Aberdeen Standard Singapore Equity U 60.44% 20 Collyer Quay, #01-01, Singapore 049319
Beneficial Life Insurance S.A. OS 50.99% 2963 Rue De La Chance Agbalepedogan, P.B. 1115, Lome, Togo
Centre Capital Non-Qualified Investors IV AIV Orion, LP LPI 27.47% 2711 Centreville Road, Suite 400, Wilmington, DE 19808, USA
CEP IV-A Chicago AIV LP LPI 23.93% 615 South Dupont Highway, Dover, DE 19901, USA
CITIC-CP Asset Management Co., Ltd. MI 26.95% Room 101-2, No.128 North Zhangjiabang Road, Pudong District, Shanghai, China
CITIC-Prudential Life Insurance Company Limited MI 50.00% 0507-0510, 1601-1616, East Tower, World Financial Centre, No.1 East Third Ring Middle Road, Chaoyang District, Beijing, 100020, China
Clairvest Equity Partners IV-A LP LPI 23.90% 22 St Clair Avenue East, Suite 1700, Toronto, ON M4T 2S3, Canada
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 303
U 71.97% Goodmorning Shinhan Tower 15F Yeoido Dong 23-2, Yeungdeungpo-gu, Seoul 150-010, Korea
OS 100.00% Unit 306-308, 3/F Azia Center, 1233 Lujiazui Ring Road, China (Shanghai) Pilot Free Trade Zone, China
Eastspring Investments Berhad OS 100.00% Level 25, Menara Hong Leong, No. 6 Jalan Damanlela, Bukit Damansara, 50490 Kuala Lumpur, Malaysia
Eastspring Investments Equity Income Fund U 20.89% Eastspring Investments Berhad, Level 22, Menara Prudential, Persiaran TRX Barat, 55188 Tun Razak Exchange, Kuala Lumpur, Malaysia
OS 100.00% 3rd Floor, 355 NEX, Rue du Savoir, Cybercity Ebene 72201, Mauritius
U 28.90% Eastspring Investments Limited, Marunouchi Park Bldg., 2-6-1 Marunochi, Chiyoda-ku, Tokyo, Japan 100-6905
Eastspring Investments North America Value Fund U 99.84% 26, Boulevard Royal, L-2449, Luxembourg
Eastspring Investments Services Pte. Ltd. OS 100.00% 10 Marina Boulevard, #32-01, Marina Bay Financial Centre, Singapore 018983
Eastspring Investments US Bond Fund U 27.84% 26, Boulevard Royal, L-2449, Luxembourg
First State China Focus Fund U 66.58% 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland
First State Global Property A U 52.26% 38 Beach Road, #06-11 South Beach Tower, Singapore 189767
GS Twenty Two Limited OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom
Hermitage Management LLC OS 100.00% 1 Corporate Way, Lansing, MI 48951, USA
Hyde Holdco 1 Limited OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom
ICICI Prudential Trust Limited OS 49.00% 12th Floor, Narain Manzil, 23, Barakhamba Road, New Delhi 110001, India
U 61.60% 8F, No 122, Tung Hua N. Rd. Taipei, Taiwan
iShares Core MSCI Europe U 21.26% State Street Fund Services (Ireland) Limited, 78 Sir John Rogerson's Quay, Dublin 2, Ireland iShares Fallen Angels High Yield Corporate Bond UCITS ETF Wing
Jackson Charitable Foundation Inc NSB 100.00% 1 Corporate Way, Lansing, MI 48951, USA
Jackson National Life (Bermuda) Limited OS 100.00% Cedar House, Hamilton, Bermuda
Jackson National Life Insurance Company of New York OS 100.00% 2900 Westchester Avenue, Suite 305, Purchase, NY 10577, USA
Lasalle Property Securities SICAV-FIS U 99.97% 11-13 Boulevard de la Foire, L-1528 Luxembourg
M&G Asia Property Trust U 99.97% 8 Marina Boulevard, 05-02 Marina Bay, Financial Centre Tower 1, Singapore, 018981
M&G Luxembourg European Strategic Value Fund U 50.24% 49 Avenue J.F. Kennedy, L-1855, Luxembourg
M&G Real Estate Asia Holding Company Pte. Ltd. OS 33.00% 10 Marina Boulevard, #31-03, Marina Bay, Financial Centre Tower 2, Singapore, 018983
Nomura Six Years Fixed Maturity Asia Pacific Emerging Market Bond Fund
U 33.30% 101 Tower, 30F, No. 7 Sec. 5, Xinyi Rd., Xinyi Dist., Taipei, Taiwan
PCA IP Services Limited OS 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong
PCA Life Assurance Co. Ltd. OS 99.79% 8th Floor, No.1 Songzhi Road, Taipei, 11047, Taiwan
PPM America Capital Partners III, LLC MI 60.50% 874 Walker Road, Suite C, Dover, DE 19904, USA
PPM CLO 3 Ltd. OS 100.00% PO Box 1093, Queensgate House, Grand Cayman KY1-1102, Cayman Islands
PPM Funds - PPM Core plus Fixed Income Fund MFS 100.00% 84 State Street, 6th Floor, Boston, MA 02109
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 307
PPM Holdings, Inc OS 100.00% 774 Walker Road, Suite C, Dover, DE 19904, USA
Pru Life Insurance Corporation of U.K. OS 100.00% 9th Floor, Uptown Place Tower 1, 1 East 11th Drive, Uptown Bonifacio, 1634 Taguig City, Metro Manila, Philippines
Pru Life UK Asset Management and Trust Corporation OS 100.00% 2/F., Uptown Parade 2, 36th Street, Uptown Bonifacio, 1634 Taguig City, Philippines
Prudence Foundation LBG 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong
Prudential (US Holdco 1) Limited OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom
Prudential Africa Services Limited OS 100.00% 5th Ngong Avenue, Nairobi, Kenya
Prudential Assurance Company Singapore (Pte) Limited OS 100.00% 30 Cecil Street, #30-01 Prudential Tower, Singapore 049712
Prudential Assurance Malaysia Berhad* OS 51.00% Level 20, Menara Prudential, Persiaran TRX Barat, 55188 Tun Razak Exchange, Kuala Lumpur, Malaysia
Prudential Corporation Holdings Limited OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom
Prudential Group Secretarial Services HK Limited OS 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong
Prudential International Treasury Limited OS 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong
Prudential IP Services Limited OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom
Prudential Life Insurance Ghana Limited OS 100.00% 35 North Street, Accra, Ghana
Prudential Mauritius Holdings Limited OS 100.00% 3rd Floor, 355 NEX, Rue du Savoir, Cybercity Ebene, 72201, Mauritius
Prudential Services Limited OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom
Prudential Services Singapore Pte. Ltd. OS 100.00% 1 Wallich Street, #19-01 Guoco Tower, Singapore 078881
PT. Prudential Life Assurance OS 94.62% Prudential Tower, JI. Jend. Sudirman Kav. 79, Jakarta 12910, Indonesia
PVFC Financial Limited OS 100.00% Suite 509, 5/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong
Reksa Dana Eastspring IDR Fixed Income Fund (NDEIFF) U 99.91% Prudential Tower, 23rd Floor, Jl. Jend. Sudirman Kav.79, Jakarta 12910, Indonesia
U 99.01% Graha CIMB Niaga 21st Floor. Jl Jend Sudirman Kav 58, Jakarta - 12190, Indonesia.
Rhodium Investment Fund U 99.98% 10 Marina Boulevard, #32-01, Marina Bay Financial Centre Tower 2, Singapore 018983
Scotts Spazio Pte. Ltd. OS 45.00% 30 Cecil Street #23-02 Prudential Tower, Singapore, 049712
Squire Reassurance Company LLC OS 100.00% 1 Corporate Way, Lansing, MI 48951, USA
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 309
Templeton Asian Growth Fund U 26.08% 8A, rue Albert Borschette, L-1246 Luxembourg
TMB Asset Management Co., Ltd. OS 65.00% 32nd FL, Abdulrahim Place, 990 Rama IV Rd, Silom, Bangrak, Bangkok 10500, Thailand
UOB Smart Global Healthcare U 35.44% 23A, 25th Floor, Asia Centre Building, 173/27-30, 32-33 South Sathorn Road, Thungmahamek, Sathorn, Bangkok 10120, Thailand
Non-current assets Investments in subsidiary undertakings 5 10,444 13,787 Amounts owed by subsidiary undertakings 2,000 –
Current assets Debtors: Amounts owed by subsidiary undertakings 6,352 7,520 Other debtors 4 6
Tax recoverable 66 53 Derivative assets 6 – 6 Pension asset 7 – 88 Cash at bank and in hand 54 28
The financial statements of the parent company on pages 310 to 318 were approved by the Board of Directors on 10 March 2020 and signed on its behalf.
Impact of initial application of IFRS 9 – – (12) (12) Total comprehensive income for the year Profit for the year – – 1,390 1,390 Actuarial gains recognised in respect of the defined benefit pension scheme – – 21 21 Foreign exchange translation differences due to change in presentation
* The 2018 comparative results have been re-presented from those previously published to reflect the change in the Company’s presentational currency from pounds sterling to US dollars (as described in note 2).
As the consolidated financial statements of the Group include the equivalent disclosures, the Company has also applied the exemptions available under FRS 101 in respect of the following disclosures: — IFRS 2 ‘Share Based Payments’ in respect of Group-settled share-based payments; — Disclosure required by IFRS 7 ‘Financial Instrument Disclosures’ and IFRS 13 ‘Fair Value Measurement’, except for the consequential amendments to IFRS 7 related to IFRS 9 which have not been adopted by the Group; — IFRS 15, ‘Revenue from Contracts with Customers’ in respect of revenue recognition; and — IAS 1, ‘Presentation of Financial Statements’ in respect of presenting comparative information on change in presentation currency.
Following the disposal of M&G plc, the Company and Group will manage its central cash resources and remittances primarily in US dollars. At 31 December 2019, terms of the majority of loans payable to and receivable from subsidiary undertakings previously denominated in pounds sterling were amended to reflect US dollars. From 31 December 2019, dividend income and dividend declared by the Company will be denominated in US dollars. Accordingly, as at 31 December 2019, the primary currency of the Company’s financing and investment activities is US dollars and the functional currency of the Company changed from pounds sterling to US dollars prospectively from that date. The Company’s assets, liabilities and equity were redenominated into US dollars using the spot exchange rate at 31 December 2019.
As a result of the change in functional currency, the Company has chosen to change its presentation currency to US dollars which is accounted for retrospectively. Prior periods have been restated into US dollars using closing rates at the relevant balance sheet date for assets, liabilities, share capital, share premium and other capital reserves. Items of total comprehensive income have been converted at the rate prevailing on the date of transaction, or at the average rate for the relevant year where this provides an equivalent measurement.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 313 3 Significant accounting policies
Amounts owed by subsidiary undertakings Amounts owed by subsidiary undertakings are shown at cost, less provisions. Provisions are determined using the expected credit loss approach under IFRS 9.
Derivatives Derivative financial instruments are held to manage certain macro-economic exposures. Derivative financial instruments are carried at fair value with changes in fair value included in the profit and loss account. Refer to Section 6.1 of the Group Chief Risk and Compliance Officer’s report for detail of the approach to market risk.
Financial Instruments Under IFRS 9, except for derivative instruments that are mandatorily classified as fair value through profit or loss, all of the financial assets and liabilities of the Company are classified as amortised cost. The Company assesses impairment on its loans and receivables using the expected credit loss approach. The expected credit loss on the Company’s loans and receivables, the majority of which represent loans to its subsidiaries, have been assessed by taking into account the probability of default on those loans. In all cases the subsidiaries are expected to have sufficient resources to repay the loan either now or over time (based on projected earnings). For loans recallable on demand the expected credit loss has therefore been limited to the impact of discounting the value of the loan between the balance sheet date and the anticipated recovery date. For loans with a fixed maturity date the expected credit loss has been determined with reference to the historic experience of loans with equivalent credit characteristics.
Foreign currency translation Transactions not denominated in the Company’s functional currency are initially recorded at the functional rate of currency prevailing on the date of the transaction. Monetary assets and liabilities not denominated in the Company’s functional currency, including borrowings that have been used to finance or provide a hedge against Group equity investments in overseas subsidiaries, are translated to the Company’s functional currency at year end exchange rates. The impact of these currency translations is recorded within the profit and loss account for the year.
