to include independent non-executive directors, and reflects the current operating environment and economic conditions, material changes in which may lead to a different outcome.
Acquisition of John Hancock’s group payout annuity business In November 2018, Jackson announced an agreement with John Hancock Life Insurance Company to reinsure 100 per cent of John Hancock’s group payout annuity business, effective from 1 October 2018.
In total, the transaction involves Jackson indemnity reinsuring approximately US$5.5 billion of reserves, representing an increase in Jackson’s general account liabilities of approximately 10 per cent. John Hancock will continue to be responsible for the administration of the business.
A dditional inform ation our existing footprint across Singapore, Malaysia, Thailand and Indonesia.
Dividend The Board has decided to increase the full-year ordinary dividend by 5 per cent to 49.35 pence per share, reflecting our 2018 financial performance and our confidence in the future prospects of the Group. In line with this, the Directors have approved a second interim ordinary dividend of 33.68 pence per share (2017: 32.5 pence per share).
5 The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring fenced with-profit funds and staff pension schemes in surplus. The estimated solvency positions include management’s calculation of UK transitional measures reflecting operating and market conditions at each valuation date, which for both 2018 and 2017 reflects the approved regulatory position.
7 See note III of the Additional unaudited financial information for definition and reconciliation to IFRS balances.
8 Asia insurance revenues include spread income, fee income, with-profits, insurance margin and expected return on shareholder assets.
9 Margin represents operating income before performancerelated fees as a proportion of the related funds under management, for further information see note I(c) of the additional unaudited financial information.
11 Defined as movements in policyholder liabilities arising from premiums (net of charges), surrenders/withdrawals, maturities and deaths.
19 The UK shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profit funds and staff pension schemes in surplus. The estimated solvency positions include management’s calculation of UK transitional measures reflecting operating and market conditions at each valuation date, which for both 2018 and 2017 reflects the approved regulatory position.
23 Net of related charges to deferred acquisition costs and tax. 24 ©Copyright 2018 Strategic Insight, an Asset International
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The merger activity ongoing at M&GPrudential and its planned separation from the rest of the Group requires significant and complex changes and these have been progressing apace throughout 2018. The Group Risk function is embedded within key work streams and a clear view exists of the objectives, risks and dependencies involved in order to execute this change agenda. A mature and well-embedded risk framework is in place and, during this period of transition, the Group Risk function has a defined role in providing oversight, support and risk management, as well as providing objective challenge to ensure the Group remains within its risk appetite. During 2018 these activities have been in the form of risk opinions, guidance and assurance on critical transformation and demerger activity, as well as assessments of the financial risks to the execution of the demerger under various stress scenarios. A key objective is that post demerger there are two strong, standalone risk functions in M&GPrudential and Prudential plc, with operational separation planning for the risk functions remaining on track.
Societal developments Focus in western economies continues to shift from the goods and services which businesses deliver to customers towards the way in which such business is conducted and how this impacts on the wider society. Stakeholder and regulatory expectations of the Group’s environmental, social and governance (ESG) activities are also increasing. In undertaking its business, the Group actively considers the ESG implications of its activities. Recent regulatory developments such as the EU General Data Protection Regulation (GDPR) have underlined that personal data must be held securely and its use must be transparent to the data owner. Risks around the security and use of personal data are actively managed by the Group, and the recent regulatory changes in data protection in the US and Europe have been incorporated into the principles against which the business requirements are defined.
Financial markets Financial markets faced a number of headwinds in 2018 and asset valuations suffered broadly amid the re-emergence of market volatility. Global markets, and emerging markets in particular, faced broad pressure throughout the year. US markets, however, proved resilient until the fourth quarter when fears of an economic slowdown triggered a sharp sell-off in equities. In parallel, credit spreads also widened as the position of the credit cycle became a key concern for market participants. Across the world, interest rates movements were mixed over the year, although there has been a notable broad flattening of the yield curve in the US, impacted by changes in growth and inflation data, risk sentiment and increased concerns of a possible recession. Financial markets remain particularly vulnerable to further abrupt changes in sentiment, and in particular if the risks to the global economy noted above were to materialise.
Political landscape Events in the past year continue to indicate that the world is in a period of global geopolitical transition and increasing uncertainty. Popular discontent remains one of the driving factors of political change, and the liberal norms and the role of multilateral rules-based institutions that underpin global order, such as the United Nations (UN), the North Atlantic Treaty Organisation (NATO) and the World Trade Organisation (WTO), appear to be evolving. Across the Group’s key geographies, we have increasingly seen national protectionism in trade and economic policies. The UK’s exit from the EU and the nature of the future relationship remains a key political uncertainty. As a global organisation, we develop plans to mitigate business risks arising from this shift and engage with national bodies where we can in order to ensure our policyholders are not adversely impacted. It is clear, however, that the full long-term impacts of these changes remain to be seen.
Q1 2018 In March 2018 the intention to demerge M&GPrudential from the rest of the Group is announced. £12 billion of annuity liabilities in UK and Europe business are reinsured to Rothesay Life Plc. A Part VII transfer of most of the portfolio is expected to be completed by 30 June 2019.
Eastspring becomes the third Prudential signatory, after M&G and PPM South Africa (PPMSA), to the UN Principles for Responsible Investment in February 2018.
The US administration proposes initial trade tariff measures (with additional proposals announced over H1 2018), raising trade tensions with its key G7 partners and China.
US equity markets decline rapidly, triggering a global sell-off, with the Dow Jones Industrial Average falling by circa 3,000 points in just two weeks. US markets rebound over the second and third quarters.
The General Data Protection Regulation (GDPR) goes live in the EU on 25 May 2018, increasing the rights of individuals over the use of their personal information by companies.
The opposition Pakatan Harapan coalition win power in Malaysia following general elections held in May 2018.
The 22nd round of talks on the Regional Comprehensive Economic Partnership (RCEP) are held in Singapore between 28 April and 8 May 2018, the goal being to create the world’s largest economic bloc. Negotiations continue into 2019.
In September, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) request from major banks and insurers, details of preparations and actions being undertaken to manage transition from London Inter-Bank Offered Rate (LIBOR) to alternative interest rate benchmarks.
Emerging market equities decline rapidly in August as tightening financial conditions impact economies with external funding vulnerabilities.
Q4 In November, Jackson announces the acquisition of the group payout annuity business of John Hancock Life Insurance Company, a closed book of circa 200,000 in-force certificates representing IFRS reserves of approximately US$5.5bn.
The IAIS launches a consultation for the Holistic Framework (HF) in November, which aims to assess and mitigate systemic risk in the insurance sector and is intended to replace the current Global Systemically Important Insurer (G-SII) measures, with the aim of adoption in November 2019.
Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued 3. Managing the risks in implementing our strategy This section provides an overview of the Group’s strategy, the significant risks arising from the delivery of this strategy and the risk management focus for the following 12 months. The risks outlined below, which are not exhaustive, are discussed in more detail in sections 5 and 6.
Serving the protection and investment needs of the growing middle class in Asia
Persistency risk Implementation of business initiatives to manage persistency risk, including review of distribution channels and incentive structures. Ongoing experience monitoring.
Morbidity risk Implementation of business initiatives to manage morbidity risk, including product repricing where required. Ongoing experience monitoring.
Policyholder behaviour risk Continued monitoring of policyholder behaviour experience and review of assumptions.
Managing the customer risk implications from: merger and transformation activity; new product propositions and new regulatory requirements.
We aim to generate attractive returns enabling us to provide financial security to our customers and deliver sustainable growth for our shareholders. Following rigorous review, we believe that this long-term strategy is best served through the demerger of M&GPrudential.
Ensuring both M&GPrudential and Prudential plc will have in place two strong standalone risk functions after demerger.
Group-wide regulatory risks Engagement with regulators and industry groups on macroprudential and systemic risk-related regulatory initiatives, international capital standards, and other initiatives with Group-wide impacts.
Engagement with the Hong Kong Insurance Authority on the Group-wide supervisory framework that will apply to the Group after the demerger of M&GPrudential.
Continuing the implementation of the Group’s information security risk management strategy and defence plan.
A dditional inform ation 4. Risk governance a. System of governance Appropriately managed risks allow Prudential to take business opportunities and enable the growth of its business. Effective risk management is therefore fundamental in the execution of the Group’s business strategy. Prudential’s approach to risk management must be both well embedded and rigorous, and, as the economic and political environment in which we operate changes, it should also be sufficiently broad and dynamic to respond to these changes.
The following section provides more detail on our risk governance, risk culture and risk management process.
Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued b. Group Risk Framework i. Risk governance and culture Prudential’s risk governance comprises the Board, organisational structures, reporting relationships, delegation of authority, roles and responsibilities, and risk policies that the Group Head Office and the business units establish to make decisions and control their activities on risk-related matters. It includes individuals, Groupwide functions and committees involved in overseeing and managing risk.
The risk governance structure is led by the Group Risk Committee, supported by independent non-executives on risk committees of Material Subsidiaries. These committees monitor the development of the Group Risk Framework, which includes risk appetite, limits, and policies, as well as risk culture.
— Employees invite open discussion on the approach to the management of risk.
The Group Risk Committee also has a key role in providing advice to the Remuneration Committee on risk management considerations to be applied in respect of executive remuneration.
Risk measurement and assessment All identified risks are assessed based on an appropriate methodology for that risk. All quantifiable risks, which are material and mitigated by holding capital, are modelled in the Group’s internal model, which is used to determine capital requirements under Solvency II and our own economic capital basis. Governance arrangements are in place to support the internal model, including independent validation and processes and controls around model changes and limitations.
Risk management and control The control procedures and systems established within the Group are designed to manage the risk of failing to meet business objectives and are detailed in the Group risk policies. These focus on aligning the levels of risk-taking with the achievement of business objectives and can only provide reasonable, and not absolute assurance, against material misstatement or loss.
The management and control of risks are set out in the Group risk policies, and form part of the holistic risk management approach under the Group’s ORSA. These risk policies define: — The Group’s risk appetite in respect of material risks, and the framework under which the Group’s exposure to those risks is limited; — The processes to enable Group senior management to effect the measurement and management of the Group material risk profile in a consistent and coherent way; and
— The flows of management information required to support the measurement and management of the Group’s material risks and to meet the needs of external stakeholders.
The methods and risk management tools we employ to mitigate each of our major categories of risks are detailed in the further risk information section below.
A dditional inform ation shareholder value is defined by a number of qualitative and quantitative expressions of risk appetite, operationalised through measures such as limits, triggers and indicators. The Group Risk function is responsible for reviewing the scope and operation of these risk appetite measures at least annually to determine that they remain relevant. The Board approves all changes made to the Group’s aggregate risk appetite, and has delegated authority to the Group Risk Committee to approve changes to the system of limits, triggers and indicators.
Risk identification Risk identification covers Group-wide: — Top down risk identification — Bottom up risk identification — Emerging risk identification.
Risk measurement and assessment Risks are assessed in terms of materiality.
Processes that support the oversight and control of risks include: — The Own Risk and Solvency Assessment (ORSA)
Monitor and report Escalation requirements in the event of a breach are clearly defined. Risk reporting provides regular updates to the Group’s Board and risk committees on exposures against Board-approved risk appetite statements and limits. Reporting also covers the Group’s key risks.
Business strategy Business strategy and the business plan provide direction on future growth and inform the level of limits on solvency, liquidity and earnings and for our key risks. The Group Risk function provide input and opinion on key aspects of business strategy.
Capital management Capital adequacy is monitored to ensure that internal and regulatory capital requirements are met, and that solvency buffers are appropriate, over the business planning horizon and under stress.
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.
Earnings volatility: The objectives of the Group’s appetite and aggregate risk limits on earnings volatility seek to ensure that variability is consistent with the expectations of stakeholders; that the Group has adequate earnings (and cash flows) to service debt and expected dividends and to withstand unexpected shocks; and that earnings (and cash flows) are managed properly across geographies and are consistent with funding strategies. The volatility of earnings is measured and monitored on operating profit and EEV operating profit bases, although IFRS and EEV total profits are also considered.
Geopolitical risk The geopolitical environment may have direct or indirect impacts on the Group, and has seen varying levels of volatility in recent years as seen by political developments in the UK, the US and the Eurozone. Uncertainty in these regions, combined with continuing conflict in the Middle East and elevated tensions in East Asia and the Korean peninsula underline that geopolitical risks have potentially global and wide-ranging impacts; for example, through increased regulatory and operational risks, and changes to the economic environment.
In the Asia business, the main market risks arise from the value of fees from its fee-earning products. In the US, Jackson’s fixed and variable annuity books are exposed to a variety of market risks due to the assets backing these policies.
The UK business’ market risk exposure arises from the valuation of the shareholder’s proportion of the with-profits fund’s future profits, which depends on equity, property and bond values.
Insurance risks The nature of the products offered by Prudential exposes it to insurance risks, which form a significant part of the overall Group risk profile.
The insurance risks that the business is exposed to by virtue of its products include longevity risk (policyholders living longer than expected); mortality risk (higher number of policyholders with life protection dying than expected); morbidity risk (more policyholders with health protection becoming ill than expected) and persistency risk (more customers lapsing their policies than expected, and a type of policyholder behaviour risk). The medical insurance business in Asia is also exposed to medical inflation risk (the increasing cost of medical treatments being higher than expected).
For M&GPrudential the most material insurance risk is longevity risk, arising from its legacy annuity business.
The Jackson business is most exposed to policyholder behaviour risk, including persistency, which impacts the profitability of the variable annuity business and is influenced by market performance and the value of policy guarantees.
Operational risk is the risk of loss or unintended gain from inadequate or failed processes, personnel, systems and external events, and can arise through business transformation; introducing new products; new technologies; and entering into new markets and geographies. Implementing the business strategy and processes for ensuring regulatory compliance (including those relating to the conduct of its business) requires interconnected change initiatives across the Group, the pace of which introduces further complexity. The Group’s outsourcing and third party relationships introduce their own distinct risks. Such operational risks, if they materialise, could result in financial loss and/or reputational damage. Operational risk is considered to be material at the level of the Group.
6.1 ‘Macro’ risks a. Global regulatory and political risks Regulatory and political risks may impact on Prudential’s business or the way in which it is conducted. This covers a broad range of risks including changes in government policy and legislation, capital control measures, new regulations at either national or international level, and specific regulator interventions or actions. Following the announcement in August 2018 that the Hong Kong Insurance Authority would become Prudential’s Group-wide supervisor after the demerger of M&GPrudential, constructive engagement with the supervisor-elect began in 2018 and will continue into 2019. In particular, Prudential continues to engage with the supervisor on its proposed Group-wide supervision framework which will apply to the Group after the demerger.
Recent shifts in the focus of some governments toward more protectionist or restrictive economic and trade policies could impact on the degree and nature of regulatory changes and Prudential’s competitive position in some geographic markets. This could take effect, for example, through increased friction in cross-border trade, capital controls or measures favouring local enterprises such as changes to the maximum level of non-domestic ownership by foreign companies. These developments continue to be monitored by the Group at a national and global level and these considerations form part of the Group’s ongoing engagement with government policy teams and regulators.
A dditional inform ation sovereign and corporate debt ratings may occur. In a severe scenario where the UK’s sovereign rating is downgraded by more than one notch, this may also impact on the credit ratings of UK companies, including M&GPrudential’s UK business. The legal and regulatory regime in which the Group (and, in particular, M&GPrudential) operates, may also be affected (including the future applicability of the Solvency II regime in the UK), the extent of which remains uncertain. There is also a risk of operational disruption to the business, in particular to M&GPrudential.
The Group’s diversification by geography, currency, product and distribution should reduce some of the potential impact of the UK’s exit. M&GPrudential, due to the geographical location of both its businesses and its customers, has the most potential to be affected. As a result of the uncertainty on the nature of the arrangements that will be put in place between the UK and the EU, M&GPrudential has completed the implementation of a range of plans including transfers of business to EU jurisdictions, balance sheet and withprofits fund hedging protection and operational measures (including customer communications) that are designed to mitigate the potential adverse impacts to the Group’s UK business. In addition, the business has sought to ensure, through various risk mitigation actions, that it is appropriately prepared for the potential operational and financial impacts of a no-deal withdrawal.
In late 2018, the US NAIC concluded an industry consultation with the aim of reducing the non-economic volatility in the variable annuity statutory balance sheet and enhancing risk management. The NAIC is targeting a January 2020 effective date for the new framework, which will have an impact on Jackson’s business. Jackson continues to assess and test the changes. The NAIC also has an on-going review of the C-1 bond factors in the required capital calculation, on which further information is expected to be provided in due course. The Group’s preparations to manage the impact of these reforms will continue.
In Asia, regulatory regimes are developing at different speeds, driven by a combination of global factors and local considerations. New local capital rules and requirements could be introduced in these and other regulatory regimes that challenge legal or ownership structures, current sales practices, or could be applied to sales made prior to their introduction retrospectively, which could have a negative impact on Prudential’s business or reported results.
b. ESG risks including climate change The business environment in which Prudential operates is continually changing, and responding effectively to those material risks with ESG implications is crucial in maintaining Prudential’s brand and reputation, and in turn its financial performance and its long-term strategy. The Group maintains active engagement with its key stakeholders, including investors, customers, employees, governments, policymakers and regulators in its key markets, as well as with international institutions – all of whom have expectations, which the Group must balance, as it responds to ESG-related matters.
Climate change is a key ESG theme which continues to move up the agenda of many regulators, governments, nongovernmental organisations and investors. An overview of the various regulatory, supervisory and investor-driven initiatives related to climate change currently in progress; how the Group manages climate change risks and opportunities; and the Group’s participation in industry initiatives in this area is outlined in the Corporate responsibility review on page 74. There has been increased regulatory and supervisory focus on sustainable finance and responsible investment. The Group recognises this and the ESG Executive Committee seeks, as one of its aims, to ensure a consistent approach in managing ESG considerations in its business activities, including investment activities.
The Group’s operational risk framework explicitly incorporates ESG as a component of its social and environmental responsibility, brand management and external communications. This is further strengthened by factoring considerations for reputational impacts when the materiality of operational risks are assessed. Policies and procedures to support how the Group operates in relation to certain ESG issues are covered in the Group Governance Manual. Prudential manages key ESG issues though a multi-disciplinary approach with first line functional ownership for ESG topics. Further information on the Group’s approach to governance on ESG issues and the relevant Group-wide policies for managing these are included in the Corporate responsibility review on page 74.
Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued 6.2 Risks from our investments a. Market risk The main drivers of market risk in the Group are: — Investment risk, which arises on our holdings of equity and property investments, the prices of which can change depending on market conditions; — Interest rate risk, which is driven by the valuation of Prudential’s assets (particularly the bonds that it invests in) and liabilities, which are dependent on market interest rates and exposes it to the risk of those moving in a way that is detrimental; and
The main investment risk exposure arises from the portion of the profits from the UK and Hong Kong with-profits funds which the shareholders are entitled to receive; the value of the future fees from the fee-earning products in the Asia business; and from the asset returns backing Jackson’s variable annuities business. Further detail is provided below.
The Group has appetite for market risk where it arises from profit-generating insurance activities to the extent that it remains part of a balanced portfolio of sources of income for shareholders and is compatible with a robust solvency position.
The Group’s market risks are managed and mitigated by the following: — Our market risk policy; — Risk appetite statements, limits and triggers; — Our asset and liability management programmes; — Hedging derivatives, including equity options and futures, interest rate swaps and swaptions and currency forwards; — The monitoring and oversight of market risks through the regular reporting of management information; and
While accepting the equity exposure that arises on future fees, the Group has limited appetite for exposures to equity price movements to remain unhedged or for volatility within policyholder guarantees after taking into account any natural offsets and buffers within the business.
Interest rate risk (Audited) Some products that Prudential offer are sensitive to movements in interest rates. As part of the Group’s ongoing management of this risk, a number of mitigating actions to the in-force business have been taken, as well as repricing and restructuring new business offerings in response to recent relatively low interest rates. Nevertheless, some sensitivity to interest rate movements is still retained.
In the UK and Europe insurance business, interest rate risk arises from the need to match the cash flows of its annuity obligations with those from its investments. The risk is managed by matching asset and liability durations as well as continually assessing the need for use of any derivatives. Under Solvency II rules, interest rate risk also results from the requirement to include a balance sheet risk margin. The with-profits business is also exposed to interest rate risk through some product guarantees. Such risk is largely borne by the with-profits fund itself although shareholder support may be required in extreme circumstances where the fund has insufficient resources to support the risk.
In Asia, our exposure to interest rate risk arises from the guarantees of some non-unit-linked investment products, including the Hong Kong with-profits business. This exposure exists because of the potential for asset and liability mismatch which, although it is small and managed appropriately, cannot be eliminated.
Credit risk is the potential for reduction in the value of investments which results from the perceived level of risk of an investment issuer being unable to meet its obligations (defaulting). Counterparty risk is a type of credit risk and relates to the risk that the counterparty to any contract we enter into being unable to meet their obligations causing us to suffer loss.
Debt and loan portfolio (Audited) Prudential’s UK and Europe business is exposed to credit risk on fixed income assets in the shareholder-backed portfolio. At 31 December 2018, this portfolio contained fixed income assets worth £21.6 billion. M&GPrudential’s debt portfolio reduced by £12.1 billion following the transfer of fixed income assets to Rothesay Life as part of the reinsurance agreement announced in March 2018. Credit risk arising from a further £64.3 billion of fixed income assets is borne largely by the with-profits fund, to which the shareholder is not exposed directly although under extreme circumstances shareholder support may be required if the fund is unable to meet payments as they fall due.
The shareholder-owned debt and loan portfolio of the Group’s other operations was £2.0 billion as at 31 December 2018.
Further details of the composition and quality of our debt portfolio, and exposure to loans, can be found in the IFRS financial statements.
The exposures held by the shareholderbacked business and with-profits funds in sovereign debt securities at 31 December 2018 are given in note C3.2(f) of the Group’s IFRS financial statements.
The exposure to derivative counterparty and reinsurance counterparty credit risk is managed using an array of risk management tools, including a comprehensive system of limits. Where appropriate, Prudential reduces its exposure, buys credit protection or uses additional collateral arrangements to manage its levels of counterparty credit risk.
Prudential has no appetite for liquidity risk, ie for any business to have insufficient resources to cover its outgoing cash flows, or for the Group as a whole to not meet cash flow requirements from its debt obligations under any plausible scenario.
8 Consumer, cyclical 3.56% 9 Basic materials 1.98% 10 Real estate 1.90%
— Regular stress testing; — Our contingency plans and identified sources of liquidity; — The Group’s ability to access the money and debt capital markets; — Regular deep dive assessments; and
The Group has appetite for retaining insurance risks in order to create shareholder value in the areas where it believes it has expertise and controls to manage the risk and can support such risk with its capital and solvency position.
The principal drivers of the Group’s insurance risk vary across its business units. At M&GPrudential, this is predominantly longevity risk. Across Asia, where a significant volume of health protection business is written, the most significant insurance risks are morbidity risk, persistency risk, and medical inflation risk. In Jackson, policyholder behaviour risk is particularly material, especially in the take up of options and guarantees on variable annuity business.
The Group manages longevity risk in various ways. Longevity reinsurance is a key tool in managing this risk. In March 2018, the Group’s longevity risk exposure was significantly reduced by reinsuring £12 billion in UK annuity liabilities to Rothesay Life, pursuant to a Part VII transfer of the majority of these liabilities expected to be completed by 30 June 2019. Although Prudential has withdrawn from selling new UK annuity business, given its significant annuity portfolio the assumptions it makes about future rates of improvement in mortality rates remain key to the measurement of its insurance liabilities and to its assessment of any reinsurance transactions. Prudential continues to conduct research into longevity risk using both experience from its annuity portfolio and industry data. Although the general consensus in recent years is that people are living longer, the rate of increase has slowed in recent years, and there is considerable volatility in year-on-year longevity experience, which is why it needs expert judgement in setting its longevity basis.
Prudential’s morbidity risk is mitigated by appropriate underwriting when policies are issued and claims are received. Our morbidity assumptions reflect our recent experience and expectation of future trends for each relevant line of business.
In Asia, Prudential writes significant volumes of health protection business, and so a key assumption is the rate of medical inflation, which is often in excess of general price inflation. There is a risk that the expenses of medical treatment increase more than expected, so the medical claim cost passed on to Prudential is higher than anticipated. Medical expense inflation risk is best mitigated by retaining the right to reprice our products each year and by having suitable overall claim limits within its policies, either limits per type of claim or in total across a policy.
Prudential’s insurance risks are managed and mitigated using the following: — The Group’s insurance and underwriting risk policies; — The risk appetite statements, limits and triggers; — Using longevity, morbidity and persistency assumptions that reflect recent experience and expectation of future trends, and industry data and expert judgement where appropriate; — Using reinsurance to mitigate longevity and morbidity risks; — Ensuring appropriate medical underwriting when policies are issued and appropriate claims management practices when claims are received in order to mitigate morbidity risk; — Maintaining the quality of sales processes and using initiatives to increase customer retention in order to mitigate persistency risk; — Using product repricing and other claims management initiatives in order to mitigate medical expense inflation risk; and
Other significant change initiatives are occurring across the Group that increase the likelihood and potential impact of risks associated with: — Complex dependencies between multiple programmes spanning different businesses; — The organisational ability to absorb change being exceeded while maintaining a stable and robust control environment ; — Unrealised business objectives/ benefits; and
Operational risks Prudential defines operational risk as the risk of loss (or unintended gain or profit) arising from inadequate or failed internal processes, personnel or systems, or from external events. This includes employee error, model error, system failures, fraud or some other event which disrupts business processes or has a detrimental impact to customers. Processes are established for activities across the scope of our business, including operational activity, regulatory compliance, and those supporting environmental, social and governance (ESG) activities more broadly, any of which can expose us to operational risks. A large volume of complex transactions are processed by the Group across a number of diverse products, and are subject to a high number of varying legal, regulatory and tax regimes. Prudential has no appetite for material losses (direct or indirect) suffered as a result of failing to develop, implement or monitor appropriate controls to manage operational risks.