Pensions The Company historically assumed a portion of the pension surplus or deficit of the Group’s main pension scheme, the Prudential Staff Pension Scheme (‘PSPS’). The Company’s portion of the surplus was transferred to M&GPrudential Services Limited at 30 June 2019. Up until that date, the Company applied the requirements of IAS 19 ‘Employee Benefits’ (as revised in 2011) for the accounting of its interest in the PSPS surplus or deficit. The key items are highlighted below.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 315 4 Reconciliation from the FRS 101 parent company results to the IFRS Group results
The parent company financial statements are prepared in accordance with FRS 101 and the Group financial statements are prepared in accordance with IFRS as issued by the IASB and endorsed by the EU.
Profit after tax Profit for the financial year of the Company (including dividends from subsidiaries) in accordance with FRS 101 and IFRS 12,255 1,390 Accounting policy difference* 15 7 Share in the IFRS result of the Group, net of distributions to the Company† (11,487) 2,622
Profit after tax of the Group attributable to shareholders in accordance with IFRS 783 4,019 $m $m
The profit for the financial year of the Company in accordance with IFRS includes dividends received in the year from subsidiary undertakings of $9,599 million for the year ended 31 December 2019 (2018: $1,996 million). Dividends received in 2019 included dividends from M&G plc prior to demerger of $5,566m and dividends from US subsidiaries of $2,000m in the form of non-current debt instruments.
* Includes amounts relating to foreign translation differences arising on the retranslation of reserves due to the change in the Company’s presentation currency
— Also on 15 October 2019, shares in Prudential (US Holdco 1) Limited were transferred to Prudential Corporation Asia Limited under a share-for-share exchange. There was no change to the Company’s total investment in subsidiary undertakings as a result of this transfer.
On 21 October 2019 the Company distributed its equity shareholding in its subsidiary M&G plc as a dividend in-specie. In accordance with IFRIC 17 the value of dividend in-specie recognised as distribution within the statement of changes in equity was the fair value of M&G plc at the date of distribution. As also required by IFRIC 17, the difference between the fair value of M&G plc on distribution and the previous carrying value of the Company’s investment in M&G plc of $3,649 million is recognised as gain within profit for the year.
Investments in subsidiaries held at 31 December 2019 have been assessed for impairment and no impairment was identified. Subsidiary undertakings of the Company at 31 December 2019 are listed in note D7 of the Group financial statements.
Cross-currency swap – – 6 – Inflation-linked swap – – – 539
The majority of Prudential staff in the UK are members of the Group’s pension schemes. The largest scheme up to the demerger of M&G plc was the Prudential Staff Pension Scheme (the Scheme) which is primarily a closed defined benefit scheme. Historically, all pension surplus and deficit were attributable to subsidiaries of M&G plc in line with the Group’s allocation policy with the exception of 30 per cent of the surplus attaching PSPS, which was allocated to Prudential plc. In preparation for the demerger of M&G plc in 2019, at 30 June 2019, the 30 per cent of surplus attaching to PSPS of $20 million was formally reallocated to M&GPrudential Services Limited. After the demerger of M&G plc, the Company no longer has any interest in the defined benefit pension scheme recognised on its balance sheet.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 317 8 Borrowings
Borrowings are repayable as follows: Notes (i) Further details on the core structural borrowings of the Company are provided in note C6.1 of the Group IFRS financial statements. (ii) The interests of the holders of the subordinated liabilities are subordinate to the entitlements of other creditors of the Company. (iii) These borrowings support a short-term fixed income securities programme.
In addition, during 2019, the Company agreed with the holders of two subordinated debt instruments to alter the terms and conditions of these instruments in exchange for an upfront fee and an increase in the coupon of the instruments. The upfront fee paid of $180 million has been recognised as an expense during the period within finance costs. The upfront fee and increase in coupon rates represent a significant change in the cash flows of each instrument and therefore, in accordance with IAS 39, has resulted in an extinguishment of the old debt and recognition of a new debt at fair value, resulting in a loss on revaluation of $208 million.
On 18 October 2019, the Company transferred six subordinated debt instruments to M&G plc to implement a rebalancing of debt prior to demerger. The debt transferred included the two instruments revalued on alteration of terms discussed above. The Company recognised a gain of $208 million on the transfer, reversing the loss on revaluation of debt instruments discussed above.
In October 2019 the Company repaid its £275 million bank loan due to Standard Chartered Bank.
12 Other information a Information on key management remuneration is given in note B2.3 of the Group financial statements. Additional information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report.
b Information on transactions of the directors with the Group is given in note D5 of the Group financial statements. c The Company employs no staff. d Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were $0.1 million (2018: $0.1 million) and for other services were $0.1 million (2018: $0.1 million). e In certain instances, the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment.
The second interim ordinary dividend for the year ended 31 December 2019, which was approved by the Board of Directors after 31 December 2019, is described in note B6 of the Group financial statements.
The�directors�are�responsible�for�keeping� adequate�accounting�records�that�are� sufficient�to�show�and�explain�the�parent� Company’s�transactions�and�disclose�with� reasonable�accuracy�at�any�time�the� financial�position�of�the�parent�Company� and�enable�them�to�ensure�that�its�financial� statements�comply�with�the�Companies� Act�2006.�They�have�general�responsibility� for�taking�such�steps�as�are�reasonably� open�to�them�to�safeguard�the�assets�of� the�Group�and�to�prevent�and�detect�fraud� and�other�irregularities.�
Prudential plc Annual�Report�2019� prudentialplc.com320 1 Our opinion is unmodified We�have�audited�the�financial�statements� of�Prudential�plc�(“the�company”)�for�the� year�ended�31�December�2019�which� comprise;�
Basis for opinion We�conducted�our�audit�in�accordance� with�International�Standards�on�Auditing� (UK)�(“ISAs�(UK)”)�and�applicable�law.� Our�responsibilities�are�described�below.� We�believe�that�the�audit�evidence� we�have�obtained�is�a�sufficient�and� appropriate�basis�for�our�opinion.� Our�audit�opinion�is�consistent�with� our�report�to�the�audit�committee.�
We�were�appointed�as�auditor�by�the� shareholders�in�October�1999.�The�period� of�total�uninterrupted�engagement�is�for� the�21�financial�years�ended�31�December� 2019.�We�have�fulfilled�our�ethical� responsibilities�under,�and�we�remain� independent�of�the�Group�in�accordance� with,�UK�ethical�requirements�including� the�Financial�Reporting�Council�(‘FRC’)� Ethical�Standard�as�applied�to�listed�public� interest�entities.�No�non-audit�services� prohibited�by�that�standard�were�provided.
2 Key audit matters: our assessment of risks of material misstatement Key�audit�matters�are�those�matters�that,�in�our�professional�judgment,�were�of�most�significance�in�the�audit�of�the�financial�statements� and�include�the�most�significant�assessed�risks�of�material�misstatement�(whether�or�not�due�to�fraud)�identified�by�us,�including�those� which�had�the�greatest�effect�on:�the�overall�audit�strategy;�the�allocation�of�resources�in�the�audit;�and�directing�the�efforts�of�the� engagement�team.�We�summarise�below�the�key�audit�matters,�in�decreasing�order�of�audit�significance,�in�arriving�at�our�audit�opinion� above,�together�with�our�key�audit�procedures�to�address�those�matters�and,�as�required�for�public�interest�entities,�our�results�from�those� procedures.�These�matters�were�addressed,�and�our�results�are�based�on�procedures�undertaken,�in�the�context�of,�and�solely�for�the� purpose�of,�our�audit�of�the�financial�statements�as�a�whole,�and�in�forming�our�opinion�thereon,�and�consequently�are�incidental�to�that� opinion,�and�we�do�not�provide�a�separate�opinion�on�these�matters.�
Our�procedures�included: Methodology choice We�assessed�the�methodology�for�selecting�assumptions�and�calculating� the�policyholder�liabilities.�This�included: �— Assessing�the�methodology�adopted�for�selecting�assumptions�by� applying�our�industry�knowledge�and�experience�and�comparing�the� methodology�used�against�industry�standard�actuarial�practice; �— Assessing�the�methodology�adopted�for�calculating�the�policyholder� liabilities�by�reference�to�the�requirements�of�the�accounting�standard� and�assessing�the�impact�of�current�year�changes�in�methodology�on� the�calculation�of�policyholder�liabilities; �— Comparing�changes�in�methodology�to�our�expectations�derived�from� market�experience;�and�
Valuation of insurance contract liabilities and investment contract liabilities with discretionary participation features (2019: $380,776 million, 2018: $496,805 million).
Our procedures for the Asia insurance segment also included: Historical comparison �— Evaluating�the�experience�analysis�in�respect�of�the�mortality�and� morbidity�assumptions�by�reference�to�actual�experience�in�order� to�assess�whether�this�supported�the�year-end�assumptions�adopted.�
Refer to page 118 (Audit Committee report), page 213 (accounting policy) and pages 244 to 261 (financial disclosures)
Subjective valuation The�area�that�involved�significant�audit�effort�and�judgement� in�2019�was�the�valuation�of�certain�level�2�and�level�3� positions�within�the�portfolio�of�financial�investments�held� at�fair�value.�These�included�unlisted�debt�securities�and� unlisted�funds�that�are�valued�by�reference�to�their�Net� Asset�Value�(‘NAV�funds’).�For�these�positions�a�reliable� third�party�price�was�not�readily�available�and�therefore� involved�the�application�of�expert�judgement�in�the� valuations�adopted.
Amortisation of US deferred acquisition costs (‘DAC’) (2019: $12,240 million, 2018: $11,113 million).
Refer to page 118 (Audit Committee report), page 211 (accounting policy) and pages 277 to 279 (financial disclosures)
Our sector experience We�challenged�the�reasonableness�of�the�selected�assumptions�relating� to�projected�investment�return�and�future�hedge�costs�based�on�our� understanding�of�developments�in�the�business.�Our�work�included� comparing�the�projected�investment�returns�against�the�investment� portfolio�mix�and�market�return�data.�Additionally,�we�evaluated� management’s�approach�for�deriving�the�assumption�for�future�hedge� costs�through�comparison�to�actuarial�market�practice,�and�corroborating� the�rationale�for�any�key�differences.
The risk is new in the current year. The risk relates to the parent company financial statements.
Low risk, high value The�carrying�amount�of�the�parent�company’s�investments� in�subsidiaries�represents�55�percent�(2018:�64�percent)�of� the�company’s�total�assets.�Their�recoverability�is�not�at�a� high�risk�of�significant�misstatement�or�subject�to�significant� judgement.�However,�due�to�their�materiality�in�the�context� of�the�parent�company�financial�statements,�this�is� considered�to�be�the�area�that�had�the�greatest�effect�on�our� overall�parent�company�audit.�
3 Our application of materiality and an overview of the scope of our audit Materiality�for�the�Group�financial� statements�as�a�whole�was�set�at� $298�million�(2018:�$446�million)� determined�with�reference�to�a�benchmark� of�IFRS�shareholders’�equity�(of�which� it�represents�1.5�per�cent�(2018:� 2.0�per�cent)).�We�consider�IFRS� shareholders’�equity�to�be�the�most� appropriate�benchmark�as�it�represents� the�residual�interest�that�can�be�ascribed� to�shareholders�after�policyholder�assets� and�corresponding�liabilities�have�been� accounted�for;�we�consider�that�this�is�the� most�appropriate�measure�for�the�size�of� the�business�and�that�it�provides�a�stable� measure�year�on�year.�We�compared� our�materiality�against�other�relevant� benchmarks�(total�assets,�total�revenue� and�profit�before�tax)�to�ensure� the�materiality�selected�was�appropriate� for�our�audit.�
We�subjected�the�Group’s�operations�to� audits�for�group�reporting�purposes�as� follows: Of�the�14�(2018:�16)�reporting�components� scoped�in�for�the�Group�audit,�we� subjected�10�(2018:�10)�to�full�scope�audits� for�group�reporting�purposes,�and�4� (2018:�5)�to�an�audit�of�account�balances.� The�components�for�which�we�performed� work�other�than�full�scope�audits�for�group� reporting�purposes�were�not�individually� significant�but�were�included�in�the�scope� of�our�group�reporting�work�as�they�did� present�specific�individual�audit�risks� that�needed�to�be�addressed�or�in�order� to�provide�further�coverage�over�the� Group’s�results.