The Group’s outsourcing and third-party relationships require distinct oversight and risk management processes. A number of important third-party relationships exist which provide the distribution and processing of Prudential’s products, both as market counterparties and as outsourcing partners. M&GPrudential outsources several operations, including a significant part of its back office, customer facing functions and a number of IT functions. In Asia, the Group continues to expand its strategic partnerships and renew bancassurance arrangements. These third-party arrangements support Prudential in providing a high level and cost-effective service to our customers, but they also make us reliant on the operational performance of our outsourcing partners.
The Group’s requirements for the management of material outsourcing arrangements, which are in accordance with relevant applicable regulations, are included through its well-established Group-wide third-party supply policy. Third-party management is also included in embedded in the Group-wide framework and risk management for operational risk (see further, below). Third-party management forms part of the Group’s Operational Risk categorisations and a defined qualitative risk appetite statement, limits and triggers are in place.
— An operational risk appetite framework that articulates the level of operational risk exposure the business is willing to tolerate, covering all operational risk categories, and sets out escalation processes for breaches of appetite.
These core framework components are embedded across the Group via the Group Operational Risk Policy and Standards documents, which set out the key principles and minimum standards for the management of operational risk across the Group.
These policies and standards include subject matter expert-led processes that are designed to identify, assess, manage and control operational risks, including the application of: — A transformation risk framework that assesses, manages and reports on the end-to-end transformation lifecycle, project prioritisation and the risks, interdependencies and possible conflicts arising from a large portfolio of transformation activities; — Internal and external review of cyber security capability and defences; — Regular updating and testing of elements of disaster-recovery plans and the Critical Incident Procedure process; — Group and business unit-level compliance oversight and testing in respect of adherence with in-force regulations; — Regulatory change teams in place to assist the business in proactively adapting and complying with regulatory developments; — A framework in place for emerging risk identification and analysis in order to capture, monitor and allow us to prepare for operational risks that may crystallise beyond the short-term horizon; — Corporate insurance programmes to limit the financial impact of operational risks; and
These activities are fundamental in maintaining an effective system of internal control, and as such outputs from these also inform core RCA, incident management and scenario analysis processes and reporting on operational risk. Furthermore, they also ensure that operational risk considerations are embedded in key business decision-making, including material business approvals and in setting and challenging the Group’s strategy.
Business resilience Business resilience is at the core of the Group’s well embedded Business Continuity Management (BCM) programme, with BCM being one of a number of activities undertaken by the Group Security function that protect our key stakeholders.
Prudential operates a BCM programme and framework that is linked with its business activities, which considers key areas including business impact analyses, risk assessments, incident management plans, disaster recovery plans, and the exercising and execution of these plans. The programme is designed to achieve a business continuity capability that meets evolving business needs and is appropriate to the size, complexity and nature of the Group’s operations, with ongoing proactive maintenance and improvements to resilience against the disruption of the Group’s ability to meet its key objectives and protect its brand and reputation. The BCM programme is supported by Group- wide governance policies and procedures and is based on industry standards that meet legal and regulatory obligations.
Business disruption risks are monitored by the Group Security function, with key operational effectiveness metrics and updates on specific activities being reported to the Group Risk Committee where required and discussed by crossfunctional working groups.
Recent developments in data protection worldwide (such as GDPR that came into force in May 2018) increases the financial and reputational implications for Prudential of a breach of its (or third-party suppliers’) IT systems. As well as data protection, increasingly stakeholder expectations are that companies and organisations use personal information transparently and appropriately. Given this, both information security and data privacy are key risks for the Group. As well as preventative risk management, it is fundamental that robust critical recovery systems are in place in the event of a successful attack on the Group’s infrastructure, breach of information security or failure of its systems to retain its customer relationships and trusted reputation.
In 2018, the organisational structure and governance model for cyber security management was revised with the appointment of a Group Chief Information Security Officer, and a repositioning of the function to allow increased focus on execution. This organisational change will increase the Group’s efficiency and agility in responding to cyber security related incidents, and will facilitate increased collaboration between business units and leverages their respective strengths in delivering the Group-wide Information Security Programme.
Viability statement prepared in accordance with the provision C.2.2 of the UK code The Group’s longer-term prospects The Group’s strategy is based around meeting the long-term savings and protection needs of its customers and hence creating value for both customers and shareholders over a time frame that can be many years. As described on pages 12 to 13, the Group’s business model supports this strategy by constantly evolving our products to meet changing customers’ needs, building out and diversifying distribution capabilities and relationships to reach new customers and investing in technology to better empower and serve the salesforce and customers. Examples of the actions undertaken during 2018 are set out on pages 18 to 37. These activities are underpinned by ongoing risk management, implemented via the Group Risk Framework and risk appetite limits described on pages 55 to 58. The Group’s management of wider environmental, social and governance issues that could pose a risk in the future to the Group is set out in the Corporate responsibility review on pages 71 to 72. This collective focus supports the sustainability of our business over the longer term.
The Directors performed the assessment by reference to the three-year period to December 2021. Three years is considered an appropriate period as it represents the period covered by the detailed business plan that is prepared annually on a rolling three-year basis. In approving the business plan, the Directors review the Group’s projected performance with regards to profitability, cash generation and capital position, together with the parent company’s liquidity over this three-year period. This projection involves setting a number of economic and other assumptions that are inherently volatile over a much longer reporting period. Such assumptions include foreign exchange rates, interest rates, economic growth rates and the impact on the business environment arising from events such as the exit of the United Kingdom from the European Union or changes in regulation.
The scenarios tested showed that the Group with or without the demerger would be able to maintain viability, over the three-year period under assessment, after taking account of the actions available to management to mitigate the impacts on capital and liquidity in such scenarios.
Conclusion on viability Based on this assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year plan period to December 2021.
2 Source of segmentation: Bloomberg Sector, Bloomberg Group and Merrill Lynch. Anything that cannot be identified from the three sources noted is classified as other. Excludes debt securities from other operations.
We want to create a positive legacy from all our business activities. We aim to provide value to our customers through the products we deliver and to our shareholders through our positive financial performance. At the same time we recognise the importance of providing benefits to all our stakeholders, whether through our community investment programmes, our environmental impact, our engagement and talent development with our colleagues or our approach to responsible investment.
The diagram below provides a guide to the sections of this Strategic report that fulfil these requirements: Anti-bribery and anti-corruption matters
People Overview, relevant risks and associated management practices – page 71
This corporate responsibility review provides an overview of our activities and progress in 2018 across a range of areas in which we have helped to provide benefits to stakeholders throughout the markets in which we operate. It also includes an overview of our Environmental, social and governance (ESG) activities.
Our ESG approach underpins the delivery of our strategy, generating sustainable earnings and resilient capital growth, enabling us to deliver on our promises to our customers.
How we govern ESG We established an ESG Executive Committee (ESG ExCo) in 2018 to lead on how we identify, manage and report on material ESG risks. Our ESG sponsor, Jonathan Oliver (Group Executive Committee member), was nominated as Chair and is supported by senior leaders from Group operations, across financial reporting, investor relations, risk, compliance, operations, investment and human resources. There is representation from our business units, provided by the Chief Investment Officers of our asset management businesses (PPM America (PPMA) and Eastspring), M&G’s Head of Corporate Finance and Stewardship and Jackson’s General Counsel. The ESG ExCo meets quarterly and reports to the Board at least twice each year, with additional ad hoc reporting provided as necessary. Our ESG ExCo is focused on the holistic assessment of ESG matters material to the Group, raising matters for Board decisionmaking and implementing resulting decisions, supporting the sustainable delivery of the Group’s strategy.
Managing our material ESG issues – summary Responsible investment As a life insurer, asset owner and manager, we are long-term stewards of our customers’ assets and we recognise the importance of ESG matters. We also recognise our responsibility to our customers, society and the environment to effectively integrate associated considerations into investment decisions and fiduciary and stewardship duties, helping to finance a more sustainable economy.
We maintain long-term relationships with our charity partners, providing support through both funding and skills-based volunteering led by our employees.
Business integrity We embed responsible and ethical behaviour across our organisation. From how we conduct ourselves, shape and monitor our culture and meet our responsibility to prevent bribery and corruption, through to transparency in our tax practices, our contribution to the global economy and our leadership role in our industry, we are a responsible, ethical business.
Our governance framework, setting out the principles by which we conduct our business and ourselves, is built on our Group Code of Business Conduct and our Group Governance Manual. We contribute to financial stability and sustainability in all of the markets in which we operate. The responsible and sustainable management of our tax affairs helps us to maintain constructive relations with our stakeholders and play a positive role in the economy. We take a long-term perspective and balance our responsibility to support our business strategy with our responsibility to the communities in which we operate, which need sustainable tax revenues.
We have a global footprint and maintain business relationships with a range of parties, such as agents and intermediaries, who act on our behalf. As such, financial crime is a key risk and we are committed to fighting it through the maintenance and implementation of policies and procedures on anti-money laundering, counterterrorist financing, anti-bribery and corruption and anti-fraud, and through our commitment to industry-wide efforts. We operate a Group-wide whistle-blowing programme, which is able to receive reports from a variety of channels and is supported by an independent third party that captures and comprehensively records matters raised.
We take our commitment to our customers seriously when training our personnel, who deliver service consistent with our values. Where customers have cause to complain to us, we have documented procedures in place to manage complaints received through multiple touchpoints, in a timely, robust and professional manner.
We work with a range of partners that support our business units with our IT network and systems, specialist professional and advisory services, facilities management, contractors and the agents that form our distribution network. Our Group Code of Business Conduct outlines the values and standards that we require of each of our suppliers. We act with integrity to ensure that modern slavery, human trafficking, child labour or any other issue that subjugates human rights is eradicated from our supply chain.
— Code of Business Conduct Policy details our required standards to be used across the Group and covers our employees and individuals or organisations acting on our behalf. It is governed by five standards: protection from financial crime, avoiding conflicts of interest, managing information, communicating as a group and providing equality for our people.
— Anti-Money Laundering and Counter Terrorist Financing Policy outlines how we prohibit money laundering or terrorist financing in our working practices, setting out how we establish parameters to prevent this taking place across the organisation.
— Security Policy outlines our commitment to ensuring security aligns to industry recommended practice for managing our regulatory and legal obligations. This includes how we manage incidents under the ‘Speak Out’ programme, our whistle-blowing process.
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
Environment — Environment Policy outlines our approach to understand and manage the direct environmental impact of the Group. This covers our measurement, monitoring, review and reporting of issues associated with our environmental performance.
Suppliers — Third-Party Supply Policy – an updated Third-Party Supply Policy was approved by the Group Risk Committee in July 2018. It covers how we manage and oversee our third-party arrangements, through due diligence/ selection criteria, contractual requirements, the ongoing monitoring of such relationships and reporting and escalation. Additionally, our policy considers the requirements of the UK Modern Slavery Act and the principles of the UN’s Universal Declaration of Human Rights.
— Employee Relations Policy outlines the way we engage our employees and motivate them to achieve success for the Group: promoting positive relationships with employees, representative organisations and trade unions, and maintaining a positive reputation for the treatment of employees.
— Health and Safety Policy covers our employees, business partners, customers and others that may be affected by our operations. This details our health and safety core principles, our commitments and the measuring and reporting on our health and safety performance.
The GGM is used as a platform for mandating specific ways of working across the Group. The chief executive of each business unit attests annually to compliance with applicable requirements set out in the policies, including matters that must be reported to the Group. Specific procedures are followed for the reporting of non-compliance. Business units present such instances in their annual certification, which in turn is reported to the Group Audit Committee.
The Group Audit Committee reviewed the results of the year-end certificate of compliance with GGM requirements. While several improvements to ensure the policies are fully embedded were discussed, no significant areas of noncompliance in relation to the policies relevant to ESG issues were noted.
Prudential remains an active member of the ClimateWise initiative, a global network of leading insurance industry organisations, and an investor signatory to the Carbon Disclosure Project. In 2018, we again participated in the Asset Owner Disclosure Project, a survey managed by ShareAction to assess the insurance sector’s response to addressing climate risk, where we ranked 30th out of 80 in the Global Climate Insurance Index (an assessment of the 80 largest insurance companies globally) (2017: 31st). In 2018, M&G collaborated on enhancing industry climate-related disclosure practices and signed up to a pilot initiative sponsored by the United Nations Environment Programme to work on climate-change scenario modelling for portfolios across different asset classes. This is a central part of the Task Force on Climate-related Financial Disclosures (TCFD) framework, and the key output will be an industry climate scenario modelling tool. Further information in relation to the Group’s support for the Financial Stability Board’s (FSB) TCFD is provided below in the section on ‘Managing climate risks and opportunities and the FSB’s TCFD’ below.
Evolving our ESG-focused investment product offering We continued to add to our ESG-focused investment product offering over 2018, in light of increasing interest and demand from customers. M&GPrudential launched two new retail funds in 2018, the M&G Positive Impact Fund and the M&G Sustainable Multi Asset Fund, both employing a structured approach to ESG integration and both investing in companies that are aligned with the United Nations Sustainable Development Goals.