The�Group�audit�team�held�a�global� planning�conference�with�component� auditors�to�identify�audit�risks�and�decide� how�each�component�team�should�address� the�identified�audit�risks.�The�Group�audit� team�instructed�component�auditors� as�to�the�significant�areas�to�be�covered,� including�the�relevant�risks�detailed�above� and�the�information�to�be�reported.� The�Group�audit�team�approved�the� component�materialities,�which�ranged� from�$40�million�to�$238�million�(2018:� $70�million�to�$146�million)�across�the� components,�having�regard�to�the�size� and�risk�profile�of�the�Group�across�the� components.�The�work�on�13�components� (2018:�15�components)�was�performed� by�component�auditors�and�work�on�the� remaining�component,�which�was�the� parent�company,�was�performed�by�the� Group�audit�team.�
The�Group�audit�team�visited�all� component�auditor�locations�that� performed�a�full-scope�audit.�Video�and� telephone�conference�meetings�were�also� held�with�these�component�auditors�and� those�that�performed�an�audit�of�account� balances.�At�these�visits�and�telephone� conference�meetings,�an�assessment�was� made�of�audit�risk�and�strategy,�the�findings� reported�to�the�Group�audit�team�were� discussed�in�more�detail,�key�working� papers�were�inspected�and�any�further� work�required�by�the�Group�audit�team�was� then�performed�by�the�component�auditor.
The�Group�team�also�routinely�reviews�the� audit�documentation�of�all�component� audits.�This�year�for�one�component�in� China,�a�joint�venture�of�the�Group,�we� visited�the�component�team�in�December� and�performed�a�preliminary�file�review.� As�the�Coronavirus�prevented�entry�to� the�country�post�year-end,�and�remote� access�to�audit�documentation�is� prohibited,�we�instead�extended�our� oversight�of�that�component�team� through�extended�telephone�discussions� and�expanded�reporting.
The�Senior�Statutory�Auditor,�in� conjunction�with�other�senior�staff�in�the� Group�and�component�audit�teams,�also� regularly�attended�Business�Unit�audit� committee�meetings�(these�were�held� at�a�regional�level�for�Asia)�and�participated� in�meetings�with�local�components�to� obtain�additional�understanding,�first�hand,� of�the�key�risks�and�audit�issues�at�a� component�level�which�may�affect�the� Group�financial�statements.
As�these�were�risks�that�could�potentially� cast�significant�doubt�on�the�Group’s�and� the�Company’s�ability�to�continue�as�a� going�concern,�we�considered�sensitivities� over�the�level�of�available�financial� resources�indicated�by�the�Group’s� financial�forecasts�taking�account�of� reasonably�possible�(but�not�unrealistic)� adverse�effects�that�could�arise�from�these� risks�individually�and�collectively�and� evaluated�the�achievability�of�the�actions� the�Directors�consider�they�would�take�to� improve�the�position�should�the�risks� materialise.�We�also�considered�less� predictable�but�realistic�second�order� impacts,�such�as�failure�of�counterparties� who�have�transactions�with�the�Group� (such�as�banks�and�reinsurers)�to�meet� commitments�that�could�give�rise�to�a� negative�impact�on�the�Group’s�financial� position�and�increased�illiquidity�which�also� adds�to�uncertainty�over�the�accessibility�of� financial�resources�and�may�reduce�capital� resources�as�valuations�decline�whilst� taking�into�consideration�developments�in� the�wider�economic�environment�reflecting� factors�such�as�the�impact�of�Brexit�and� other�such�macroeconomic�events.�
Disclosures of emerging and principal risks and longer‑term viability Based�on�the�knowledge�we�acquired� during�our�financial�statements�audit,�we� have�nothing�material�to�add�or�draw� attention�to�in�relation�to:�
�— we�have�identified�material� inconsistencies�between�the�knowledge� we�acquired�during�our�financial� statements�audit�and�the�directors’� statement�that�they�consider�that�the� annual�report�and�financial�statements� taken�as�a�whole�is�fair,�balanced�and� understandable�and�provides�the� information�necessary�for�shareholders� to�assess�the�Group’s�position�and� performance,�business�model�and� strategy;�or�
A dditional inform ation prudentialplc.com� Prudential plc Annual�Report�2019 329 6 We have nothing to report on the other matters on which we are required to report by exception Under�the�Companies�Act�2006�we�are� required�to�report�to�you�if,�in�our�opinion: �— Adequate�accounting�records�have�not� been�kept�by�the�parent�company,�or� returns�adequate�for�our�audit�have�not� been�received�from�branches�not�visited� by�us;�or�
The EEV basis results have been prepared in accordance with the EEV Principles issued by the European Insurance CFO Forum in 2016. The EEV Principles provide consistent definitions, a framework for setting actuarial assumptions and an approach to the underlying methodology and disclosures. All results are stated net of tax and converted using actual exchange rates (AER) unless otherwise stated. AER are actual historical exchange rates for the specific accounting period.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 333
Continuing operations: Operating profit from long-term business and asset management 6,138 1,782 7,920 8,898 Other income and expenditure note (i) (923) (969) Restructuring costs note (ii) (92) (63)
Attributable to: Equity holders of the Company: From continuing operations 4,152 5,576 From discontinued operations (4,797) 546
Notes (i) EEV basis other income and expenditure represents the post-tax IFRS basis results for other operations (including interest costs on core structural borrowings, corporate expenditure for head office functions in London and Hong Kong, the Group’s treasury function and Africa operations) less the unwind of expected margins on the internal management of the assets of the covered business (as explained in note 14(i)(g)).
(ii) Restructuring costs include group-wide costs incurred for IFRS 17 implementation in 2019 from continuing operations.
Operating profit (loss) from continuing operations 6,107 1,777 (979) 6,905 6,905 7,866
Non-operating profit (loss) from continuing operations 1,962 (3,802) (904) (2,744) (2,744) (2,286)
(Loss) profit for the year from discontinued operations note (iv) – – – – (4,797) (4,797) 546
Profit (loss) for the year 8,069 (2,025) (1,883) 4,161 (4,797) (636) 6,126
Foreign exchange movements on operations 409 – 34 443 223 666 (1,574) Intra-group dividends and investment in
Net increase (decrease) in shareholders’ equity 7,227 (2,367) 3,750 8,610 (17,301) (8,691) 2,935
Shareholders’ equity at end of year 39,235 16,342 (866) 54,711 – 54,711 63,402
Representing: Shareholders’ equity at end of year 39,235 16,342 (866) 54,711 – 54,711 63,402
Shareholders’ equity per share at end of year note (iii) 1,508¢ 628¢ (33)¢ 2,103¢ – 2,103¢ 2,445¢
Shareholders’ equity per share at beginning of year note (iii) 1,234¢ 722¢ (178)¢ 1,778¢ 667¢ 2,445¢ 2,337¢
(ii) Other movements include reserve movements in respect of the shareholders’ share of actuarial gains and losses on defined benefit pension schemes that were transferred to M&G plc at 30 June 2019, share capital subscribed, share-based payments, treasury shares and intra-group transfers between operations that have no overall effect on the Group’s shareholders’ equity.
(iii) Based on the number of issued shares at the end of 2019 of 2,601 million shares (end of 2018/beginning of 2019: 2,593 million shares, beginning of 2018: 2,587 million shares). (iv) On 21 October 2019, the Group completed the demerger of its UK and Europe operations (M&G plc), resulting in two separately listed companies. The demerger dividend in specie of M&G plc has been recorded at the fair value of M&G plc at the date of the demerger. The difference between the fair value and its carrying value, together with profit earned up to the date of the demerger have been recorded as loss for the year from the discontinued UK and Europe operations.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 335
Policyholder liabilities (net of reinsurers’ share) and unallocated surplus of with-profits funds (376,572) (527,273) Shareholders’ accrued interest in the long-term business 35,234 41,434
The supplementary information on pages 333 to 357 was approved by the Board of Directors on 10 March 2020.
The EEV basis results have been prepared in accordance with the EEV Principles issued by the European Insurance CFO Forum in 2016. The EEV Principles provide consistent definitions, a framework for setting actuarial assumptions and an approach to the underlying methodology and disclosures. Where appropriate, the EEV basis results include the effects of adoption of EU-endorsed IFRS. The Directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles.
— The shareholders’ total net worth in excess of required capital (free surplus). Free surplus is defined in note 11.
Required capital For shareholder-backed business, the following capital requirements apply for long-term business: — Asia: the level of required capital has been set to an amount at least equal to local statutory notification requirements. For China JV life operations, the level of required capital follows the approach for embedded value reporting issued by the China Association of Actuaries (CAA) reflecting the China Risk Oriented Solvency System (C-ROSS) regime; and
Operating profit from long-term business and asset management 7,920 8,898 (11)% 8,880 (11)%
Short-term fluctuations in investment returns 3,254 (3,335) (3,333) Effect of changes in economic assumptions (1,868) 416 417 Impact of NAIC reform, hedge modelling and other related changes in the US (3,457) – – Mark-to-market value movements on core structural
Notes (i) The movement in new business contribution from $4,707 million for 2018 to $4,405 million for 2019 from continuing operations is analysed as follows: Asia $m
Foreign exchange movement (17) – (17) Effect of changes in interest rates and other economic assumptions (35) (155) (190) Impact of US EEV hedge modelling enhancements note 7 – (114) (114) Sales volume, business and product mix and other items 97 (78) 19
(ii) Asia new business contribution is analysed as follows: AER CER
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 339 4 Operating profit from long-term business in force
(iii) In Asia, the 2019 effect of experience variances and other items of $285 million is driven overall by positive mortality and morbidity experience in a number of local business units, together with positive persistency variance from participating and health and protection products.
US Investment return related experience on fixed income securities note (ii) (243) 80 Investment return related impact due to changed expectation of profits on in-force variable annuity business in future periods based on current period separate account return, net of related hedging activity and other items note (iii) 1,119 (2,057)
Notes (i) For 2019, the credit of $2,451 million mainly represents the increase in bond and equity values in Hong Kong and higher than expected investment returns in Singapore, Thailand and Taiwan. The small losses in Indonesia and Malaysia represent bond gains being more than offset by lower than expected equity returns. (ii) The net result relating to fixed income securities reflects a number of offsetting items as follows: – The impact on portfolio yields of changes in the asset portfolio in the year; – Credit experience versus the longer-term assumption (which in 2019 was positive); and – The difference between actual realised gains and losses and the amortisation of interest-related realised gains and losses that is recorded within operating profit. (iii) This item reflects the net impact of: – Changes in projected future fees and future benefit costs arising from the difference between the actual growth in separate account asset values of 24.1 per cent and that assumed of 4.8 per cent (geometric) (2018: actual growth of negative 5.4 per cent compared to assumed growth of positive 5.3 per cent (geometric)); and – Related hedging activity arising from realised and unrealised gains and losses on equity and interest rate derivatives compared to the updated expected long-term allowance for hedging costs recorded in operating profit, and other items.
Notes (i) In 2019, the negative effect of $(667) million largely arises from movements in long-term interest rates, resulting in lower assumed fund earned rates in Hong Kong, Thailand and
(ii) In 2019, the charge of $(1,556) million mainly reflects the effect of a decrease in the assumed separate account return, following the 80 basis points decrease in the US 10-year treasury yield over the year, partially offset by the increase in US equity risk premium as described in note 15(i), resulting in lower projected fee income and an increase in projected benefit costs for variable annuity business.
7 Impact of NAIC reform, hedge modelling and other related changes in the US
Total EEV impact of NAIC reform, hedge modelling and other related changes in the US (3,457)
Notes (i) The National Association of Insurance Commissioners (NAIC) has implemented changes to the US statutory reserve and capital framework for variable annuities, effective from 1 January 2020. Jackson has chosen to early adopt the changes at 31 December 2019 for US statutory reporting and the Group has updated EEV accordingly. The impact on Group EEV is a $37 million benefit, with the increase in the cost of capital from higher capital requirements more than offset by the timing benefit from releasing policyholder liabilities earlier than previously anticipated. The impact on the various components of EEV as at 31 December 2019 is shown below. As discussed in note 14(i)(e), the below is based on a capital requirement of 250 per cent of the risk-based capital company action level and so the impact on free surplus is not equal to the effect on Jackson’s US statutory position.
The initial impact on EEV is shown as a reduction in the value of in-force business as at 1 January 2019, and so the unwind of those cash flows over the year reduces the expected transfer to net worth and hence operating free surplus generation by $(903) million. This leads to an equal and offsetting benefit in short-term fluctuations as the excess of the actual cost of hedging in 2019 over the expected cost falls accordingly. There is no impact on total free surplus generation for 2019. See note 11 for the US free surplus results.