The Positive Impact Fund seeks to invest in companies that have a positive impact on society through addressing the world’s major social and/or environmental challenges, while providing attractive financial returns. Sustainability and impact considerations are fundamental in the stock selection process. The M&G Impact team undertakes a ‘triple I’ approach to identifying impactful investments, analysing the investment case, intentionality and impact of a company to assess its suitability for the fund. The fund won Best New Entrant (Fund) at the 2018 Investment Week Sustainable and ESG Investment Awards.
We as a Group welcomed, and are a signatory to, the FSB’s TCFD Recommendations, which were released in 2017. Our governance structures, which provide oversight in this important area, were enhanced in 2018 through the establishment of our ESG ExCo, which will oversee the Group’s processes to assess the climate related risks and opportunities facing our businesses, which are currently under development, and the identification and delivery of supporting implementation activities, with the view to enhancing our climate-related financial risk management practices. Over the next year the Group will take action to enhance the Group’s climate-related financial risk management practices and disclosure.
As an organisation with a long history, we invest for the long term. Integrating non-financial decision-making with our current financial systems is a key part of taking that long-term view and is a continuing priority for the Group.
Further information on our approach to responsible investment, including progress made by our businesses during 2018 in enhancing ESG integration, investing for positive change and collaborating and participating in industry initiatives, will be found in our forthcoming 2018 ESG report.
Environment Managing our direct environmental impact Cognisant of our direct environmental impacts as an occupier of over 400 properties worldwide, we strive to play our part in reducing our operational impacts where possible. In 2016, we established a global environmental targets framework and roadmap to drive progress across a range of environmental aspects and impacts for our operational property portfolio worldwide. This framework aligns to our regional footprints covering Asia, the UK and Europe and the US, reflecting the maturity of environmental management practices in these markets and the autonomy given to our business units in managing their operations.
We recognise the importance of our own internal environmental targets and decarbonisation goals in reducing our direct footprint. In 2018, global energy use across our occupied estate was 127,098 MWh (2017: 129,324 MWh), a decrease of 2 per cent. Our absolute Scope 1 and Scope 2 (market based) Greenhouse Gas (GHG) emissions decreased by 7 per cent to 61,318 tCO2e (2017: 65,979 tCO2e restated) across our occupied estate. When normalised against net lettable floor area, our Scope 1 and 2 emissions fell by 13 per cent to 99 kg CO2e/m2 influenced by several factors such as decarbonisation of the UK/European grid (cleaner electricity generation), outsourcing our UK data centres and a 7 per cent increase in occupied floor area.
Investment Estate Occupied Estate * 2017 figures restated as revised data became available from suppliers
As a Group, we signed up to RE100 in 2018 to achieve 100 per cent renewable electricity by 2025 across our occupied and managed investment estates. 30 per cent of our global electricity consumption is procured from 100 per cent certified renewable sources (solar PV and on-shore wind). Our Group Scope 2 (market based) emissions are independently assured by Deloitte. Looking ahead, we will develop roadmaps in 2019 for the demerged businesses to set out strategies to achieve this target, on a country-by-country basis.
Our combined reported and unreported carbon footprint from air travel is a significant contribution to our overall emissions. Therefore, as part of a holistic approach to the management of our climate impacts, we will focus management effort on reducing the need for travel through the deployment of digitally enabled office working practices and offsetting emissions from unavoidable flights as final mitigation. Plans will be developed in 2019 to establish a CO2 offsetting programme for air travel emissions.
As part of our ongoing environmental management system (ISO 14001:2015) in the UK, we achieved zero nonconformities in 2018, and focused on improving recycling rates and minimising single use vending cups and plastics, as well as completing the roll out of advanced energy analytics software across our largest UK properties following a successful trial.
For the Group as a whole, further detail on our environmental performance throughout 2018 is available online and will be published in our 2018 ESG report early in 2019, including performance against our global environmental objectives.
Scope 1 emissions are our direct emissions from the combustion of fuel, fugitive emissions and company-owned vehicles. Scope 2 emissions cover our indirect emissions from the purchase of electricity, heating and cooling. We have reported our Scope 2 emissions using both the location and market-based methods in line with the GHG Protocol Scope 2 Guidance. Our Scope 3 footprint includes UK/EU/Africa booked business travel for the occupied estate, global water consumption from the occupied and investment estate (where Prudential have operational control), waste generated from occupied properties (UK and US) and global investment properties (where Prudential have operational control). We continue to work with our business units to review the extent of our Scope 3 reporting and increase coverage where practicable.
kg CO2e per employee – Scope 1 and 2 only Group1 3.1 3.2 -3%
* Note that when reporting Group totals, the market-based emission is used.
Scope 2 calculations use the IEA GHG 2018 Conversion Factors for locationbased reporting. Market-based reporting uses supplier emission factors for our UK REGO-backed supply and RE-DISS factors where available.
Accounting methodology: The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard
Diversity and inclusion Organisations benefit from a number of diverse perspectives and experiences and we consider this is important to our success today and in the future. Diversity and inclusion (D&I) is one of our strategic objectives. Tim Rolfe, Group HR Director, is the executive sponsor across the Group, with Nic Nicandrou, Chief Executive of Prudential Corporation Asia, acting as the Board member accountable for D&I work.
The Group D&I Policy ensures we provide equal opportunities to our workforce through fostering an environment where our current and prospective employees are treated with dignity and respect, ensuring an appropriate diversity of skill sets and backgrounds to deliver success across the Group. Our policy supports an inclusive culture, where all our employees are protected against discrimination and provided with opportunities regardless of their age, caring responsibilities, disability status, ethnicity, gender, religion, sexual orientation, professional, social, educational or cultural background, or employment contract type. Through our policy we govern our business units to have effective approaches in place to comply with local regulation, provide equality of opportunity and encourage our suppliers to promote equality of opportunity. Each of our businesses, including Group Head Office (GHO), is required to report regularly to Group HR on its compliance with the policy.
We are committed to improving the diversity balance of our organisation. For example, Prudential Corporation Asia completed a review of recruitment processes resulting in a clear commitment to equal opportunities being incorporated in all job adverts internally and externally across Asia. Additionally, Prudential Corporation Asia has committed to increasing the focus on blind CV assessment and gender balanced short-lists. Our Group operations have reported a measurable improvement in the balance of gender, ethnicity, international experience and sector background experience in hires. The Group offers tailored 1:1 maternity coaching for female staff. This development initiative helps mothers to prepare for maternity leave, offers support while they are out of the office, and aids and facilitates a successful return to the workplace. Externally, M&GPrudential achieved recognition from D&I-related awards and rankings. Several individuals were winners or shortlisted for awards, for example the EMpower100 Ethnic Minority Executives List, the Black Business Awards, Women in Investment Awards and Top 50 Leading Lights, Kindness and Leadership Awards. M&G Investments was ranked in the top 50 of the UK’s Social Mobility Employers Index.
The Group continues to provide innovative programmes designed in partnership with top academic institutions and industry experts, focused on early career development, leadership development and opportunities, to develop a strategic and innovation mindset through varied career experiences and projects. In 2018 the Enhance programme incorporated several new themes, notably collaboration, including virtual and a new course ‘Experiments at Work’, which encourages expansive thinking in finding fresh perspectives for repetitive challenges and applying creative behaviours in everyday situations.
Employee engagement We want to foster an environment in which employees feel empowered and that they are making an active contribution to the organisation and the communities we serve. We drive employee engagement through a number of initiatives, including colleague appreciation programmes, wellbeing programmes, networking opportunities with peers and senior leaders across functions and employee focus groups. Each of our businesses manages its own activities in this area, including employee engagement surveys, regular employee open forums with senior management and team away days to discuss business performance. Our businesses, including GHO, have processes and, where appropriate, a policy in place for engaging with employees. For any significant issues that are likely to impact either positively or negatively on our reputation as an employer – at both business and Group level immediate reporting to Group HR is required.
Employee engagement in the context of the demerger We understand that during times of change within organisations, colleagues can require extra support and engagement. Since we announced in March 2018 our intention to demerge M&GPrudential from the Group, we have embarked on a programme of engagement to ensure that colleagues are fully briefed on progress towards the demerger and the expected shape of the organisation afterwards. This has involved town hall meetings with senior management, smaller question-and-answer sessions with leadership, regular updates from senior management on progress, line managers playing a key role in demergerrelated communications and encouraging colleagues to submit questions and concerns, with a commitment to respond as soon as practicable. The frequency of these two-way communications is increasing during 2019, as we move closer to the demerger.
Group Executive Committee (GEC) Includes Executive directors 11 11 0 – –
Notes 1 Excludes Prudential Corporation Asia joint venture. 2 In many of our businesses, we provide our employees with the option to not disclose their gender.
For these employees, gender is recorded as ‘undisclosed’. 3 No specification or information is captured on gender for an immaterial number of our employees.
We appreciate that managing and supporting our people through such a period of change is vital in ensuring that they remain engaged with the business, and we also recognise the value of the culture that we have built up in the business and are taking steps to ensure that culture is protected during the process of the demerger. Throughout our communications we have been stressing the importance of partnership, stewardship and ownership, key elements of our culture, and we are doing everything we can to ensure that our colleagues are aware that they have a stake in the future success of the demerged businesses.
Data protection and cyber security For all businesses, the theft of large quantities of personal data has become increasingly common, at significant cost to consumers and businesses. For us, as for many other businesses, the impact of such events has the potential to be more severe in the future as our business changes and becomes increasingly digital. These types of incidents also have the potential to significantly impact on the continuity of our business, our customer relationships and our brand reputation, as well as to diminish customers’ trust in engaging digitally with us and all businesses. The knock-on effect of this could be that many of the social benefits of new technology, such as enabling financial inclusion and greater access to primary healthcare, may not be realised. In this context, cyber risk remains a prominent concern and focus area for ourselves, regulators and businesses globally.
Our cyber strategy was rolled out during 2018, providing increased insight into our Group-wide information security performance. The strategy is designed to deliver against three objectives: to protect the business, comply with applicable laws and regulations, and support the growth of the business. A number of work streams underpin the delivery of the strategy, covering risk prevention, the Group-wide baseline of security controls and capability, and promoting resilience. This supports the business to prioritise and make informed, risk-based decisions. These benefits will continue to be delivered throughout 2019, as the strategy matures under the new Group Chief Information Security Officer.
A key element to managing cyber risk and strategies is to have good information, which our executives and other stakeholders across the business use to make good decisions. During the course of 2018, 18 reports on topics such as the current performance of cyber security capabilities across the Group and the lessons learned from industry events have been provided to various executive committees including the Group Executive Committee and the Group Risk Committee.
The programme continues to evolve to ensure that the way we manage cyber risk remains effective and includes all three elements of cyber risk management –
people, processes and technology. This is vital as changes to our business, the technologies we use and our operating environment continue to gather pace. For example, throughout 2018, we continually reviewed and made adjustments where necessary to our KPIs. This is to ensure that they provide appropriate oversight and cover areas of cyber risk that may have been introduced as a consequence of new technologies. Similarly, we continue to identify, adjust and review the cyber capabilities we need. The Group-wide policies and standards for information and cyber security, which were refreshed in 2018 to reflect the rapid advance in cyber threats, have been introduced and will be reviewed annually and adjusted where necessary to reflect a changing operational environment.
Our community investment strategy is closely aligned with our business purpose
A dditional inform ation and with our stakeholders’ concerns and interests, focused on four principal themes: — Social inclusion; — Education and life skills; — Disaster preparedness; and — Employee engagement.
In the US, the Jackson Charitable Foundation has brought Cha-Ching to more than 2.7 million elementary school students since 2017 through partnerships with Junior Achievement USA and Discovery Education. The Cha-Ching videos and lessons have been integrated into Junior Achievement’s third grade classroom programme. Each year, schools across the country have the chance to win US$10,000 to increase financial education at their school and US$1,000 to donate to a charity of their choice through the Cha-Ching Money Smart Kids Pledge Challenge in the US.
In the UK, working with Young Enterprise, we have developed an online educational resource for primary school students in England and Wales that has enabled the Cha-Ching programme to be brought into the classroom. The Quality Marked teaching resource is linked to the Personal Finance Education Group’s Financial Education Framework and has guidance for teachers on how most effectively to integrate activities into their teaching, as well as activities for home-learning. Since launch in late 2016, the resource has been downloaded 28,478 times in 1,179 schools across the UK.
Jackson Charitable Foundation teams up with Ramsey Education In 2018, in addition to Cha-Ching, Jackson Charitable Foundation sponsored Ramsey Education’s Foundations in Personal Finance curriculum in 250 high schools across the country. The Foundation, which has a mission to advance financial knowledge on a national scale, has teamed up with Ramsey Education to ensure that more than 20,000 high school students have access to this critical, financial education programme that teaches valuable skills to prepare them for a life of financial freedom. More than three million students have benefited from Foundations in Personal Finance in middle schools, high schools and universities nationwide. Foundations in Personal Finance can be used as a primary resource to fulfil requirements in mathematics, economics, family consumer science, business mathematics and personal finance. Educators who use this programme see their students build confidence, security and hope. They share stories of students going to college debt-free, paying cash for their first car, or even helping their parents learn about the importance of an emergency fund.
Employee volunteering Jackson’s charitable efforts are focused on strengthening families and increasing economic opportunities in the communities we call home. Our employees work together for a common cause, which helps them build stronger bonds and valuable skills.
Disaster readiness and relief Helping to make Asia more prepared and safer Safe Steps is a first-of-its-kind, in terms of reach and breadth of partnerships, pan-Asian public service initiative to enhance awareness through the dissemination of educational survival tips for natural disasters, road safety and first aid. The programme was created and developed by Prudence Foundation in partnership with National Geographic and the International Federation of Red Cross and Red Crescent Societies. It is a multi-platform programme including on-air video messages and informative website and educational collateral that can be shared among communities. At its core, Safe Steps utilises one-minute videos to provide simple to understand messages on how to be prepared and stay safe in three areas that cause unnecessary loss of life: natural disasters (launched 2014), road safety (2016) and first aid (2017).
The programme continues to reach an estimated 250 million people every day across Asia, through partnerships with government, humanitarian and private sector organisations. In 2018, new partnerships were formed in Cambodia, Hong Kong, the Philippines, Singapore and Vietnam. For example, Prudence Foundation and Prudential Singapore embarked on a new partnership with the Singapore Red Cross Society, focusing on a mass community first aid training programme aimed at the younger demographic.
Safe Schools programme Asia Pacific is the world’s most disasterprone region, and the Prudence Foundation continues to focus on disaster preparedness, relief and recovery in our Asia markets. Prudence Foundation works with the humanitarian, government and private sector to help communities better prepare for such disasters before they strike, as well as providing support at times of emergency response and recovery.
Safe Steps Safe Steps is a pan-Asian public service initiative to enhance awareness through the dissemination of educational survival tips for natural disasters, road safety and first aid. The programme was created and developed by Prudence Foundation in partnership with National Geographic and the International Federation of Red Cross and Red Crescent Societies. Prudence Foundation and Prudential Singapore embarked on a new partnership with the Singapore Red Cross Society in 2018, with a mass community first aid training programme aimed at younger people.
Emergency fund relief Prudential has been a Group-level supporter of Save the Children since 2010 and is one of the Children’s Emergency Fund’s major supporters. This allows us to act swiftly when disasters occur in any of our markets and provides an instant, effective fundraising mechanism for employees when needed. In 2018 Save the Children’s emergency fund was used 93 times across 35 countries, and helped to reach over 2.1 million people affected by emergencies with life-saving support.
Working with purpose In partnership with RVS we launched our ‘Bring People Together’ campaign, which seeks to encourage and empower more people to volunteer, particularly those aged 50 to 65. Specifically its aim is to inspire them to start their own activities or clubs for older people with the backing of RVS. From social activities and hobby classes to running a lunch club or providing companionship to older people in their homes, together we want to harness the get-up-and-go of pre-retirees by encouraging them to put their talents and life experience to valuable use by becoming volunteer co-ordinators. The programme aims to support the creation of 150 new groups and recruit 500 volunteer co-ordinators to lead them.
PruGOals As part of our nationwide commitment to social inclusion in the UK, Prudential has developed the PruGOals programme in partnership with our four charity partners: Teach First, Transformation Trust, Greenhouse Sports and the Dame Kelly Holmes Trust.
Support for disadvantaged communities M&GPrudential also continues to support disadvantaged communities near our offices and during 2018 over 200 charities received support either by donation or employee volunteering. The range of areas which received support is extensive and includes projects that relate to education, arts and heritage, children and youth, the environment, medical research and social and welfare matters. M&GPrudential continues to support many aspects of education and provides several on-site educational days for students at our London headquarters. M&GPrudential continued its support of City Giving Week with an on-site event which each day showcased several charities that have received support and highlighted the services they provide. The Lord Mayor of the City of London attended M&G’s event as part of his initiative to promote the varied charitable activities undertaken by City businesses.
M&GPrudential continues to use its sponsorship of the RHS Chelsea Flower Show to support social issues through RHS outreach programmes including Greening Grey Britain, It’s Your Neighbourhood and the RHS Campaign for School Gardening across the UK.
Employee volunteering Successful volunteering programme – Chairman’s Challenge Many of our employees play an active role in their communities through volunteering, charitable donations and fundraising. In the UK and Europe, the US and Asia we offer our employees the opportunity to support charities through payroll giving.
The programme continues to appeal to colleagues, with the number of volunteers signing up increasing year-on-year. Last year 9,054 colleagues from around the world took part, volunteering over 49,000 hours to support 33 projects.
Each volunteering project focuses on one or more of our CR priorities and allows us to support both large, well established charities and innovative, smaller-scale activities with volunteers as well as financial support. Prudential donates £150 to our charity partners for every employee who registers for the programme. Charity partners use this money to seed-fund charitable projects for Prudential volunteers. Each year, employees across the Group are involved in the voting process to decide on the most innovative projects, which receive extra funding towards their charitable objectives.
Volunteering across the Group As well as volunteering efforts on behalf of the Chairman’s Challenge, employees around the Group volunteered on a huge range of other charitable projects, from providing relief following disasters to mentoring schoolchildren, supporting the elderly and skills-sharing. We recognise that employee volunteering brings benefit not only to the charities but also to the development of our people, and we actively encourage colleagues to participate in our programmes.
Risk assessment For more information on the risks facing our business, see the Group Chief Risk Officer’s report on page 52. Further information on how we manage our material ESG issues and associated risks are provided in the ‘Managing our material ESG issues’ section of the Corporate responsibility review on page 71.
Dear Shareholder Good�governance�encourages�decisions� to�be�made�in�a�way�that�is�most�likely�to� promote�the�success�of�the�Company�for�the� benefit�of�its�members,�taking�into�account� the�views�and�interest�of�the�Group’s�wider� stakeholders.�We�aim�to�achieve�this�through� a�governance�framework�that�supports� decision-making,�is�continuously�updated� to�meet�the�Group’s�business�needs,�makes� room�for�challenge�and�encompasses�a� prudent�system�of�internal�controls�and� processes�for�identifying,�managing�and� mitigating�key�risks.
In�relation�to�the�governance�of�both�the� Prudential�and�the�M&GPrudential�Groups,� work�has�been�undertaken�to�help�ensure� a�smooth�transition�and�ensure�that�both� Groups�have�boards�properly�composed�to� meet�their�future�strategic�needs.�Most� importantly�this�has�included�establishing� a�separate�M&GPrudential�board�and�the� appointment�of�the�first�independent� non-executive�director,�Mike�Evans,� as�chairman�of�that�board.�
Looking after our stakeholders and wider community initiatives At�Prudential,�we�recognise�that�our� stakeholders�are�key�to�our�long-term�success.� We�seek�to�engage�proactively�with�them,�to� understand�their�views�and�to�take�these� views�into�account�when�making�decisions.�
Mr�Falcon�will�step�down�as�an�Executive� Director�of�the�Board�at�the�conclusion�of� the�2019�Annual�General�Meeting,�as�will� Mr�Foley�and�Mr�Nicandrou.�These�changes� are�being�made�as�part�of�our�progress� towards�demerger�and�are�more�fully� described�on�page�88.�Each�of�Mr�Falcon,� Mr�Foley�and�Mr�Nicandrou�will�maintain�their� roles�as�chief�executives�of�their�respective� business�units�and�members�of�the�Group� Executive�Committee.
Group governance Corporate governance codes – statement of compliance The�Company�has�dual�primary�listings�in� London�(premium�listing)�and�Hong�Kong� and�has�therefore�adopted�a�governance� structure�based�on�the�UK�and�Hong�Kong� Corporate�Governance�Codes�(the�UK�and� HK�Codes).�
The�Company�has�also�complied�with�the� provision�of�the�HK�Code�other�than�as� follows:�Provision�B.1.2(d)�of�the�HK�Code� requires�companies,�on�a�comply�or�explain� basis,�to�have�a�remuneration�committee� which�makes�recommendations�to�a�main� board�on�the�remuneration�of�nonexecutive �directors.�This�provision�is�not� compatible�with�supporting�provision�D.2.3� of�the�UK�Code�which�recommends�that� the�board�determines�the�remuneration�of� non-executive�directors.�Prudential�has� chosen�to�adopt�a�practice�in�line�with�the� recommendations�of�the�UK�Code.
Material Subsidiary governance Prudential�has�appointed�independent� non-executive�directors�to�the�boards�of�its� four�Material�Subsidiary�entities�within�the� Group:�Jackson�National�Life�Insurance� Company,�M&G�Group�Limited,�Prudential� Corporation�Asia�Limited�and�The� Prudential�Assurance�Company�Limited.� Each�Material�Subsidiary�has�a�board�of� directors�led�by�an�independent�chair�and� an�audit�committee�and�risk�committee,� composed�entirely�of�independent� non-executives.�
Regulatory environment Until�the�demerger�is�completed,�the� Prudential�Regulation�Authority�(PRA)�will� continue�to�be�the�Group-wide�supervisor� of�Prudential.�The�PRA�will�be�the�Groupwide �supervisor�of�M&GPrudential� following�the�demerger.�After�the�demerger,� Prudential’s�individual�insurance�and�asset� management�businesses�will�continue�to�be� supervised�at�a�local�entity�level�and�local� statutory�capital�requirements�will�continue� to�apply.�The�Supervisory�College,�made�up� of�the�authorities�overseeing�the�principal� regulated�activities�in�jurisdictions�where� the�future�Prudential�Group�will�operate,� has�made�a�collective�decision�that�Hong� Kong’s�Insurance�Authority�(IA)�should� become�the�new�Group-wide�supervisor� for�Prudential�plc.
The�Company�holds�an�ongoing� programme�of�regular�contact�with�major� shareholders,�conducted�by�the�Chairman,� to�discuss�their�views�on�the�Company’s� governance.�The�Senior�Independent� Director�offers�meetings�to�major� shareholders�as�needed�and�this�year� carried�out�a�consultation�specifically�on� the�Chairman’s�tenure.�Engagement�with� institutional�investors�on�the�Directors’� Remuneration�Policy�and�implementation� is�led�by�the�Remuneration�Committee� Chair�on�an�annual�basis.�Other�Nonexecutive �Directors�are�available�to�meet� with�major�shareholders�on�request.�
Operation of the Board How the Board leads the Group The�Group�is�headed�by�a�Board�led�by� the�Chairman.�
The�Board�is�currently�made�up�of�16� Directors,�of�which�a�majority,�excluding� the�Chairman,�are�independent�Nonexecutive �Directors.�Biographical�details� of�each�of�the�Directors�can�be�found� on�pages�89�to�94�and�further�details�of� the�roles�of�the�Chairman,�Group�Chief� Executive,�Senior�Independent�Director,� Committee�Chairs�and�the�Non-executive� Directors�can�be�found�on�pages�101� and�102.�
The�Board�is�collectively�responsible�to� shareholders�for�the�long-term�sustainable� success�of�the�business�through: �— Approving�the�Group’s�long-term� strategic�objectives,�annual�budgets� and�business�plans,�as�recommended� by�the�Group�Chief�Executive�and�any� material�changes�to�them; �— Monitoring�the�implementation�of� strategic�objectives,�annual�budgets� and�business�plans; �— Establishing�the�Company’s�purpose,� values�and�strategy�and�satisfying�itself� that�these�are�aligned�with�the�Group’s� culture;�and
Key areas of focus – how the Board spent its time The�Board�held�10�meetings�during�2018.�In�addition�to�those�meetings�set�out�in�the�table�below,�the�Board�held�a�separate�two-day� strategy�event�in�June�and�two�Board�workshops�focused�on�the�demerger.
Notes 1� Ms�Richards�stepped�down�from�the�Board�with�effect�from�10�August�2018. 2� Mr�Stowe�stepped�down�from�the�Board�with�effect�from�31�December�2018. 3� Ms�Schroeder�was�appointed�a�member�of�the�Risk�Committee�with�effect�from�1�March�2018. 4� Mr�Watjen�was�appointed�a�member�of�the�Risk�Committee�with�effect�from�1�November�2018.� 5� Mrs�Wicker-Miurin�was�appointed�a�member�of�the�Board�with�effect�from�3�September�2018.�
Membership and composition of the Board �— Leading�the�Nomination�&�Governance�Committee�in� succession�planning�and�the�identification�of�potential� candidates,�having�regard�to�the�skills�and�experience�the� Board�needs�to�fulfil�its�strategy,�and�making� recommendations�to�the�Board
General induction programme relevant to new Non-executive Directors Role-specific induction programme for Fields Wicker-MiurinUnderstanding our governance Understanding our business
Continuing development of knowledge and skills During�2018,�the�Board�and�its�Committees� received�a�number�of�technical�and�business� updates�as�part�of�their�scheduled�meetings,� providing�information�on�external� developments�relevant�to�the�Group�and�on� particular�products�or�operations.�Below�is� an�overview�of�how�Directors�are�kept� up�to�date:�
�— The�Remuneration�Committee�receives� updates�on�regulatory�and�governance� developments�affecting�the�Group’s� remuneration�arrangements.�In�2018,� these�included�trends�with�the�insurance� industry�and�peers,�trends�from�the�2018� Annual�General�Meeting�season,� Corporate�Governance�reform�including� remuneration�and�gender�pay�gap� reporting.