There were no changes to Jackson’s hedging philosophy during 2019, which continues to focus on the underlying economics of the products whilst managing the volatility in the statutory position. The revised allowance for the long-term cost of hedging is expected to give a more refined indication of the expected long-term cost of the dynamic hedging programme under EEV economic assumptions, albeit it is not intended to reflect the exact derivatives held at a given point in time. In common with other long-term assumptions, the allowance for the expected cost of hedging in EEV will be kept under review, particularly in light of future experience under the new variable annuity statutory capital regime.
In addition to the enhancement to the cost of hedging described above, a number of other changes have been made to EEV reporting following the NAIC reform, coupled with the objective of bringing the EEV free surplus more in line with the US statutory basis of reporting. The total impact of these changes as recorded in EEV non-operating profit was $(261) million. A reconciliation of EEV free surplus to surplus under the Group’s LCSM capital measure at 31 December 2019 by segment is provided in note I(i) in the additional financial information.
Holding company cash and short-term investments note (i) (2,207) – (2,207) (4,121) – (4,121)
Net core structural borrowings of shareholder-financed businesses note (iv) 3,387 633 4,020 5,640 233 5,873
(ii) In May 2019, the Company redeemed its £400 million 11.375 per cent subordinated notes. (iii) In October 2019, Prudential plc transferred subordinated debt to M&G plc as part of the demerger. In addition to the subordinated debt held at 31 December 2018 as shown in the table above, the debt transferred included the further £300 million 3.875 per cent subordinated debt raised in July 2019. (iv) The movement in the value of core structural borrowings includes foreign exchange effects for pounds sterling denominated debts, which are included in ‘Exchange movements on foreign operations’. The movement in the mark-to-market value adjustment can be analysed as follows: Mark-to-market value adjustment at beginning of year 233 1,005 Mark-to-market value adjustment on subordinated debt substituted to M&G plc at fair value at beginning of year (82) – Charge (credit) in respect of mark-to-market movements included in the income statement* 466 (733) Effect of foreign exchange movements for pounds sterling denominated debts 16 (39)
Prudential plc Annual Report 2019 prudentialplc.com342 9 Gain (loss) attaching to corporate transactions
Gain on disposals note (i) 178 – Other corporate transactions note (ii) (385) (100)
Prudential Life Insurance Company, and the disposal of Prudential Vietnam Finance Company Limited, a wholly owned subsidiary that provides consumer finance. (ii) In 2019, other corporate transactions undertaken by continuing operations resulted in an EEV loss of $(385) million (2018: $(100) million). This primarily reflects costs related to the demerger of M&G plc from Prudential plc.
10 Analysis of movement in total net worth and value of in-force for long-term business 2019 $m
Operating profit from continuing operations 2,617 548 3,165 4,475 7,640 Non-operating profit (loss) from continuing operations (568) 262 (306) (1,534) (1,840)
Shareholders’ equity at end of year note 5,395 6,891 12,286 41,893 54,179
Asia Shareholders’ equity at beginning of year 2,202 2,904 5,106 25,879 30,985
Existing business – transfer to net worth 1,914 (320) 1,594 (1,594) – Expected return on existing business note 4 80 67 147 1,395 1,542 Changes in operating assumptions and
Operating profit based on longer-term investment returns 1,522 104 1,626 4,262 5,888
Intra-group dividends and investment in operations (1,108) – (1,108) – (1,108)
Shareholders’ equity at end of year 3,624 3,182 6,806 31,037 37,843
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 343 2019 $m
Existing business – transfer to net worth 1,167 (293) 874 (874) – Expected return on existing business note 4 61 92 153 575 728 Changes in operating assumptions and
Intra-group dividends and investment in operations (525) – (525) – (525)
Net value of in-force business 31,037 10,856 41,893 25,879 12,824 38,703 * The time value of options and guarantees (TVOG) arises from the variability of economic outcomes in the future and is, where appropriate, calculated as the difference between an average outcome across a range of economic scenarios, calibrated around a central scenario, and the outcome from one central economic scenario, as described in note 14(i)(d). The TVOG and the outcome from the central economic scenario are linked; as the central economic scenario is updated for market conditions and the outcome reflects more or less of the guaranteed benefit payouts and associated product charges, there will be consequential changes to the TVOG.
Operating free surplus generated before impact of US EEV hedge modelling enhancements and restructuring costs 1,772 2,028 3,800 (923) 2,877
Impact of US EEV hedge modelling enhancements note 7 – (903) (903) – (903)
Free surplus generated in the year 2,936 (643) 2,293 (1,427) 2,512 3,378
Net cash flows paid to parent company note (h) (950) (525) (1,475) 2,159 (684) – Demerger dividend in specie of M&G plc – – – – (7,379) (7,379) External dividends – – – (1,634) – (1,634) Foreign exchange movements on foreign operations, timing differences and other items note (i) (357) 185 (172) 810 (426) 212
Net movement in free surplus 1,629 (983) 646 (92) (5,977) (5,423) Balance at beginning of year 2,591 2,760 5,351 3,831 5,977 15,159
Free surplus generated in the year 1,013 748 1,761 (1,013) 2,624 3,372
Net cash flows to parent company note (h) (916) (452) (1,368) 2,259 (891) – External dividends – – – (1,662) – (1,662) Foreign exchange movements, timing differences and other items note (i) (847) (144) (991) 1,847 (58) 798
Notes (a) Operating free surplus generated by Asia insurance and asset management operations before restructuring costs can be analysed as follows: AER CER AER CER
Operating free surplus generated from in-force life business 2,141 2,003 2,004 7% 7%
(f) Non-operating items include short-term fluctuations in investment returns, the effect of changes in economic assumptions for long-term business, the impact of NAIC reform, hedge modelling and other related changes in the US (as described in note 7) and the effect of corporate transactions (as described in note 9). In particular, for other business it includes $(383) million for demerger costs (post-tax). In addition, for 2018 this included the impact in the US of changes to RBC factors following the US tax reform, which were formally approved by the NAIC in June 2018.
(g) Free surplus generated from the discontinued UK and Europe operations in 2019 includes profit for the period of ownership up to the demerger in October 2019 and fair value adjustment at the date of the demerger.
(h) Net cash flows to parent company for Asia operations reflect the flows as included in the holding company cash flow.
Mark-to-market value movements on Jackson assets backing surplus and required capital – (127) (127) – – (127) Other items (including intra-group loans and other intra-group transfers between operations and other non-cash items) * (780) (20) (800) 2,017 319 1,536 * The Group total for other items in 2018 included the effect of the net issuance of $1.5 billion of subordinated debt.
(j) Free surplus from continuing operations at 31 December 2019 represents: 2019 $m
The discounted value of in-force business and required capital for the Group’s continuing long-term business operations can be reconciled to the 2019 and 2018 total emergence of free surplus as follows: $m $m
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 347
The table below shows how the VIF generated by the in-force business and the associated required capital for the Group’s continuing long-term business operations is modelled as emerging into free surplus over future years.
The sensitivities shown below are for the impact of instantaneous (and permanent) changes on the embedded value of long-term business operations and include the combined effect on the value of in-force business and net assets (including derivatives) held at the valuation dates indicated. The results only allow for limited management actions such as changes to future policyholder bonuses where applicable. If such economic conditions persisted, the financial impacts may differ to the instantaneous impacts shown below. In this case management could also take additional actions to help mitigate the impact of these stresses. No change in the assets held at the valuation date is assumed when calculating sensitivities. If the changes in assumptions shown in the sensitivities were to occur, the effect shown below would be recorded within two components of the profit analysis for the following year, namely the effect of changes in economic assumptions and short-term fluctuations in investment returns. In addition, for changes in interest rates, the effect shown below for the US (Jackson) would also be recorded within mark-to-market value movements on Jackson assets backing surplus and required capital, which are taken directly to shareholders’ equity. In addition to the sensitivity effects shown below, the other components of the profit for the following year would be calculated by reference to the altered assumptions, for example new business contribution and unwind of discount and other expected returns, together with the effect of other changes such as altered corporate bond spreads.
Interest rates and consequential effects – 1% increase (46) 207 161 (270) 126 (144) Interest rates and consequential effects – 0.5% decrease (121) (123) (244) 77 (88) (11)
— 5 per cent proportionate decrease in base mortality (ie increased longevity) and morbidity rates.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 349
(i) Methodology (a) Covered business The EEV basis results for the Group are prepared for ‘covered business’ as defined by the EEV Principles. Covered business represents the Group’s long-term insurance business (including the Group’s investments in joint venture and associate insurance operations), for which the value of new and in-force contracts is attributable to shareholders.
(b) Valuation of in-force and new business The EEV basis results are prepared incorporating best estimate assumptions about all relevant factors including levels of future investment returns, persistency, mortality, morbidity and expenses, as described in note 15(iii). These assumptions are used to project future cash flows. The present value of the projected future cash flows is then calculated using a discount rate, as shown in note 15(i), which reflects both the time value of money and all other non-diversifiable risks associated with the cash flows that are not otherwise allowed for.
New business In determining the EEV basis value of new business, premiums are included in projected cash flows on the same basis of distinguishing regular and single premium business as set out in the Group’s new business sales reporting.
New business contribution represents profit determined by applying operating and economic assumptions as at the end of the period. New business profitability is a key metric for the Group’s management of the development of the business. In addition, new business margins are shown by reference to annual premium equivalents (APE) and the present value of new business premiums (PVNBP). These margins are calculated as the percentage of the value of new business profit to APE and PVNBP. APE is calculated as the aggregate of regular premiums on new business written in the period and one-tenth of single premiums. PVNBP is calculated as the aggregate of single premiums and the present value of expected future premiums from regular premium new business, allowing for lapses and the other assumptions made in determining the EEV new business contribution.
(c) Cost of capital A charge is deducted from the embedded value for the cost of locked-in required capital supporting the Group’s long-term business. The cost is the difference between the nominal value of the capital held and the discounted value of the projected releases of this capital, allowing for post-tax investment earnings on the capital.
US (Jackson) The principal financial options and guarantees in Jackson are associated with the variable annuity and fixed annuity lines of business.
In deriving the time value of financial options and guarantees, management actions in response to emerging investment and fund solvency conditions have been modelled. Management actions encompass, but are not confined to, investment allocation decisions, levels of regular and final bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance with assumed management actions applying in the emerging investment and fund solvency conditions. In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options available to management.
The time value of financial options and guarantees reflects how the market value of the assets (including derivatives) held to manage the liability portfolios are expected to vary across the range of economic scenarios considered. For instance, in some economic scenarios the derivative portfolio may project gains in excess of the cost of the underlying guarantees on an EEV basis.
(e) Level of required capital In adopting the EEV Principles, Prudential has based required capital on the applicable local statutory regulations, including any amounts considered to be required above the local statutory minimum requirements to satisfy regulatory constraints.
For shareholder-backed businesses, the following capital requirements for long-term business apply: — Asia: the level of required capital has been set to an amount at least equal to local statutory notification requirements. For China JV life operations, the level of required capital follows the approach for embedded value reporting issued by the China Association of Actuaries (CAA) reflecting the C-ROSS regime; and
— US: the level of required capital has been set at 250 per cent of the risk-based capital (RBC) required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL).
Since financial options and guarantees are explicitly valued under the EEV methodology, risk discount rates exclude the effect of these product features.
Market risk allowance The allowance for market risk represents the beta multiplied by an equity risk premium.
Product level betas reflect the product mix at the valuation date to produce appropriate betas and risk discount rates for each major product group.
The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults, as shown in note 15(i)(b). In determining this allowance, a number of factors have been considered, in particular including: — How much of the credit spread on debt securities represents an increased short-term credit risk not reflected in the risk margin reserve long-term default assumptions and how much is liquidity premium (which is the premium required by investors to compensate for the risk of longer-term investments that cannot be easily converted into cash at the fair market value). In assessing this effect, consideration has been given to a number of approaches to estimate the liquidity premium by considering recent statistical data; and
The level of the additional allowance is assessed at each reporting period to take account of prevailing credit conditions and as the business in force alters over time. The additional allowance for variable annuity business has been set at one-fifth of the non-variable annuity business to reflect the proportion of the allocated holdings of general account debt securities.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 353
For the purpose of determining the long-term returns for debt securities of Jackson for fixed annuity and other general account business, a risk margin reserve charge is included, which reflects the expected long-term rate of default based on the credit quality of the portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold bonds; for equity-related investments, a long-term rate of return is assumed (as disclosed in note 15(i)(b)), which reflects the aggregation of risk-free rates and the equity risk premium at the end of the reporting period. For variable annuity separate account business, operating profit includes the unwind of discount on the opening value of in-force business adjusted to reflect projected rates of return at the end of the reporting period, with the excess or deficit of the actual return recognised within non-operating results, together with related hedging activity variances.
(c) Unwind of discount and other expected returns The Group’s methodology in determining the unwind of discount and other expected returns is by reference to the value of in-force business at the beginning of the year (adjusted for the effect of changes in economic and operating assumptions in the current year) and required capital and surplus assets.
(f) Effect of changes in economic assumptions Movements in the value of in-force business at the beginning of the year caused by changes in economic assumptions, net of the related changes in the time value of financial options and guarantees, are recorded in non-operating results.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 355
Note Assumed new business spread margins are as follows: January to June issues
(a) Asia — The stochastic cost of guarantees is primarily of significance for the Hong Kong, Malaysia, Singapore, Taiwan and Vietnam businesses; — The principal asset classes are government bonds, corporate bonds and equity; — Interest rates are projected using a stochastic interest rate model calibrated to the current market yields; — Equity returns are assumed to follow a log-normal distribution; — The corporate bond return is calculated based on a risk-free return plus a mean-reverting spread; — The volatility of equity returns ranges from 18 per cent to 35 per cent for both years; and — The volatility of government bond yields ranges from 1.1 per cent to 2.0 per cent for both years.
Expense assumptions Expense levels, including those of the service companies that support the Group’s long-term business, are based on internal expense analysis and are appropriately allocated to acquisition of new business and renewal of in-force business. For mature business, it is Prudential’s policy not to take credit for future cost reduction programmes until the actions to achieve the savings have been delivered. An allowance is made for short-term required expenses that are not representative of the longer-term expense loadings of the relevant businesses. At 31 December 2019 the allowance held for these costs across the Group was $313 million, mainly arising in Asia. Expense overruns are reported where these are expected to be short-lived, including businesses that are growing rapidly or are sub-scale.
Corporate expenditure, which is included in other income and expenditure, comprises expenditure of the Group head office function in Hong Kong that is not allocated to the covered business or asset management, primarily for corporate related activities that are charged as incurred, and expenditure of the Group head office function in London, together with restructuring costs incurred across the Group.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 357 16 Insurance new business
Notes (a) The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profit for shareholders.
Statement of directors’ responsibilities in respect of the European Embedded Value (EEV) basis supplementary information The directors have chosen to prepare supplementary information in accordance with the European Embedded Value Principles issued by the European Insurance CFO Forum in 2016 (‘the EEV Principles’) using the methodology and assumptions set out in the Notes on the EEV basis results.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 359
Our responsibility is to audit, and express an opinion on, the supplementary information in accordance with the terms of our engagement and in accordance with International Standards on Auditing (UK). Those standards require us to comply with the Financial Reporting Council’s Ethical Standard.
The purpose of this report and restrictions on its use by persons other than the Company This report is made solely to the Company in accordance with the terms of our engagement. Our audit work has been undertaken so that we might state to the Company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our audit work, for this report, or for the opinions we have formed.
Philip Smart for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants London
(v) Asia operations – analysis of adjusted IFRS operating profit based on longer-term investment returns by business unit 372
(i) Reconciliation of adjusted IFRS operating profit based on longer-term investment returns to profit before tax from continuing operations
For regulated insurance entities, the available and required capital included in the LCSM measure for Hong Kong IA Group regulatory purposes are based on the local solvency regime applicable in each jurisdiction. At 31 December 2019 the Prudential Group’s total surplus of available capital over the regulatory Group Minimum Capital Requirement (GMCR), calculated using this LCSM was $23.6 billion before allowing for the payment of the 2019 second interim ordinary dividend.
Estimated Group LCSM capital position based on Group Minimum Capital Requirement (GMCR)
Group Minimum Capital Requirement ($bn) 9.5 (5.0) 4.5 7.6 (3.8) 3.8 LCSM surplus (over GMCR) ($bn) 23.6 (14.1) 9.5 19.4 (9.7) 9.7 * Excludes M&G plc and includes $3.7 billion of subordinated debt issued by Prudential plc that was transferred to M&G plc on 18 October 2019.
The shareholder LCSM capital position by segment is presented below at 31 December 2019 and 31 December 2018 for comparison: Estimated Group shareholder LCSM capital position (based on GMCR)
Base position 9.5 309% Impact of: 20% instantaneous fall in equity markets 1.5 (9)% 40% fall in equity markets note (1) (0.2) (39)% 50 basis points reduction in interest rates (0.2) (17)% 100 basis points increase in interest rates (1.3) (19)% 100 basis points increase in credit spreads note (2) (1.6) (36)%
Notes (1) Where hedges are dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period. (2) US RBC solvency position included using a stress of 10 times expected credit defaults.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 365
Analysis of movement in Group capital position A summary of the estimated movement in the Group shareholder LCSM surplus (based on GMCR) from $9.7 billion at 31 December 2018 to $9.5 billion at 31 December 2019 is set out in the table below.
Balance at beginning of year 9.7 Operating: Operating capital generation from the in-force business 2.5 Investment in new business (0.6)
Non-operating and other capital movements: Non-operating experience (including market movements) (0.6) Adoption of NAIC regulatory reforms in the US 0.1 Corporate activities (excluding demerger items) (0.8) Demerger costs (0.4) Subordinated debt redemption (0.5) Demerger related impacts 1.0
— Net dividend impact of $(0.9) billion: this includes external dividends of $(1.6) billion paid during 2019 largely based on the Group prior to demerger net of regular remittances paid by M&G plc during 2019 prior to the demerger of $0.7 billion.
EEV free surplus excluding intangibles* 3.6 1.8 1.2 6.6 *As per the “Free surplus excluding distribution rights and other intangibles” from note 11 of the Group’s EEV basis results.
Notes: (i) Required Capital under EEV is set at least equal to local statutory notification requirements for Asia (with China JV following the approach for embedded value reporting issued by the China Association of Actuaries (CAA) reflecting the C-ROSS regime) and at 250 per cent of the risk-based capital (RBC) required by the NAIC at the Company Action Level (CAL). This is higher than the solo legal entity statutory minimum capital requirements that are included in the LCSM surplus (over GMCR).
(ii) The EEV Principles require surplus assets to be included at fair value and central core senior debt held at market value. Within LCSM surplus, some local regulatory regimes value certain assets at cost and core structural borrowings are held at amortised cost.
(iv) Deductions applied to EEV free surplus primarily include the impact of applying the embedded value reporting approach issued by the CAA within EEV free surplus as compared to the C-ROSS surplus reported for local regulatory purposes. The $(0.9) billion predominantly arises from the requirement under the CAA embedded value methodology to establish a deferred profit liability within EEV net worth.
Reconciliation of Group IFRS shareholders’ equity to shareholder LCSM available capital position $bn
Group IFRS shareholders’ equity 19.5 Remove DAC, goodwill and intangibles (18.2) Add subordinated debt at IFRS book value 4.6 Valuation differences 8.6 Other (0.5)
The key items of the reconciliation as at 31 December 2019 are: — $(18.2) billion due to the removal of DAC, goodwill and other intangibles from the IFRS statement of financial position; — $4.6 billion due to the addition of subordinated debt, which is treated as available capital under LCSM but as a liability under IFRS; and — $8.6 billion due to differences on the basis of valuing assets and liabilities between IFRS and local statutory valuation rules, including reductions for inadmissible assets. The most significant difference arises in Jackson where local statutory reserves are reduced by an expense allowance linked to surrender charges. IFRS makes no such allowance but instead defers acquisition costs on the balance sheet as a separate asset (which is not recognised on the statutory balance sheet).
Basis of preparation In advance of the GWS framework coming into force, Prudential applies the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine group regulatory capital requirements (both minimum and prescribed levels). The summation of local statutory capital requirements across the Group is used to determine group regulatory capital requirements, with no allowance for diversification between business operations. The Group available capital is determined by the summation of available capital across local solvency regimes for regulated entities and IFRS net assets (with adjustments described below) for non-regulated entities. The Hong Kong IA has yet to make any final decisions regarding the GWS framework for the industry and it continues to consider and consult on the proposed legislation and related guidelines. The results above should not therefore be interpreted as representing the results or requirements under the industry-wide GWS framework and are not intended to provide a forecast of the eventual position.
US operations – internal funds 273.4 237.0 Other operations 3.9 5.8
Total Group funds under management – continuing operations 543.9 455.3 * The 2018 comparatives have been adjusted from the previously published amounts to exclude the discontinued UK and Europe operations. Additionally, the comparatives have been adjusted to include cash and cash equivalents and to exclude assets held that are attributable to external unit holders of consolidated collective investment schemes to align to the current year’s presentation.
Net cash remittances by business units 2,149 2,259 Net interest paid note (c) (527) (488) Tax received 265 190 Corporate activities (260) (274)
Transactions to effect the demerger, including debt substitution note(d) (146) 2,071 Demerger costs (424) (29) Redemption of subordinated debt for continuing operations (504) (553) Early settlement of UK-inflation-linked derivative liability (587) – Other corporate activities relating to continuing operations note(e) (338) (336)
Notes (a) Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation. (b) Significant cash remittances from business units were hedged into sterling using forward contracts during 2018 and 2019 and these contracts determine the amount of sterling recorded in the holding company cash flow for the relevant remittances. The implicit rates may therefore differ from that applied to present the holding company cash flow in US dollars. If local currency remittances in Asia had been translated directly into US dollars using the relevant month-end spot rate then the growth rate in Asia remittances year on year would have been 8 per cent (compared to 4 per cent shown in the table above). The dividend paid by Jackson in the US in US dollars in 2019 was $525 million (2018: $450 million).
(e) Other corporate activities relating to continuing operations primarily relates to the first instalment payable following the renewal of bancassurance arrangement with UOB of $253 million, ongoing centrally funded payments of bancassurance distribution rights and other items.
— Fee income represents profit driven by net investment performance, being fees that vary with the size of the underlying policyholder funds, net of investment management expenses.
— Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. These exclude items such as restructuring costs, which are not included in the segment profit, as well as items that are more appropriately included in other categories (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate).
Margin on revenues 3,035 – 3,035 Expenses: Expected return on shareholder assets 194 26 220
Share of related tax charges from joint ventures and associate note (5) (31) – (31)
Adjusted IFRS operating profit based on longer-term investment returns long-term business 2,993 3,038 6,031
Adjusted IFRS operating profit based on longer-term investment returns – asset management 242 11 253
Margin on revenues 2,790 – 2,790 Expenses: Expected return on shareholder assets 172 14 186
Adjusted IFRS operating profit based on longer-term investment returns long-term business 2,633 2,552 5,185
Notes to the tables throughout I(iv) (1) For Asia, opening and closing policyholder liabilities have been used to derive an average balance for the year, as a proxy for average balances throughout the year. The calculation of average liabilities for the US is generally derived from month-end balances throughout the year as opposed to opening and closing balances only. The average liabilities for fee income in the US have been calculated using daily balances instead of month-end balances in order to provide a more meaningful analysis of the fee income, which is charged on the daily account balance. Average liabilities for spread income are based on the general account liabilities to which spread income is attached. Average liabilities used to calculate the administration expenses margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson.
(6) The 2018 comparative information has been presented at both AER and CER to eliminate the impact of exchange translation. CER results are calculated by translating prior year results using the current year foreign exchange rates. All CER profit figures have been translated at current year average rates for US dollars to reflect the change in the Group’s presentation currency in 2019. For Asia, CER average liabilities have been translated using current year opening and closing exchange rates.
Share of related tax charges from joint ventures and associate note (5) (31) (53) (51)
Adjusted IFRS operating profit based on longer-term investment returns – long-term business 2,993 2,646 2,633
Adjusted IFRS operating profit based on longer-term investment returns – asset management (Eastspring Investments) 283 242 239
Adjusted IFRS operating profit based on longer-term investment returns – long-term business 3,038 2,552
Total adjusted IFRS operating profit based on longer-term investment returns before acquisition costs and DAC adjustments 3,602 3,602 3,717 3,717
Share of related tax charges from joint ventures and associate (31) (53) (51) 42% 39%
* In 2019, the adjusted IFRS operating profit based on longer-term investment returns for Asia insurance operations includes a net credit of $142 million (2018: $126 million on an AER basis) representing a small number of items that are not expected to reoccur, including the impact of a refinement to the run-off of the allowance for prudence within technical provisions.