The�Board�is�responsible�for�ensuring�that� an�appropriate�and�effective�system�of� internal�control�and�risk�management�is� in�place�across�the�Group.�The�framework� of�risk�management�and�internal�controls� centres�on�clear�delegated�authorities�to� ensure�Board�oversight�and�control�of� important�decisions.�The�framework�is� underpinned�by�the�Group�Code�of� Business�Conduct,�which�sets�out�the� ethical�standards�the�Board�requires�of� itself,�employees,�agents�and�others� working�in�the�Group.�The�framework�is� designed�to�manage�rather�than�eliminate� the�risk�of�failure�to�achieve�business� objectives,�and�can�only�provide� reasonable�and�not�absolute�assurance� against�material�misstatement�or�loss.
The�Board�determines�the�nature�and� extent�of�the�principal�risks�it�is�willing�to� take�in�achieving�its�strategic�objectives.� It�has�delegated�authority�to�the�Risk� Committee�to�assist�the�Board�in�providing� leadership,�direction�and�oversight�of�the� Group’s�overall�risk�appetite,�risk�tolerance� and�strategy,�overseeing�and�advising� on�the�current�and�potential�future�risk� exposures�of�the�Group,�reviewing�and� approving�the�Group’s�risk�management� framework,�including�changes�to�risk�limits� within�the�overall�Board�approved�risk� appetite,�monitoring�the�effectiveness� of�the�risk�management�framework�and� adherence�to�the�various�risk�policies.� Regular�activities�are�detailed�in�the� report�on�pages�124�to�127.
�— Takes�and�manages�risk�exposures� in�accordance�with�the�risk�appetite,� mandate�and�limits�set�by�the�Board; �— Identifies�and�reports�the�risks�that� the�Group�is�exposed�to,�and�those� that�are�emerging; �— Promptly�escalates�any�limit�breaches� or�any�violations�of�risk�management� policies,�mandates�or�instructions; �— Identifies�and�promptly�escalates� significant�emerging�risk�issues;�and
As�part�of�the�evaluation,�the�chief� executive�and�chief�financial�officer� of�each�business�unit,�including�Group� Head�Office,�certify�compliance�with� the�Group’s�governance�policies�and� the�risk�management�and�internal�control� requirements.�The�Group�Risk�function� facilitates�a�review�of�the�matters�identified� by�this�certification�process.�This�includes� the�assessment�of�any�risk�and�control� issues�reported�during�the�year,�risk�and� control�matters�identified�and�reported�by� the�other�Group�oversight�functions�and� the�findings�from�the�reviews�undertaken� by�Group-wide�Internal�Audit,�which� carries�out�risk-based�audit�plans�across� the�Group.�Issues�arising�from�any�external� regulatory�engagement�are�also�taken� into�account.
For�the�purposes�of�the�effectiveness� review,�the�Group�has�followed�the�FRC� Guidance�on�Risk�Management,�Internal� Control�and�Related�Financial�and�Business� Reporting.�In�line�with�this�guidance,� the�certification�provided�above�does� not�apply�to�certain�material�joint�ventures� where�the�Group�does�not�exercise� full�management�control.�In�these�cases,� the�Group�satisfies�itself�that�suitable� governance�and�risk�management� arrangements�are�in�place�to�protect�the� Group’s�interests.�However,�the�relevant� Group�company�which�is�party�to�the�joint� venture�must,�in�respect�of�any�services� it�provides�in�support�of�the�joint�venture,� comply�with�the�requirements�of�the� Group’s�internal�governance�framework.
Since�the�announcement�of�our�intention� to�demerge�M&GPrudential,�the�Committee� has�had�to�oversee�some�elements�of� establishing�the�M&GPrudential�board.�The� Committee�interviewed�and�recommended,� with�the�input�of�the�M&GPrudential�chief� executive,�the�appointment�of�Mike�Evans� to�the�M&GPrudential�board,�and�details� were�announced�on�1�October.�The� Committee�has�assisted�Mike�Evans�in�the� search�for�suitable�non-executives�to�join� the�M&GPrudential�board.
The principal Board Committees are the Nomination & Governance, Audit, Risk and Remuneration Committees. These Committees form a key element of the Group governance framework, providing effective independent oversight of the Group’s activities by the Non-executive Directors. Each Committee Chair provides an update to the Board on the matters covered at each Committee meeting, supported by a short written summary.
Key matters considered during the year Matter considered How the Committee addressed the matter
External auditor An�important�part�of�the�Committee’s� work�consists�of�overseeing�the�Group’s� relationship�with�KPMG�LLP�(KPMG),� including�safeguarding�independence,� approving�non-audit�fees�and�satisfying� itself�that�it�is�in�the�best�interests�of� shareholders�to�recommend�the� reappointment�of�KPMG.�Following�the� publication�of�the�FRC’s�Audit�Quality� Inspection�report�for�KPMG�in�June�2018,� I�and�the�Group�Finance�Director�met�with� KPMG’s�leadership�and�the�Committee� discussed�the�actions�their�firm�is�taking� to�improve�quality.�We�also�reviewed�the� assessment�of�the�audit�of�Prudential�and� introduced�changes�to�enhance�our�auditor� effectiveness�monitoring�process.�
Demerger activities In�2018�the�Committee�considered�a� number�of�key�areas�under�its�remit�in� the�context�of�the�demerger�process� including�the�progress�in�integrating� the�finance�functions�of�M&G�and� Prudential�UK�&�Europe�into�a�single� M&GPrudential�team�with�an�appropriate� control�environment�and�the�capabilities,� processes�and�systems�to�support�both�the� demerger�activity�and�the�future�ambitions� of�the�M&GPrudential�business.�
Committee members �— David�Law�(Chair)� �— Howard�Davies �— Philip�Remnant �— Alice�Schroeder �— Lord�Turner�
As�Chair�of�the�Committee,�I�have� responsibility�for�ensuring�the�Committee� operates�effectively.�In�advance�of�each� Committee�meeting,�I�speak�to�the�chairs�of� our�Material�Subsidiary�audit�committees� and�report�to�the�full�Board�after�each� Committee�meeting�on�the�main�matters� discussed.�We�have�also�held�private� sessions�as�a�Committee�to�discuss� performance�and�also�with�the�Group’s� Resilience�Director�to�discuss� whistleblowing�cases�and�their�resolution� and�had�private�discussions�with�GwIA� and�KPMG.�An�annual�review�of�our� effectiveness�was�carried�out�as�part�of�the� Board�evaluation,�described�in�more�detail� on�page�100.�The�Committee�was�found�to� be�functioning�effectively.
Goodwill and other intangible assets including deferred acquisition costs (DAC) The�Committee�received�information�to�enable�it�to�review�the�more�material�intangible�asset� balances.�This�included�the�recoverability�and�amortisation�of�the�DAC�balance�in�the�US�and� whether�there�had�been�any�indication�of�impairment�of�the�Group’s�distribution�rights�assets.� The�Committee�was�satisfied�that�there�was�no�impairment�of�the�Group’s�intangibles�at� 31�December�2018.�Further�information�is�contained�in�note�C5�of�the�IFRS�financial�statements.
FRC review of 2017 Annual Report and Accounts As�an�outcome�of�the�FRC’s�regular�oversight�role�on�company�reporting�through�its�review�of�the� Group’s�2017�Annual�Report�and�Accounts,�a�small�number�of�disclosure�improvements�have�been� made�in�the�2018�financial�statements�of�which�the�most�significant�is�to�demonstrate�better�the� linkage�between�movement�in�insurance�and�investment�contract�balances�reported�in�the�income� statement�and�the�notes�(see�note�C4.1�(a)(iii)).�The�FRC�notes�that�its�review�was�based�on�the� Group’s�2017�Annual�Report�and�Accounts�only�and�does�not�benefit�from�detailed�knowledge� of�the�Group’s�business�or�an�understanding�of�the�underlying�transactions.
External audit Review of effectiveness, non-audit services and auditor reappointment External�audit�effectiveness The�Group’s�external�auditor�is�KPMG�LLP�(KPMG)�and�oversight�of�the�relationship�with�them�is�
one�of�the�Committee’s�key�responsibilities.�The�Committee�reviews�the�effectiveness�of�the�audit� throughout�the�year�taking�into�account: �— The�detailed�audit�strategy�for�the�year�and�coverage�of�the�highlighted�risks; �— Group�materiality�and�how�that�is�applied�to�the�individual�business�units; �— Insight�around�the�key�accounting�judgements,�including�benchmarking,�and�the�way�KPMG� applied�constructive�challenge�and�professional�scepticism�in�dealing�with�management.�The� Committee�formally�met�with�the�Group�Lead�Partner�without�management�present�on�three� occasions�over�the�last�year; �— The�outcome�of�management’s�internal�evaluation�of�the�auditor�as�discussed�below;�and� �— Other�external�evaluations�of�KPMG,�with�a�focus�on�the�FRC’s�Annual�Quality�Review.
FRC’s Annual Audit Quality Review of KPMG During�June�2018,�the�FRC�published�the�principal�findings�arising�from�the�2017/18�inspection� of�KPMG�carried�out�by�its�Audit�Quality�Review�team.�The�FRC�noted�that�there�had�been�a� deterioration�in�quality�at�KPMG�and�it�was�placing�the�firm�under�increased�scrutiny.�The�audit� of�Prudential�plc�had�not�been�reviewed�by�the�FRC�as�part�of�the�2017/18�inspection.
The�Committee�has�responsibility�for�monitoring�auditor�independence�and�objectivity�and� is�supported�in�doing�so�by�the�Group’s�Auditor�Independence�Policy�(the�Policy).�The�Policy� is�updated�annually�and�approved�by�the�Committee.�It�sets�out�the�circumstances�in�which� the�external�auditor�may�be�permitted�to�undertake�non-audit�services�and�is�based�on�four� key�principles�which�specify�that�the�auditor�should�not: �— Audit�its�own�firm’s�work; �— Act�as�management�or�employees�for�the�Group; �— Have�a�mutual�or�conflicting�interest�with�the�Group;�or �— Be�put�in�a�position�of�being�an�advocate�for�the�Group.
The�Group�is�undergoing�a�period�of�unprecedented�change�with�both�the�demerger�of� M&GPrudential�from�Prudential�plc�being�considered�and�the�new�insurance�accounting�standard� (IFRS�17)�requiring�implementation�in�2022.�The�Committee�currently�believes�any�change�of�auditor� should�be�scheduled�to�limit�operational�disruption�during�such�a�period�of�change�given�the� significant�volume�of�work�to�be�delivered�by�the�Group’s�finance�teams�in�relation�to�the�demerger� and�preparing�to�implement�the�new�insurance�accounting�standard�in�2022.�The�Committee� considered�its�strategy�on�audit�tendering�in�February�2019,�concluding�that�with�the�change�in� implementation�date�for�IFRS�17�that�the�previously�proposed�timeline�for�appointing�a�new�auditor� should�also�be�extended�by�one�year�to�the�2023�year�end.�In�conducting�this�review,�the�Committee� concluded�that�it�would�be�appropriate�to�commence�a�competitive�tender�for�the�2023�audit�in�the� first�half�of�2020.�This�would�permit�the�current�auditors�to�complete�the�first�year�of�IFRS�17� adoption�and�reduce�the�‘self-review’�threat�to�any�of�the�audit�firms�conducting�advisory�services�on� implementation�of�finance�systems�for�the�new�accounting�standard�who�are�invited�to�tender�for�the� audit.�The�suggested�timeline�should�also�enable�the�Committee�to�take�into�account�any�proposals� arising�from�the�current�reviews�of�the�auditing�profession.�The�timing�remains�subject�to�the� Committee’s�normal�annual�review�of�auditor�performance�and�recommendation�to�shareholders.
In-depth reviews included consideration of the Jackson fixed annuity business and hedging programme. Reviews were also performed on the Group’s credit risk exposures, in the context of our assessment of the global credit cycle, and into our Asia business which included reviews of the product lifecycle in Singapore, persistency risk in Indonesia and fund management and modelling in our Hong Kong and Singapore businesses. During the year we continued to oversee the work required as a result of the continued applicability to the Group of the requirements under the Global Systemically Important Insurer (G-SII) regime, which included the approval of the 2018 Systemic Risk Management Plan, Liquidity Risk Management Plan and Recovery Plan.
Information security and privacy Information security and data privacy also received attention from the Committee in 2018. During the year we reviewed progress achieved on the implementation of our plans on cyber defence. The Committee received updates on implementation activity to ensure compliance with the EU’s General Data Protection Regulation
Committee members — Howard Davies (Chair) — David Law — Kai Nargolwala — Alice Schroeder (from March 2018) — Lord Turner — Tom Watjen (from November 2018)
Securities dealing and inside information Prudential�has�adopted�securities�dealing� rules�relating�to�transactions�by�Directors� on�terms�no�less�exacting�than�required�by� Appendix�10�to�the�HK�Listing�Rules�and� by�relevant�UK�regulations.�The�Directors� have�complied�with�these�rules�throughout� the�period.�
Requirements of Listing Rule 9.8.4 Information�to�be�included�in�the�Annual� Report�and�accounts�under�Listing�Rule� 9.8.4�may�be�found�as�follows: Listing Rule Description Page 9.8.4�(4) Details�of�long-term� incentive�schemes� required�by�Listing� Rule�9.4.3 9.8.4�(10)� Contracts�of�Significance� involving�a�Director
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�has�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�Group� 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.