(b) Analysis of Eastspring Investments adjusted IFRS operating profit based on longer-term investment returns
Operating income before performance-related fees note (1) 636 566 Performance-related fees 12 23
Operating income (net of commission) note (2) 648 589 Operating expense note (2) (329) (311) Group’s share of tax on joint ventures’ operating profit (36) (36)
Notes (1) Operating income before performance-related fees for Eastspring Investments can be further analysed as follows: Retail $m
External funds under management note (1): Money market funds (MMF) 13.3 14.8
Total funds under management note (2) 241.1 192.7 * The 2018 comparative internal funds under management of $114.9 billion included $22.2 billion of funds managed on behalf of M&G plc. Following the demerger, these funds have been reclassified to external funds under management in 2019.
Notes (1) External funds under management – analysis of movements $m $m
Note The analysis of movements above includes $13,337 million as at 31 December 2019 relating to Asia Money Market Funds (31 December 2018: $14,776 million).
I(vi) Reconciliation of expected transfer of value of in-force business and required capital to free surplus The tables below show how the value of in-force business (VIF) generated by the in-force long-term business and the associated required capital is modelled as emerging into free surplus over the next 40 years. Although circa 7 per cent of the Group’s embedded value emerges after this date, analysis of cash flows emerging in the years shown in the tables is considered most meaningful. The modelled cash flows use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same assumptions and sensitivities used to prepare our 2019 results.
In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2019, the tables also present the expected future free surplus to be generated from the investment made in new business during 2019 over the same 40-year period for long-term business operations.
Total free surplus expected to emerge in the next 40 years 63,023 22,660 85,683 7,723 2,120 9,843 * The analysis excludes amounts incorporated into VIF at 31 December 2019 where there is no definitive time frame for when the payments will be made or receipts received. It also excludes any free surplus emerging after 2059.
Discounted expected free surplus generation for years 2020 to 2059 3,512 1,399 4,911 Discounted expected free surplus generation for years after 2059 771 – 771
EEV new business profit for long-term business operations 3,522 883 4,405
Less: Amounts expected to be realised in the current year (4,004) – – – – – – (4,004)
Asia $m $m $m $m $m $m Other $m Total $m 2018 expected free surplus generation for years 2019 to 2058 1,987 1,915 1,842 1,835 1,831 1,746 49,411 60,567
Add: Expected free surplus to be generated in year 2059* – – – – – – 1,205 1,205
2019 expected free surplus generation for years 2020 to 2059 – 1,963 2,088 1,941 1,965 1,895 53,171 63,023
$m $m $m $m $m $m Other $m Total $m 2018 expected free surplus generation for years 2019 to 2058 2,017 2,132 2,212 2,132 2,070 2,075 13,051 25,689
Less: Amounts expected to be realised in the current year (2,017) – – – – – – (2,017)
At 31 December 2019, the total free surplus expected to be generated from continuing operations over the next five years (2020 to 2024 inclusive), using the same assumptions and methodology as those underpinning our 2019 embedded value reporting, was $17.3 billion (31 December 2018: $19.8 billion).
At 31 December 2019, the total free surplus expected to be generated on an undiscounted basis in the next 40 years is $85.7 billion, $(0.6) billion lower than the $86.3 billion expected at the end of 2018 from continuing operations, with the $2.4 billion increase in Asia being more than offset by the $(3.0) billion decrease in the US. In Asia the increase from new business of $7.7 billion, together with favourable foreign exchange gains and operating assumption updates following the annual review of experience, more than offset the effect of generally lower interest rates across the region decreasing projected returns. At 31 December 2019 expected free surplus generation in Asia for the next 40 years is $63.0 billion (31 December 2018: $60.6 billion). In the US new business contributed $2.1 billion to expected free surplus generation. Operating, non-operating and other movements were $(3.1) billion, principally driven by the impact of lower interest rates and the effect of the NAIC reform, hedge modelling and other related changes described in note 7 of the EEV financial statements. At 31 December 2019 expected free surplus generation in the US for the next 40 years is $22.7 billion (31 December 2018: $25.7 billion).
Actual underlying free surplus generated in 2019 from life business in force at the end of 2018, before the impact of US EEV hedge modelling enhancements and restructuring costs, was $4.7 billion including $0.6 billion of changes in operating assumptions and experience variances. This compares with the expected 2019 realisation at the end of 2018 of $4.0 billion.
Transfer to free surplus in 2019 before impact of US EEV hedge modelling enhancements 1,914 2,070 3,984 Expected return on free assets 80 61 141 Changes in operating assumptions and experience variances 147 411 558
Underlying free surplus generated from in-force life business before impact of US EEV hedge modelling enhancements and restructuring costs* 2,141 2,542 4,683 2019 free surplus expected to be generated at 31 December 2018 1,987 2,017 4,004 * Underlying free surplus generated from in-force life business before restructuring costs in 2019 in the US was $1,639 million (Group total $3,780 million), after reflecting the $(903) million impact of US EEV hedge modelling enhancements described in note 7 of the EEV financial statements.
I(vi) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus continued
Total discounted free surplus expected to emerge in the next 40 years 30,403 14,694 45,097 3,512 1,399 4,911
The discounted expected generation from all in-force business can be reconciled to the total embedded value for long-term business operations as follows: $m
Discounted expected generation from all in-force business at 31 December 2019 48,989 Free surplus of life operations held at 31 December 2019 5,395 Other items* (205)
All options were granted at nil consideration. No options have been granted to substantial shareholders, suppliers of goods or services (excluding options granted to agents under the Prudential International Savings-Related Share Option Scheme for Non-Employees) or in excess of the individual limit for the relevant scheme. The maximum share entitlement of each participant under the relevant scheme for each option granted is limited to the total savings and any bonus or interest accumulated under that participant’s savings contract, divided by the exercise price. At 31 December 2019, the maximum number of shares issued or issuable under the schemes, which were approved by shareholders, to all participants would not exceed 1 per cent of the issued share capital of the Company in the preceding 12-month period.
The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2019.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £15.83.
End of year * As a result of the demerger of M&G plc, the exercise price of the outstanding share options at 18 October 2019 and the total number of shares have been adjusted with effect from 21 October 2019. These adjustments do not change the overall fair value of the options and were confirmed as being fair and reasonable by an independent financial adviser in accordance with the rules of that plan and the Hong Kong Stock Exchange Listing Rules.
The total number of securities available for issue under the scheme is 2,553,935 which represents 0.098 per cent of the issued share capital at 31 December 2019.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £15.06.
The weighted average fair value of options granted under the plan in the period was £2.90.
This table is only a summary and should be read in conjunction with Prudential’s consolidated financial statements and the related notes included elsewhere in this document.
Share of profits from joint ventures and associates, net of related tax 397 319 233 200 261
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) note (i) 2,287 3,557 2,909 1,379 2,644
Dividend per share declared and paid in reporting period 63.18¢ 64.34¢ 59.32¢ 69.72¢ 59.01¢ Interim ordinary dividend/final ordinary dividend 63.18¢ 64.34¢ 59.32¢ 55.20¢ 59.01¢ Special dividend 14.52¢
Adjusted operating profit based on longer-term investment returns note (ii) 5,310 4,409 4,378 4,131 3,610
Supplementary EEV financial information EEV income statement – continuing operations note (v)
Other financial information at 31 December 2019 $bn 2018 $bn 2017 $bn 2016 $bn 2015 $bn
Notes (i) This measure is the formal profit (loss) before tax measure under IFRS. It is not the result attributable to shareholders. (ii) Adjusted operating profit is determined on the basis of including longer-term investment returns. EEV and IFRS operating profits are stated after excluding the effect of short-term fluctuations in investment returns on shareholder-backed business gain or loss on corporate transactions and costs connected to the demerger of M&G plc from Prudential plc. Separately, for IFRS basis results, operating profit also excludes amortisation of acquisition accounting adjustments arising on the purchase of business. For EEV basis results, operating profit excludes the effect of changes in economic assumptions and the mark-to-market value movements on core structural borrowings for shareholder-financed operations.
(iv) The 2019 surplus is estimated under the LCSM regime, adopted by the Group following the demerger of its UK and Europe operations in October 2019, as discussed in note I(i), with 2018 comparative information re-presented on this basis. Prior to the demerger, the Group was subject to the Solvency II capital requirements.
Detailed reconciliation of adjusted operating profit based on longer-term investment returns to IFRS profit before tax for the Group’s continuing operations is shown in note B1.1 to the Group IFRS basis results.
Non-operating profit (loss), net of tax 885 (3,013) (456) (2,584) 383 (2,201)
Other comprehensive income, net of tax and non-controlling interests 192 2,679 (146) 2,725 – 2,725
IFRS profit for the year, net of tax and noncontrolling interests 1,814 1,982
Other comprehensive income, net of tax and non-controlling interests (206) (1,446)
Operating income before performance-related fees note 636 566 Share of joint venture revenue (244) (250)
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 385
Notes (a) APE new business sales only include one tenth of single premiums, recorded on policies sold in the year. Gross premiums earned include 100 per cent of such premiums. (b) Other adjustments principally include amounts in respect of the following: – Gross premiums earned include premiums from existing in-force business as well as new business. The most significant amount is recorded in Asia, where a significant portion of regular premium business is written. Asia in-force premiums form the vast majority of the other adjustment amount; – In October 2018, Jackson entered into a 100 per cent reinsurance agreement with John Hancock Life Insurance Company to acquire a closed block of group payout annuity business. The transaction resulted in an addition to gross premiums earned of $5.0 billion in 2018. No amounts were included in APE new business sales. – APE includes new policies written in the year which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts and in M&G plc for certain unit-linked savings and similar contracts. These are excluded from gross premiums earned and recorded as deposits; – APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and – For the purpose of reporting APE new business sales, the Group’s share of amounts sold by the Group’s insurance joint ventures and associates are included. Under IFRS, joint ventures and associates are equity accounted and so no amounts are included within gross premiums earned.
II(viii) Reconciliation between IFRS and EEV shareholders’ equity The table below shows the reconciliation of EEV shareholders’ equity and IFRS shareholders’ equity at the end of the year: EEV shareholders’ equity 54,711 63,402 Less: Value of in-force business of long-term business note (a) (41,893) (42,045) Deferred acquisition costs assigned zero value for EEV purposes 14,239 12,834 Other note (b) (7,580) (12,223)
Notes (a) The EEV shareholders’ equity comprises the present value of the shareholders’ interest in the value of in-force business, total net worth of long-term business operations and IFRS
Closing EEV basis shareholders’ equity ($ million) 39,235 16,342 (866) 54,711 (528) 55,239
EEV basis profit for the year, net of tax and non-controlling interests ($ million) 4,808 1,052
II(x) Calculation of EEV shareholders’ funds per share EEV shareholders’ funds per share is calculated as closing EEV shareholders’ equity divided by the number of issued shares at 31 December 2019 of 2,601 million (31 December 2018: 2,593 million). EEV shareholders’ funds per share excluding goodwill attributable to shareholders is calculated in the same manner, except goodwill attributable to shareholders is deducted from closing EEV shareholders’ equity. 2018 comparatives have been restated to show amounts attributable to continuing operations on a comparable basis.
Closing EEV shareholders’ equity ($ million) 39,235 16,342 (866) 54,711 Less: Goodwill attributable to shareholders ($ million) (796) – (26) (822)
Closing EEV shareholders’ equity excluding goodwill attributable to shareholders ($ million) 38,439 16,342 (892) 53,889
Shareholders’ funds per share (in cents) 1,508¢ 628¢ (33)¢ 2,103¢ Shareholders’ funds per share excluding goodwill attributable to shareholders (in cents) 1,478¢ 628¢ (34)¢ 2,072¢
Closing EEV shareholders’ equity ($ million) 32,008 18,709 (4,616) 46,101 Less: Goodwill attributable to shareholders ($ million) (634) – – (634)
A number of risk factors affect Prudential’s operating results and financial condition and, accordingly, the trading price of its shares. The risk factors mentioned below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. The information given is as of the date of this document, and any forward-looking statements are made subject to the reservations specified under ‘Forward-looking statements’.
— A reduction in the financial strength and flexibility of corporate entities which may result in a deterioration of the credit rating profile and valuation of the Group’s invested credit portfolio, as well as higher credit defaults and wider credit and liquidity spreads resulting in realised and unrealised credit losses.
— Failure of counterparties who have transactions with Prudential (e.g. banks and reinsurers) to meet commitments that could give rise to a negative impact on Prudential’s financial position and on the accessibility or recoverability of amounts due or, for derivative transactions, adequate collateral not being in place.
For some non-unit-linked investment products, in particular those written in some of the Group’s Asia operations, it may not be possible to hold assets which will provide cash flows to match those relating to policyholder liabilities. This is particularly true in those countries where bond markets are not developed and in certain markets where regulated premium and claim values are set with reference to the interest rate environment prevailing at the time of policy issue. This results in a mismatch due to the duration and uncertainty of the liability cash flows and the lack of sufficient assets of a suitable duration. While this residual asset/liability mismatch risk can be managed, it cannot be eliminated. Where interest rates in these markets remain lower than those used to calculate premium and claim values over a sustained period, this could have a material adverse effect on Prudential’s reported profit and the solvency of its business units. In addition, part of the profit from the Group’s Asia operations is related to bonuses for policyholders declared on with-profits products, which are impacted by the difference between actual investment returns of the with-profits fund (which are broadly based on historical and current rates of return on equity, real estate and fixed income securities) and minimum guarantee rates offered to policyholders. This profit could be lower in particular in a sustained low interest rate environment.
Prudential is subject to the risk of potential sovereign debt credit deterioration owing to the amounts of sovereign debt obligations held in its investment portfolio Investing in sovereign debt creates exposure to the direct or indirect consequences of political, social or economic changes (including changes in governments, heads of state or monarchs) in the countries in which the issuers of such debt are located and to the creditworthiness of the sovereign. Investment in sovereign debt obligations involves risks not present in debt obligations of corporate issuers. In addition, the issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due in accordance with the terms of such debt, and Prudential may have limited recourse to compel payment in the event of a default. A sovereign debtor’s willingness or ability to repay principal and to pay interest in a timely manner may be affected by, among other factors, its cash flow situation, its relations with its central bank, the extent of its foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward local and international lenders, and the political constraints to which the sovereign debtor may be subject.
Jackson’s financial strength is rated AA- by Standard & Poor’s and Fitch, A1 by Moody’s and A+ by A.M. Best.
Prudential Assurance Co. Singapore (Pte) Ltd’s financial strength is rated AA- by Standard & Poor’s.
All ratings above are on a stable outlook and are stated as at the date of this document.
Implementing further initiatives related to significant regulatory changes, such as IFRS 17, and the transition to a legislative framework in Hong Kong for the groupwide supervision of insurance groups (GWS Framework), may amplify these risks. Risks related to the GWS Framework are explained in the ‘Regulatory risks’ risk factor.
Adverse experience in the operational risks inherent in Prudential’s business, and those of its material outsourcing partners, could disrupt its business functions and have a negative impact on its results of operations Operational risks are present in all of Prudential’s businesses, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems or human error, fraud, the effects of natural or man-made catastrophic events (such as natural disasters, pandemics, cyber-attacks, acts of terrorism, civil unrest and other catastrophes) or from other external events. These risks may also adversely impact Prudential through its partners which provide bancassurance, outsourcing, external technology, data hosting and other services.
The recent social unrest and coronavirus outbreak, and measures to contain it, have slowed economic and social activity in Hong Kong and mainland China, and in the case of the coronavirus is having a broader global economic impact. While these conditions persist, the level of sales activity in affected markets are expected to be adversely impacted through a reduction in travel and agency and bancassurance activity. Extended travel restrictions in particular may also adversely impact product persistency in the Group’s Hong Kong business. Disruption to Prudential’s operations may also result where Prudential’s employees, or those of its service partners, are affected by travel restrictions; office closures and other measures impacting on working practices, such as the imposition of remote working arrangements; quarantine requirements under local laws and/or other psychosocial impacts.
Prudential’s business is dependent on processing a large number of transactions for numerous and diverse products. It also employs a large number of complex and interconnected information technology (IT) and finance systems and models, and user developed applications in its processes. The long-term nature of much of the Group’s business also means that accurate records have to be maintained securely for significant time periods. Further, Prudential operates in an extensive and evolving legal and regulatory environment (including in relation to tax) which adds to the complexity of the governance and operation of its business processes and controls.
Although Prudential’s IT, compliance and other operational systems, models and processes incorporate governance and controls designed to manage and mitigate the operational and model risks associated with its activities, there can be no assurance as to the resilience of these systems and processes to disruption or that governance and controls will always be effective. Due to human error, among other reasons, operational and model risk incidents do occur from time to time and no system or process can entirely prevent them, although Prudential has not, to date, identified any such incidents that have had a material impact. Prudential’s legacy and other IT systems, data and processes, as with operational systems and processes generally, may also be susceptible to failure or security/data breaches.
There is an increasing requirement and expectation on Prudential and its business partners, to not only hold customer, shareholder and employee data securely, but use it in a transparent and appropriate way. The risk of not securely handling or misusing data may be increased by the use of emerging technological tools which could increase the volume of data that Prudential collects and processes. Developments in data protection worldwide (such as the implementation of EU General Data Protection Regulation that came into force in 2018 and the California Consumer Protection Act that came into force on 1 January 2020) may also increase the financial and reputational implications for Prudential following a significant breach of its (or its third-party suppliers’) IT systems. New and currently unforeseeable
Prudential operates in a number of markets through joint ventures and other arrangements with third parties, involving certain risks that Prudential does not face with respect to its consolidated subsidiaries Prudential operates, and in certain markets is required by local regulation to operate, through joint ventures and other similar arrangements. For such Group operations, management control is exercised in conjunction with other participants. The level of control exercisable by the Group depends on the terms of the contractual agreements, in particular, those terms providing for the allocation of control among, and continued cooperation between, the participants. In addition, the level of control exercisable by the Group could be subject to changes in the maximum level of non-domestic ownership imposed on foreign companies in certain jurisdictions. Prudential may face financial, reputational and other exposure (including regulatory censure) in the event that any of its partners fails or is unable to meet its obligations under the arrangements, encounters financial difficulty, or fails to comply with local or international regulation and standards such as those pertaining to the prevention of financial crime. In addition, a significant proportion of the Group’s product distribution is carried out through arrangements with third parties not controlled by Prudential such as bancassurance and agency arrangements and is therefore dependent upon continuation of these relationships. A temporary or permanent disruption to these distribution arrangements, such as through significant deterioration in the reputation, financial position or other circumstances of the third party or material failure in controls (such as those pertaining to the third-party system failure or the prevention of financial crime) could adversely affect Prudential’s results of operations.
Adverse experience relative to the assumptions used in pricing products and reporting business results could significantly affect Prudential’s results of operations In common with other life insurers, the profitability of the Group’s businesses depends on a mix of factors including mortality and morbidity levels and trends, policy surrenders and take-up rates on guarantee features of products, investment performance and impairments, unit cost of administration and new business acquisition expenses. The Group’s businesses are subject to inflation risk. In particular, the Group’s medical insurance businesses in Asia are also exposed to medical inflation risk.
Prudential needs to make assumptions about a number of factors in determining the pricing of its products, for setting reserves, and for reporting its capital levels and the results of its long-term business operations. Assumptions about future expected levels of mortality are of relevance to the Guaranteed Minimum Withdrawal Benefit (GMWB) of Jackson’s variable annuity business.
In Asia, the Group’s principal competitors include global life insurers together with regional insurers and multinational asset managers. In most markets, there are also local companies that have a material market presence. Jackson’s competitors in the US include major stock and mutual insurance companies, mutual fund organisations, banks and other financial services companies.
Prudential believes that competition will intensify across all regions in response to consumer demand, digital and other technological advances, the need for economies of scale and the consequential impact of consolidation, regulatory actions and other factors. Prudential’s ability to generate an appropriate return depends significantly upon its capacity to anticipate and respond appropriately to these competitive pressures.
Prudential conducts its businesses subject to regulation and associated regulatory risks, including a change to the basis in the regulatory supervision of the Group, the effects of changes in the laws, regulations, policies and interpretations and any accounting standards in the markets in which it operates Changes in government policy and legislation (including in relation to tax), capital control measures on companies and individuals, regulation or regulatory interpretation applying to companies in the financial services and insurance industries in any of the markets in which Prudential operates (including those related to the conduct of business by Prudential or its third party distributors), or decisions taken by regulators in connection with their supervision of members of the Group, which in some circumstances may be applied retrospectively, may adversely affect Prudential. The impact from any regulatory changes may affect Prudential, for example changes may be required to its product range, distribution channels, handling and usage of data, competitiveness, profitability, capital requirements, risk management approaches, corporate or governance structure and, consequently, reported results and financing requirements. Also, regulators in jurisdictions in which Prudential operates may impose requirements affecting the allocation of capital and liquidity between different business units in the Group, whether on a geographic, legal entity, product line or other basis. Regulators may also change the level of capital required to be held by individual businesses, the regulation of selling practices, solvency requirements and could introduce changes that impact products sold or that may be sold. Furthermore, as a result of interventions by governments in light of financial and global economic conditions, there may continue to be changes in government regulation and supervision of the financial services industry, including the possibility of higher capital requirements, restrictions on certain types of transactions and enhancement of supervisory powers.
While the HKIA has agreed that the subordinated debt instruments Prudential has in issue can be included as part of the Group’s capital resources for the purposes of satisfying the capital requirements imposed under the LCSM under the interim principles agreed with the HKIA, the grandfathering provisions under the GWS Framework remain subject to the Hong Kong legislative process. If Prudential is ultimately not able to include the subordinated debt instruments it holds as part of the Group’s capital resources for the purposes of satisfying the capital requirements imposed under the GWS Framework it may need to raise additional capital, which may in turn lead to increased costs for the Group.
Currently there are also a number of other global regulatory developments which could impact Prudential’s businesses in its many jurisdictions. These include the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and its subsequent amendments in the US which provided for a comprehensive overhaul of the financial services industry within the US including reforms to financial services entities, products and markets, the work of the Financial Stability Board (FSB) in the area of systemic risk including the reassessment of the designation of Global Systemically Important Insurers (G-SIIs), and the Insurance Capital Standard (ICS) being developed by the International Association of Insurance Supervisors (IAIS). In addition, regulators in a number of jurisdictions in which the Group operates are further developing their local capital regimes. Across Asia this includes China, Hong Kong, Singapore, Thailand and India. There remains a high degree of uncertainty over the potential impact of such changes on the Group.
ComFrame – the common framework for the supervision of Internationally Active Insurance Groups (IAIGs). Prudential is expected to satisfy the criteria to be an IAIG and would therefore be subject to these measures. The HF also includes a monitoring element for the identification of a build-up of systemic risk and to enable supervisors to take action where appropriate. The IAIS has already consulted on an application paper on the liquidity risk elements introduced into the ICPs and ComFrame with a further consultation focused on macroeconomic elements expected to follow in 2021. The IAIS continues to develop the ICS as part of ComFrame. The implementation of ICS will be conducted in two phases – a five-year monitoring phase followed by an implementation phase. ComFrame will more generally establish a set of common principles and standards designed to assist supervisors in addressing risks that arise from insurance groups with operations in multiple jurisdictions. The ComFrame proposals, including ICS, could result in enhanced capital and regulatory measures for IAIGs.
The Group’s accounts are prepared in accordance with current IFRS applicable to the insurance industry. The International
Any changes or modification of IFRS accounting policies may require a change in the way in which future results will be determined and/or a retrospective adjustment of reported results to ensure consistency.
The resolution of several issues affecting the financial services industry could have a negative impact on Prudential’s reported results or on its relations with current and potential customers Prudential is, and in the future may continue to be, subject to legal and regulatory actions in the ordinary course of its business on matters relevant to the delivery of customer outcomes. Such actions relate, and could in the future relate, to the application of current regulations or the failure to implement new regulations (including those relating to the conduct of business), regulatory reviews of broader industry practices and products sold (including in relation to lines of business already closed) in the past under acceptable industry or market practices at the time and changes to the tax regime affecting products. Regulators may also focus on the approach that product providers use to select third-party distributors and to monitor the appropriateness of sales made by them. In some cases, product providers can be held responsible for the deficiencies of third-party distributors.
In the US, there has been significant attention on the different regulatory standards applied to investment advice delivered to retail customers by different sectors of the industry. As a result of reports relating to perceptions of industry abuses, there have been numerous regulatory inquiries and proposals for legislative and regulatory reforms. This includes focus on the suitability of sales of certain products, alternative investments and the widening of the circumstances under which a person or entity providing investment advice with respect to certain employee benefit and pension plans would be considered a fiduciary subjecting the person or entity to certain regulatory requirements. There is a risk that new regulations introduced may have a material adverse effect on the sales of the products by Prudential and increase Prudential’s exposure to legal risks.
The failure to understand and respond effectively to the risks associated with environmental, social or governance (ESG) factors could adversely affect Prudential’s achievement of its long-term strategy The business environment in which Prudential operates is continually changing. A failure to manage those material risks associated with the ESG themes detailed below may adversely impact on the reputation and brand of the Group, the results of its operations, its ability to attract and retain customers and staff, its ability to deliver on its long-term strategy and therefore its long-term financial success. Ensuring high levels of transparency and responsiveness to stakeholders is a key aspect of this. ESG-related issues may also directly or indirectly impact key stakeholders, ranging from customers to institutional investors, employees, suppliers and regulators, all of whom have expectations in this area, which may differ.