Directors in office during the year Board of Directors 89 to 94
Shareholder information and note C10 of the notes on the Group financial statements
The�Committee’s�report�is�presented�in�the� following�sections: 1� �An�‘at�a�glance’�summary�of�the�Group’s� remuneration�arrangements�on�pages� 135�and�136; 2� �A�summary�of�our�Directors’� remuneration�policy�on�pages�137� to�141�which�describes�how�we�pay� Directors.�This�policy�was�approved� by�shareholders�at�the�2017�AGM; 3� �Our�Annual�report�on�remuneration�on� pages�142�to�165�which�describes�how� the�Committee�applied�the�Directors’� remuneration�policy�in�2018�and�the� decisions�it�has�made�in�respect�of�2019;� and 4� �Supplementary�information�on�pages� 166�to�169.
Implementing the Directors’ remuneration policy During�2018,�the�Committee�operated� all�elements�of�remuneration�in�line�with� the�Directors’�remuneration�policy,�which� received�the�support�of�90.7�per�cent� of�shareholders�at�the�AGM�in�May� 2017.�The�new�policy�simplified�pay� arrangements�by�reducing�the�number�of� annual�bonus�measures,�it�also�introduced� a�two-year�holding�period�on�long-term� incentive�awards�and�increased�share� ownership�guidelines.�
2018�operating�profit�and�Group�free� surplus�generation�exceeded�the�stretching� targets�established�by�the�Board,�with� operating�profit�6�per�cent�higher�and� Group�free�surplus�generation�14�per�cent� higher�than�2017�on�a�constant�exchange� rate�basis,�despite�lower�earnings�from� annuities�following�the�reinsurance� transaction�in�March�2018.�EEV�new� business�profit�was�11�per�cent�higher�than� prior�year�on�a�constant�exchange�rate� basis�reflecting�the�performances�outlined� in�the�business�performance�review,�which� delivered�a�result�approaching�the�Board� approved�targets.�All�of�our�business�units� achieved�target�remittances�levels�and,� although�lower�than�the�prior�period,�we� achieved�our�objective�to�balance�net� remittances�sufficient�to�cover�the�dividend� and�corporate�costs,�with�reinvestment�in� profitable�opportunities�within�the� business�units,�and�maintained�significant� cash�stock�at�the�centre.�The�business�unit� remittances�contributed�to�Group� cashflow,�which�approached�the�stretch� target�level.�The�Group�achieved�these� results�while�maintaining�appropriate�levels� of�capital�and�while�operating�within�the� Group’s�risk�framework�and�appetites.�The� Committee�believes�that�the�bonuses�it� awarded�to�Executive�Directors�for�2018� (between�84�per�cent�and�95�per�cent�of� executives’�maximum�AIP�opportunities)� appropriately�reflect�this�performance.
Performance�in�2018�has�continued�to� deliver�on�the�momentum�achieved�in� recent�years.�The�Group�delivered�total� operating�profits�of�£13,782�million�in�the� 2016,�2017�and�2018�financial�years.� Based�on�total�shareholder�return�(TSR)� and�this�strong�cumulative�operating� profit�performance�over�the�period,�the� Committee�determined�that�between� 55.5�and�62.5�per�cent�of�the�Prudential� Long�Term�Incentive�Plan�(PLTIP)�awards� made�to�Executive�Directors�in�2016� would�vest�(depending�on�the�business� unit).�These�awards�will�be�released�to� participants�in�April�2019.�
Changes to the executive team As�you�will�be�aware,�there�have�been� changes�to�Prudential’s�team�of�Executive� Directors�during�2018.�James�Turner�was� appointed�as�Group�Chief�Risk�Officer�in� March�2018.�Anne�Richards�stepped�down� from�the�Board�as�Chief�Executive,�M&G�in� August�2018.�Barry�Stowe�retired�as� Chairman�and�Chief�Executive�Officer�of� our�North�American�Business�Unit�(NABU)� and�stepped�down�from�the�Board�on� 31�December�2018.�He�was�succeeded�by� Michael�Falcon�who�was�appointed�to�the� Board�on�7�January�2019.�The�remuneration� decisions�arising�from�these�changes�were� disclosed�in�stock�exchange�and�website� announcements�when�they�took�place.� Further�information�can�be�found�in�the� Recruitment�arrangements�and�Payments� to�past�Directors�sections�of�this�report.�
Implementation in 2019 The�Committee�intends�to�continue�to� operate�within�the�current�Directors’� remuneration�policy�during�2019.�In� determining�remuneration�packages�for� 2019,�the�Committee�was�mindful�of�the� need�for�restraint�in�base�salary�increases.� All�Executive�Directors�received�a�salary� increase�of�2�per�cent�effective�1�January� 2019.�The�2019�salary�increase�budgets�for� other�employees�across�the�Group’s� business�units�were�between�2�per�cent�and� 8�per�cent.�No�changes�have�been�made�to� executives’�maximum�opportunities�under� either�the�annual�incentive�or�the�long-term� incentive�plans,�as�we�believe�remuneration� packages�provide�an�appropriate�balance� between�performance�over�the�short�and� the�long�term.
This approach benefits from maximising the community of interest between Executive Directors and other shareholders during the 2019 to 2021 period, improving simplicity by reducing the number of measures used in the PLTIP, and providing a set of metrics common to all Executive Directors by removing the different measures and weightings previously applied to Group executives, business unit Chief Executives and to the Group Chief Risk Officer.
In conclusion The Committee intends to seek shareholder approval for a new Directors’ remuneration policy at the 2020 AGM. During 2019, we will review this policy, taking into account the demerger, the views of our shareholders, evolving market practice in meeting the requirements of the new UK Corporate Governance Code, changing accounting standards and the broader regulatory and competitive environment. I trust that you will find this report a clear account of the way in which the Committee has implemented the Directors’ remuneration policy during 2018.
For business unit CEOs, awards vest based on TSR, business unit operating profit and balanced scorecard measures
For other Executive Directors, awards vest based on TSR, Group operating profit and balanced scorecard measures
Michael�Falcon2 Chairman�and�CEO,�Jackson�Holdings US$800,000 100% 40% 400% Mark�FitzPatrick Chief�Financial�Officer £760,000 175% 40% 250% John�Foley Chief�Executive,�M&GPrudential £797,000 180% 40% 250% Nic�Nicandrou Chief�Executive,�Prudential�Corporation�Asia HK$10,930,000 180% 40% 250% James�Turner Group�Chief�Risk�Officer £638,000 160% 40% 250% Mike�Wells Group�Chief�Executive £1,149,000 200% 40% 400%
Salary The�Committee�reviews�salaries�annually,�considering�factors�such�as: �— Salary�increases�for�other�employees�across�the�Group;� �— The�performance�and�experience�of�the�executive; �— The�size�and�scope�of�the�role; �— Group�and/or�business�unit�financial�performance;� �— Internal�relativities;�and �— External�factors�such�as�economic�conditions�and�market�data.
Benefits Executive�Directors�are�offered�benefits�which�reflect�their�individual� circumstances�and�are�competitive�within�their�local�market,�including: �— Health�and�wellness�benefits; �— Protection�and�security�benefits; �— Transport�benefits; �— Family�and�education�benefits; �— All�employee�share�plans�and�savings�plans;� �— Relocation�and�expatriate�benefits;�and �— Reimbursed�business�expenses�(including�any�tax�liability)�incurred� when�travelling�overseas�in�performance�of�duties.
In�setting�the�Directors’�remuneration�policy,�the�Committee�considers�a�range�of�factors�including: Statement of consideration of conditions elsewhere in the Group Across�the�Group,�remuneration�is�reviewed�regularly�with�the�intention�that�all�employees�are�paid�appropriately�in�the�context�of�their� local�market�and�given�their�individual�skills,�experience�and�performance.�Each�business�unit’s�salary�increase�budget�is�set�with� reference�to�local�market�conditions.�The�Committee�considers�salary�increase�budgets�in�each�business�unit�when�determining�the� salaries�of�Executive�Directors.
The operation of the Remuneration Committee Members Anthony�Nightingale�(Chair�of�the�Committee) Kai�Nargolwala Philip�Remnant Thomas�Watjen Fields�Wicker-Miurin�(member�since�3�September�2018)
Pension entitlements Pension�provisions�in�2018�were: Executive Director 2018 pension arrangement Life assurance provision
Annual bonus outcomes for 2018 Target setting For�the�financial�AIP�metrics�which�comprise�80�per�cent�of�the�bonus�opportunity�for�all�Executive�Directors�apart�from�the�Group�Chief� Risk�Officer,�the�performance�ranges�are�set�by�the�Committee�prior�to,�or�at�the�beginning�of,�the�performance�period.�These�ranges�are� based�on�the�annual�business�plans�approved�by�the�Board�and�reflect�the�ambitions�of�the�Group�and�business�units,�in�the�context�of� anticipated�market�conditions.�
M&GPrudential� Objectives�included�completing� the�sale�of�the�shareholder� annuity�portfolio�to�Rothesay� Life�Plc,�progressing�the� demerger�of�the�M&GPrudential� business�from�Prudential�plc,� continuing�to�build�positive� relationships�with�regulators,� leveraging�digital�opportunities,� developing�our�range�of� products�and�investment� offerings,�and�continued� development�of�executive� bench�strength.
Outcome of bonus assessments On�the�basis�of�the�strong�performance�of�the�Group�and�its�business�units�and�the�Committee’s�consideration�of�the�total�bonus�value� in�light�of�its�view�of�all�relevant�circumstances,�including�the�overall�contribution�of�the�executive,�behavioural,�conduct�and�risk� management�considerations,�the�Committee�determined�the�following�2018�AIP�awards.�Forty�per�cent�of�all�awards�are�deferred�into� shares�for�three�years: Executive Director Role salary1
John�Foley 50% 50%�(business�unit�target) Nic�Nicandrou4 50% 50%�(Group�target) Barry�Stowe 50% 50%�(business�unit�target) James�Turner5 50% 50%�(Group�target) Mike�Wells 50% 50%�(Group�target)
Long-term incentives awarded in 2018 2018 share-based long-term incentive awards As�detailed�in�the�Directors’�remuneration�policy,�approved�by�shareholders�at�the�2017�AGM,�all�long-term�incentive�awards�made� to�Executive�Directors�in�2018�were�granted�under�the�PLTIP.�The�vesting�of�these�awards�will�depend�on: �— Relative�TSR�(25�per�cent�of�award);�
Number of shares or ADRs subject to award* Face value of award†
Balanced scorecard of strategic measures Between�1�January�2017�and�31�December�2018,�the�Group�also�made�good�progress�towards�meeting�the�measures�under�the� sustainability�scorecard�used�for�the�2017�and�2018�PLTIP�awards: �— Capital measure – Solvency II operating capital generation�The�Group’s�Solvency�II�operating�capital�generation�between� 1�January�2017�to�31�December�2018�was�above�the�Plan�level�established�for�2017�PLTIP�awards.�The�Group’s�Solvency�II�operating� capital�generation�between�1�January�2018�and�31�December�2018�was�above�the�Plan�level�established�for�2018�PLTIP�awards.
Prudential TSR vs FTSE 100 and peer group average – total return per cent over 10 years to December 2018
The�information�in�the�table�below�shows�the�total�remuneration�for�the�Group�Chief�Executive�over�the�same�period: Group�Chief� Executive M�Tucker1 T�Thiam T�Thiam T�Thiam T�Thiam T�Thiam T�Thiam T�Thiam2 M�Wells M�Wells M�Wells M�Wells
Other�payments 308 – – – – – – – – – – –�
Group Chief Executive pay compared with employee pay To�further�increase�transparency�of�executive�remuneration�and�its�alignment�with�the�pay�of�other�employees,�we�are�publishing�our� CEO�pay�ratio�one�year�in�advance�of�the�disclosure�becoming�a�requirement�under�the�UK�Companies�(Miscellaneous�Reporting)� Regulations�2018.�The�employee�comparator�group�used�for�the�purpose�of�this�analysis�is�all�UK�employees.�This�includes�employees� in�M&GPrudential�and�Group�Head�Office�in�2018.�The�table�below�compares�the�Group�Chief�Executive’s�‘single�figure’�of�total� remuneration�to�that�received�by�three�representative�UK�employees�in�2018.�
Gender pay gap The�UK�business�entities�have�recently�reported�their�2018�UK�gender�pay�gap�data�and�details�can�be�found�on�the�Group’s�website� at�www.prudential.co.uk/responsibility.�There�has�been�narrowing�of�the�pay�gaps�in�some�areas�and�modest�increases�in�others.�While� we�have�made�progress,�the�gender�pay�gap�cannot�be�removed�overnight.�We�remain�focused�and�committed�to�closing�it�as�quickly�as� possible.�We�have�a�policy�and�carry�out�procedures�to�ensure�that,�where�men�and�women�perform�similar�roles,�they�are�paid�equally.� However,�the�gender�pay�gaps�demonstrate�the�demographic�profile�of�the�business�(and�the�financial�services�sector�more�widely):� there�is�a�greater�proportion�of�males�in�more�senior�and�front-office�roles�and�a�greater�proportion�of�females�in�more�junior,�support�and� back-office�non-finance�roles.�All�the�Group’s�businesses�are�continuing�to�work�on�initiatives�to�increase�the�proportion�of�women�in� senior�management�and�operating�roles�as�part�of�the�Group’s�strategic�focus�on�diversity�and�inclusion�as�described�in�the�diversity�and� inclusion�statement�on�our�website.�This�important�priority�is�reflected�in�the�Group’s�reward�structure�through�the�diversity�measure� attached�to�PLTIP�awards�granted�from�2017�onwards.