The environmental risks associated with climate change is one ESG area that poses significant risks to Prudential and its customers. These risks include transition risks and physical risks. The global transition to a lower carbon economy could have an adverse impact on investment valuations as the financial assets of carbon-intensive companies re-price and could result in some asset sectors facing significantly higher costs and a disorderly adjustment to their asset values. The speed of this transition will be influenced by factors such as public policy, technology and changes in market or investor sentiment. This may adversely impact the valuation of investments held by the Group. The potential broader economic impact from this may adversely affect customer demand for the Group’s products. The physical impacts of climate change, driven by both specific short-term climate-related events such as natural disasters and longer-term changes to the natural environment, will increasingly influence the longevity, mortality and morbidity risk assessments of the Group’s underwriting product offerings. Climate-driven changes in countries in which Prudential, or its key third parties, operate could impact on its operational resilience and could change its claims profile. There is an increasing expectation from stakeholders for Prudential to understand, manage and provide increased transparency of its exposure to climate-related risks. Given that Prudential’s investment horizons are long term, it is potentially more exposed to the long-term impact of climate change risks. Additionally, Prudential’s stakeholders increasingly expect an approach to responsible investment that demonstrates how ESG considerations are effectively integrated into investment and engagement decisions, and fiduciary and stewardship duties.
A Acquisition expenses Acquisition expenses include the initial expenses and commissions incurred in writing new business less deferred costs.
Actual exchange rates (AER) Actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates at the balance sheet date for the balance sheet.
Asset-backed security (ABS) A security whose value and income payments are derived from and collateralised (or ‘backed’) by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually.
Assets under management (AUM) Assets under management represent all assets managed or administered by or on behalf of the Group, including those assets managed by third parties. Assets under management include managed assets that are included within the Group’s statement of financial position and those assets belonging to external clients outside the Prudential Group, which are therefore not included in the Group’s statement of financial position. These are also referred to as ‘funds under management (FUM)’.
Bonuses Bonuses refer to the non-guaranteed benefit added to participating life insurance policies and are the way in which policyholders receive their share of the profits of the policies. These include regular bonus and final bonus and the rates may vary from period to period.
Closed-book life insurance business A ‘closed book’ is essentially a group of insurance policies that are no longer sold, but are still featured on the books of a life insurer as a premium-paying policy. The insurance company has “closed the books” on new sales of these products which will remain in run-off until the policies expire and all claims are settled.
Collective investment schemes (CIS) CIS is an open-ended investment fund of pooled assets in which an investor can buy and sell units that are issued in the form of shares.
Constant exchange rates (CER) Prudential plc reports its results at both actual exchange rates (AER) to reflect actual results and also constant exchange rates (CER) to eliminate the impact from exchange translation. CER results are calculated by translating prior year results using current period foreign currency exchange rates ie current period average rates for the income statements and current period closing rate for the balance sheet.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 397
European Embedded Value (EEV) Financial results that are prepared on a supplementary basis to the Group’s consolidated IFRS results and which are prepared in accordance with a set of Principles issued by the CFO Forum of European Insurance Companies in 2016. Embedded value is a way of measuring the current value to shareholders of the future profits from life business written based on a set of assumptions.
F Fixed annuities (FA) Fixed annuity contracts written in the US which allow for tax-deferred accumulation of funds, are used for asset accumulation in retirement planning and for providing income in retirement and offer flexible pay-out options. The contract holder pays the insurer a premium, which is credited to the contract holders’ account. Periodically, interest is credited to the contract holders’ account and administrative charges are deducted, as appropriate.
G Group free surplus Group free surplus at the end of the period comprises free surplus for the insurance businesses, representing the excess of the net worth over the required capital included in the EEV results and IFRS net assets for the asset management and other businesses, excluding goodwill. The free surplus generated during the period comprises the movement in this balance excluding foreign exchange, capital and other reserve movements. Specifically, it includes amounts maturing from the in-force operations during the period less the investment in new business, the effect of market movements and other one-off items.
Group pay-out annuities These are a closed block of defined benefit annuity plans assumed from John Hancock USA and John Hancock New York in October 2018, in which a single premium payment from an employer (contract holder) funds the pension benefits for its employees (participants).
Group-wide Supervision (GWS) Framework Regulatory framework which is currently under development by the Hong Kong Insurance Authority for the industry and is expected to be finalised in the second half of 2020.
Guaranteed investment contracts (GICs) (US) Investment contracts between an insurance company and an institutional investor, which provide a stated rate of return on deposits over a specified period of time. They typically provide for partial or total withdrawals at book value if needed for certain liquidity needs of the plan.
L Liquidity coverage ratio (LCR) Prudential calculates this as assets and resources available to us that are readily convertible to cash to cover corporate obligations in a prescribed stress scenario. We calculate this ratio over a range of time horizons extending to twelve months.
M Money Market Fund (MMF) An MMF is an open-ended mutual fund that invests in short-term debt securities such as US treasury bills and commercial paper. The purpose of an MMF is to provide investors with a safe place to invest easily accessible cash-equivalent assets characterised as a low-risk, low-return investment.
Morbidity rate Rate of sickness, varying by such parameters as age, gender and health, used in pricing and computing liabilities for future policyholders of health products, which contain morbidity risks.
N National Association of Insurance Commissioners (NAIC) The NAIC is the US standard setting and regulatory support organisation created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five US territories.
O Operational borrowings Borrowings which arise in the normal course of the business. From 1 January 2019, these also include all lease liabilities under IFRS 16.
Participating policies or participating business Contracts of insurance where the policyholders have a contractual right to receive, at the discretion of the insurer, additional benefits based on factors such as investment performance, as a supplement to any guaranteed benefits. This is also referred to as with-profits business.
S Separate account A separate account is a pool of investments held by an insurance company not in or ‘separate’ from its general account. The returns from the separate account generally accrue to the policyholder. A separate account allows an investor to choose an investment category according to his individual risk tolerance, and desire for performance.
U Unallocated surplus Unallocated surplus is recorded wholly as a liability and represents the excess of assets over policyholder liabilities for Prudential’s with-profits funds. The balance retained in the unallocated surplus represents cumulative income arising on the with-profits business that has not been allocated to policyholders or shareholders.
V Variable annuity (VA) (US) An annuity whose value is determined by the performance of underlying investment options that frequently includes securities. A variable annuity’s value is not guaranteed and will fluctuate, depending on the value of its underlying investments. The holder of a variable annuity assumes the investment risk and the funds backing a variable annuity are held in the insurance companies separate account.
Value of in-force business (VIF) The present value of future shareholder cash flows projected to emerge from the assets backing liabilities of the in-force covered business.
With-profits contracts For Prudential, the most significant with-profits contracts are written in Hong Kong, Malaysia and Singapore. See ‘participating policies or participating business’ above.
Communication with shareholders The Group maintains a corporate website containing a wide range of information relevant for private and institutional investors, including the Group’s financial calendar: www.prudentialplc.com
Details of the 2019 AGM and of the General Meeting held in October 2019, including the major items discussed at those meetings and the results of the voting, can be found on the Company’s website.
Company constitution Prudential is governed by the Companies Act 2006, other applicable legislation and regulations, and provisions in its Articles of Association (Articles). Any change to the Articles must be approved by special resolution of the shareholders. There were no changes to the constitutional documents during 2019. The current Memorandum and Articles are available on the Company’s website.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 401
Major shareholders The table below shows the holdings of major shareholders in the Company’s issued ordinary share capital, as at 31 December 2019, as notified and disclosed to the Company in accordance with the Disclosure Guidance and Transparency Rules.
On 11 February 2020, Norges Bank notified that its holding had decreased to 2.998 per cent of the Company’s issued share capital.
Where, under an employee share scheme, participants are the beneficial owners of the shares but not the registered owners, the voting rights are normally exercisable by the trustee on behalf of the registered owner in accordance with the relevant plan rules. The Trustees would not usually vote any unallocated shares held in trust but they may do so at their discretion provided it would be considered to be in the best interests of the beneficiaries of the trust and permitted under the relevant trust deed.
Authority to issue shares The Directors require authority from shareholders in relation to the issue of shares. Whenever shares are issued, these must be offered to existing shareholders pro rata to their holdings unless the Directors have been given authority by shareholders to issue shares without offering them first to existing shareholders. Prudential seeks authority from its shareholders on an annual basis to issue shares up to a maximum amount, of which a defined number may be issued without pre-emption. Disapplication of statutory pre-emption procedures is also sought for rights issues. The existing authorities to issue shares, and to do so without observing pre-emption rights, are due to expire at the end of this year’s AGM. Relevant resolutions to authorise share capital issuances will be put to shareholders at the AGM on 14 May 2020.
Details of shares issued during 2019 and 2018 are given in note C10 on page 290.
A number of dividend waivers are in place in respect of shares issued but not allocated under the Group’s employee share plans. These shares are held by the Trustees and will, in due course, be used to satisfy requirements under the Group’s employee share plans. The dividends waived represent less than one per cent of the value of dividends paid during the year.
UK register Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA, UK.
Singapore register Shareholders who have shares standing to the credit of their securities accounts with The Central Depository (PTE) Limited (CDP) in Singapore may refer queries to the CDP at 11 North Buona Vista Drive, #01-19/20 The Metropolis Tower 2, Singapore 138589. Enquiries regarding shares held in Depository Agent Sub-accounts should be directed to your Depository Agent or broker.
Tel +1 800 990 1135, or from outside the USA +1 651 453 2128 or log on to www.adr.com
Shareholders on the UK or Hong Kong registers have the option to elect to receive their dividend in US dollars instead of pounds sterling or Hong Kong dollars respectively. More information may be found on our website www.prudentialplc. com/investors/shareholder-information/ dividend/dividend-currency-election
Cash dividend alternative The Company operates a Dividend Re-investment Plan (DRIP). Shareholders who have elected for the DRIP will automatically receive shares for all future dividends in respect of which a DRIP alternative is offered. The election may be cancelled at any time by the shareholder. Further details of the DRIP and the timetable are available at www.shareview.co.uk/4/Info/Portfolio/ default/en/home/shareholders/Pages/ ReinvestDividends.aspx
Electronic communications Shareholders are encouraged to elect to receive shareholder documents electronically by registering with Shareview at www.shareview.co.uk This will save on printing and distribution costs, and create environmental benefits. Shareholders who have registered will be sent an email notification whenever shareholder documents are available on the Company’s website and a link will be provided to that information. When registering, shareholders will need their shareholder reference number which can be found on their share certificate or proxy form. The option to receive shareholder documents electronically is not available to shareholders holding shares through CDP. Please contact Equiniti if you require any assistance or further information.
Providing financial security since 1848 1848 Prudential is established as Prudential Mutual Assurance, Investment and Loan Association in Hatton Garden, London, offering loans and life assurance to professional people. From the beginning the figure of Prudence was adopted as the symbol to be used on the Company seal to represent the values of the business.
To this day she still carries her arrow (signifying strength of purpose), serpent (the ancient symbol of wisdom) and mirror (representing self awareness).
1854 Prudential opens the Industrial Department to sell a new type of insurance, Industrial Insurance, to the working classes, for premiums of a penny and upwards.
Successive generations have looked to Prudential to safeguard their financial security – from industrial workers and their families in Victorian Britain to 20 million customers worldwide today. Our financial strength, heritage, prudence and focus on our customers’ long-term needs ensure that people continue to turn to our trusted brands to help them plan for today and tomorrow.
Prudential’s office at Ludgate Hill, London; from The Building News, 1863.
Any forward-looking statements contained in this document speak only as of the date on which they are made. Prudential expressly disclaims any obligation to update any of the forward-looking statements contained in this document or any other forwardlooking statements it may make, whether as a result of future events, new information or otherwise except as required pursuant to the UK Prospectus Rules, the UK Listing Rules, the UK Disclosure and Transparency Rules, the Hong Kong Listing Rules, the SGX-ST listing rules or other applicable laws and regulations.
1879 Prudential moves into Holborn Bars, a purpose-built office complex designed by Alfred Waterhouse. The building becomes a London landmark.
1986 Prudential acquires Jackson National Life Insurance in the United States.
Prudential plc is a holding company, some of whose subsidiaries are authorised and regulated, as applicable, by the Hong Kong Insurance Authority and other regulatory authorities.