Chairman and Non-executive Director remuneration in 2018 Chairman’s fees The�Chairman’s�fee�was�reviewed�by�the�Committee�during�2018�and�increased�by�2.2�per�cent�to�£750,000�with�effect�from�1�July�2018� in�order�to�reflect�inflation.
Mark FitzPatrick John Foley Nic Nicandrou James Turner Barry Stowe Mike Wells
Date of contract Notice period to the Company Notice period from the Company
Exercise period Number of notional ADRs 25�October�to�24�November�2019 11,224 30�days�commencing�on�the�date�of�release�of�Prudential�plc’s�results�for�2019 30,938 30�days�commencing�on�the�date�of�release�of�Prudential�plc’s�results�for�2020 14,380
Payments to past Directors and payments for loss of office The�Committee’s�approach�when�exercising�its�discretion�under�the�policy�is�to�be�mindful�of�the�particular�circumstance�of�the�departure� and�the�contribution�the�individual�made�to�the�Group.
Directors’ remuneration report continued 2019 share-based long-term incentive awards The�Executive�Directors’�long-term�incentive�awards�will�continue�to�be�made�under�the�PLTIP�and�the�opportunity�levels�remain�the� same�as�the�2018�PLTIP�awards.�However,�as�highlighted�in�the�Annual�statement�from�the�Chairman�of�the�Remuneration�Committee� at�the�beginning�of�this�report,�changes�will�be�made�to�the�vesting�scale�and�measures�under�PLTIP�for�the�2019�awards�only.�The�vesting� of�these�awards�will�depend�on: �— Relative�TSR�(75�per�cent�of�award);�and
The�peer�group�for�2019�PLTIP�awards�is�set�out�below: Aegon AIA AXA�Equitable China�Taiping�Insurance Great�Eastern Lincoln�National Manulife MetLife Ping�An�Insurance Principal�Financial Prudential�Financial Sun�Life�Financial
Share Incentive Plan awards held in Trust at 1 Jan 2018 � (number�of
Notes to the Primary statements A Background and critical accounting policies A1 Basis of preparation and exchange rates 179 A2 New accounting pronouncements in 2018 180 A3 Accounting policies
B4 Tax charge 210 B5 Earnings per share 213 B6 Dividends 214
C Balance sheet notes C1 Analysis of Group statement of financial position by segment
C2 Analysis of segment statement of financial position by business type
C3 Assets and liabilities C3.1 Group assets and liabilities – measurement 221 C3.2 Debt securities 229 C3.3 Loans portfolio 235 C3.4 Financial instruments – additional information C3.4(a) Financial risk 236 C3.4(b) Derivatives and hedging 238 C3.4(c) Derecognition, collateral and offsetting 239
C4 Policyholder liabilities and unallocated surplus C4.1 Movement and duration of liabilities C4.1(a) Group overview 241 C4.1(b) Asia insurance operations 244 C4.1(c) US insurance operations 246 C4.1(d) UK and Europe insurance operations 248 C4.2 Products and determining contract liabilities C4.2(a) Asia 250 C4.2(b) US 253 C4.2(c) UK and Europe 259
Acquisition�costs�and�other�expenditure note (ii) B2 (8,855) (9,993) Finance�costs:�interest�on�core�structural�borrowings�of�shareholder-financed�businesses (410) (425) (Loss)�gain�on�disposal�of�businesses�and�corporate�transactions D1.1 (80) 223 Remeasurement�of�the�sold�Korea�life�business – 5
Profit�before�tax�attributable�to�shareholders B1.1 3,635 3,296 Total�tax�charge�attributable�to�policyholders�and�shareholders B4 (296) (1,580) Adjustment�to�remove�tax�(credit)�charge�attributable�to�policyholders’�returns (326) 674 Tax�charge�attributable�to�shareholders’�returns B4 (622) (906)
Other comprehensive income (loss): Items that may be reclassified subsequently to profit or loss Exchange�movements�on�foreign�operations�and�net�investment�hedges: Exchange�movements�arising�during�the�year A1 344 (404) Cumulative�exchange�gain�of�sold�Korea�life�business�recycled�through�profit�or�loss – (61) Related�tax 5 (5)
of�share-based�payments� – – 69 – – 69 – 69 Change�in�non-controlling�interests D1.2 – – – – – – 7 7 Movements�in�respect�of�option�to�
Reserves Profit�for�the�year – – 2,389 – – 2,389 1 2,390 Other�comprehensive�income: Exchange�movements�on�foreign� operations�and�net�investment� hedges,�net�of�related�tax – – – (470) – (470) – (470)
Net�unrealised�valuation�movements,� net�of�related�change�in� amortisation�of�deferred� acquisition�costs�and�related�tax – – – – 486 486 – 486
Shareholders’�share�of�actuarial�gains� and�losses�on�defined�benefit� pension�schemes,�net�of�related�tax – – 89 – – 89 – 89
Deferred�acquisition�costs�and�other�intangible�assets C5.2 11,923 11,011 Property,�plant�and�equipment C13 1,409 789 Reinsurers’�share�of�insurance�contract�liabilities C4.1(a)(iv) 11,144 9,673 Deferred�tax�assets C8.1 2,595 2,627 Current�tax�recoverable C8.2 618 613 Accrued�investment�income C1 2,749 2,676 Other�debtors C1 4,088 2,963 Investment�properties C14 17,925 16,497 Investment�in�joint�ventures�and�associates�accounted�for�using�the�equity�method 1,733 1,416
Equity�securities�and�portfolio�holdings�in�unit�trusts note (i) 214,733 223,391 Debt�securities note (i) C3.2 175,356 171,374 Derivative�assets C3.4 3,494 4,801 Other�investments note (i) 6,512 5,622
Cash flows from operating activities Profit�before�tax (being tax attributable to shareholders’ and policyholders’ returns) note (i) 3,309 3,970 Adjustments�to�profit�before�tax�for�non-cash�movements�in�operating�assets�and�liabilities: Other�non-investment�and�non-cash�assets� (3,503) (968) Policyholder�liabilities�(including�unallocated�surplus) (17,392) 44,877 Other�liabilities�(including�operational�borrowings) 4,344 3,360 Interest�income�and�expense�and�dividend�income�included�in�result�before�tax (7,861) (8,994)
Cash flows from investing activities Purchases�of�property,�plant�and�equipment C13 (289) (134) Proceeds�from�disposal�of�property,�plant�and�equipment 4 – Acquisition�of�businesses�and�intangibles note (v) (504) (351) Sale�of�businesses note (v) – 1,301
Balance at beginning of year Issue of debt Redemption of debt Modification of debt*
IFRS 15, ‘Revenue from Contracts with Customers’ The�Group�has�adopted�IFRS�15,�‘Revenue�from�Contracts�with�Customers’�from�1�January�2018.�This�standard�provides�a�single� framework�to�recognise�revenue�for�contracts�with�different�characteristics�and�overrides�the�revenue�recognition�requirements� previously�provided�in�other�standards.�The�contracts�excluded�from�the�scope�of�this�standard�include: �— Lease�contracts�within�the�scope�of�IAS�17,�’Leases’; �— Insurance�contracts�within�the�scope�of�IFRS�4,�‘Insurance�Contracts’;�and �— Financial�instruments�within�the�scope�of�IAS�39,�‘Financial�Instruments’.
Jackson’s�liabilities�for�insurance�contracts,�which�include�those�for�separate�accounts� (reflecting�separate�account�assets),�policyholder�account�values�and�guarantees� measured�as�described�in�note�C4.2�and�the�associated�deferred�acquisition�cost�asset� are�measured�under�US�GAAP�and�liability�adequacy�testing�is�performed�in�this�context.� Under�US�GAAP,�most�of�Jackson’s�products�are�accounted�for�under�Accounting� Standards�Codification�Topic�944,�Financial�Services�–�Insurance�of�the�Financial� Accounting�Standards�Board�(ASC�944)�whereby�deferred�acquisition�costs�are�amortised� in�line�with�expected�gross�profits.�Recoverability�of�the�deferred�acquisition�costs�in�the� balance�sheet�is�tested�against�the�projected�value�of�future�profits�using�current�estimates� and�therefore�no�additional�liability�adequacy�test�is�required�by�IFRS�4.�The�DAC� recoverability�test�is�performed�in�line�with�US�GAAP�requirements�which�in�practice� is�at�a�grouped�level�of�those�contracts�managed�together.
Except�for�acquisition�costs�of�with-profits�contracts�of�the�UK�regulated�with-profits� funds,�which�are�accounted�for�under�the�‘grandfathered’�FRS�27,�costs�of�acquiring�new� insurance�business�are�accounted�for�in�a�way�that�is�consistent�with�the�principles�of�the� ’grandfathered’�ABI�SORP�with�deferral�and�amortisation�against�margins�in�future� revenues�on�the�related�insurance�policies.�In�general,�this�deferral�is�shown�by�an�explicit� carrying�value�in�the�balance�sheet.�However,�in�some�Asia�operations�the�deferral�is� implicit�through�the�reserving�methodology.�The�recoverability�of�the�deferred�acquisition� costs�is�measured�and�is�deemed�impaired�if�the�projected�margins�(which�are�estimated� based�on�a�number�of�assumptions�similar�to�those�underlying�policyholder�liabilities)� are�less�than�the�carrying�value.�To�the�extent�that�the�future�margins�differ�from�those� anticipated,�then�an�adjustment�to�the�carrying�value�will�be�necessary�either�through� an�impairment�(if�the�projected�margins�are�lower�than�carrying�value)�or�through�a�change� in�the�amortisation�profile.
Determination of impaired value In�estimating�the�present�value�of�future�cash�flows�for�determining�the�impaired�value� of�instruments�held�at�amortised�cost,�the�Group�looks�at�the�expected�cash�flows�of�the� assets�and�applies�historical�loss�experience�of�assets�with�similar�credit�risks�that�has� been�adjusted�for�conditions�in�the�historical�loss�experience�which�no�longer�exist,�or�for� conditions�that�are�expected�to�arise.�The�estimated�future�cash�flows�are�discounted� using�the�financial�asset’s�effective�interest�rate�and�exclude�credit�losses�that�have�not�yet� been�incurred.�
Assets held at amortised cost When�assets�held�at�amortised�cost�are�subject�to�impairment�testing�estimated�future� cash�flows�are�compared�to�the�carrying�value�of�the�asset.�In�estimating�future�cash�flows,� the�Group�looks�at�the�expected�cash�flows�of�the�assets�and�applies�historical�loss� experience�of�assets�with�similar�credit�risks�that�has�been�adjusted�for�conditions�in�the� historical�loss�experience�which�no�longer�exist,�or�for�conditions�that�are�expected�to� arise.�The�estimated�future�cash�flows�are�discounted�using�the�financial�asset’s�original�or� variable�effective�interest�rate�and�exclude�credit�losses�that�have�not�yet�been�incurred.�
Accounting pronouncements endorsed by the EU but not yet effective IFRS 9, ‘Financial instruments: Classification and measurement’ In�July�2014,�the�IASB�published�a�complete�version�of�IFRS�9�with�the�exception�of�macro�hedge�accounting.�The�standard�became� mandatorily�effective�for�the�annual�periods�beginning�on�or�after�1�January�2018,�with�early�application�permitted�and�transitional� rules�apply.
When�adopted�IFRS�9�replaces�the�existing�IAS�39,�’Financial�Instruments�–�Recognition�and�Measurement’,�and�will�affect�the� following�three�areas: �— The classification and the measurement of financial assets and liabilities �IFRS�9�redefines�the�classification�of�financial�assets.�Based�on�the�way�in�which�the�assets�are�managed�in�order�to�generate�cash� flows�and�their�contractual�cash�flow�characteristics�(whether�the�cash�flows�represent�‘solely�payments�of�principal�and�interest’),� financial�assets�are�classified�into�one�of�the�following�categories:�amortised�cost,�fair�value�through�other�comprehensive�income� (FVOCI)�and�fair�value�through�profit�or�loss�(FVTPL).�An�option�is�also�available�at�initial�recognition�to�irrevocably�designate�a� financial�asset�as�at�FVTPL�if�doing�so�eliminates�or�significantly�reduces�accounting�mismatches.