We remain on track to deliver the 2013 profit growth and cash generation objectives we announced in December 2010. Our clear strategy and the strength of our products and distribution – combined with our balanced portfolio of businesses and market-leading positions in Asia – mean we are well positioned to deliver continued relative outperformance in the medium-term.
Quick links For further information about our KPIs, go to page 2
For further information about our Board of Directors, go to page 108
The directors’ report of Prudential plc for the year ended 31 December 2011 is set out on pages 1-130, 436-463 and 466-470, and includes the sections of the Annual Report referred to in these pages.
• Rated as a ‘World Class’ service provider for six successive years by Service Quality Measurement Group
* Operating profit from long-term operations excluding Eastspring Investments, development costs and Asia regional head office costs.
I am pleased to report a strong performance in 2011. We announced in December 2010 clear ‘Growth and Cash’ objectives for 2013. 2011 has marked another year of progress towards achieving these objectives: (i) doubling 2009 Asia IFRS and new business profit by 2013, (ii) cumulative net remittances to the Group of at least £3.8 billion over 2010 to 2013 and (iii) UK, Asia and Jackson to deliver respectively £350 million, £300 million and £200 million of cash in 2013.
We have continued to make progress in Asia as measured by our primary growth metric, new business profit. Six markets have achieved new business profit growth in excess of 20 per cent in 2011. Our focus on profitable growth has not stopped us from continuing to grow our absolute and relative scale: six of our 11 Asian life insurance operations are now market leaders in terms of absolute new business sales and, excluding India, all of our markets have grown their sales in 2011.
In executing our strategy, we are guided by three clearly defined Group-wide operating principles.
The first of these is a balanced approach to performance management across the three key measures of IFRS, EEV and cash, with an increased emphasis on IFRS and cash. As a result, in 2011, we are reporting results which show growth across all three key measures. This puts us in a strong position to continue to capture the profitable growth opportunities available in our chosen markets.
Notes 1 Excluding Eastspring Investments, development costs and Asia regional head office expenses.
Harvey McGrath Chairman and Chairman of the Nomination Committee Harvey McGrath was appointed as an independent non-executive director of Prudential in September 2008 and became the Chairman and Chairman of the Nomination Committee in January 2009. Harvey has a long and distinguished career in the international financial services industry, having started his career at Chase Manhattan Bank in London and New York. From 1980 to 2007 he worked for the Man Group, first as Treasurer, then Finance Director, then President of Man Inc. in New York before being appointed as Chief Executive of Man Group plc in London in 1990 and then Chairman in 2000. He left Man Group in 2007.
Harvey is also Chairman of the London Development Agency which works for the Mayor of London coordinating economic development and regeneration across London. He is the former Chairman of both London
First and the East London Business Alliance and former Vice Chairman of the London Skills and Employment Board from 2006 to 2011. In July 2011, Harvey was appointed as co-chair of the new Board of the London Enterprise Partnership (LEP).
and Group Treasurer in 2001. He was appointed Chief Executive of Prudential Capital and to the Group Executive Committee in 2007. Prior to joining Prudential, John spent three years with National Australia Bank as General Manager, Global Capital Markets. John began his career at Hill Samuel & Co Limited where, over a 20 year period, he worked in every division of the bank, culminating in senior roles in risk, capital markets and treasury of the combined TSB and Hill Samuel Bank. Age 55.
Tidjane was a non-executive director of Arkema in France until November 2009. He is a member of the Board of the Association of British Insurers (ABI) and a member of the Council of the Overseas Development Institute (ODI) in London. Tidjane is a member of the Africa Progress Panel chaired by Kofi Annan and a sponsor of Opportunity International. In January 2011, he was appointed to chair the G20 High Level Panel for Infrastructure Investment, which reported to the G20 Leaders at the G20 Summit in Cannes in November 2011. Tidjane is a member of the UK-ASEAN Business Council and of the Strategic Advisory Group on UK Trade and Investment. In January 2012, Tidjane was appointed to the Prime Minister’s Business Advisory Group. Tidjane was awarded the Légion d’Honneur by the French President in July 2011. Age 49. Michael McLintock
Executive Director Michael McLintock has been an executive director of Prudential since September 2000. He is also Chief Executive of M&G, a position he held at the time of M&G’s acquisition by Prudential in 1999. Michael joined M&G in 1992. He previously also served on the board of Close Brothers Group plc as a non-executive director from 2001 to 2008. Since October 2008, he has been a Trustee of the Grosvenor Estate and was appointed as a non-executive director of Grosvenor Group Limited in March 2012. He has also been a member of the Finance Committee of the MCC since October 2005. Age 50.
1 Harvey McGrath 2 Tidjane Thiam 3 Nicolaos Nicandrou ACA 4 Robert Devey 5 John Foley 6 Michael McLintock 7 Barry Stowe 8 Michael Wells
F in a n cia l state m e n ts
A d d itio n a l in fo rm atio n Overview | Contents
Overview 2 Highlights 4 At a glance 6 Chairman’s statement 8 Group Chief Executive’s report
Governance 108 Board of directors 130 Additional disclosures 1 3 1 Index to principal Directors’ Report disclosures
Prudential Corporation Asia • Total IFRS operating profit* up 32 per cent to £709 million – making our life insurance business in Asia the biggest contributor† to Group IFRS operating profit
• High performing multi-channel distribution with increasing agent activity and productivity and strongly growing sales through an extensive range of bank partners
• Well balanced life insurance product portfolio emphasising regular premium savings and protection that offers good returns for customers and shareholders
• More market leading positions than any other life insurer in the region and the region’s largest onshore mutual fund manager
Prudential Corporation Asia Prudential is a leading international life insurer in Asia with operations in 12 markets. We have built a high performing platform with effective, multi-channel distribution, a product portfolio centred on regular savings and protection, award winning customer services and a well respected brand.
Prudential UK Prudential UK is a leading life and pensions provider to approximately 7 million customers in the United Kingdom.
For further information go to page 46 *Based on long-term business. † Based on operating profit before other income and expenditure.
I am pleased to introduce Prudential’s 2011 Annual Report. We have followed our excellent results in 2010 with another strong performance, led by our fast-growing Asian business, which is the largest contributor to both the sales and profits of the Group.
In 2011 we saw continued market volatility around the world, caused in part by concerns about sovereign debt, particularly in the Eurozone. However, our disciplined approach to risk and capital management and our focus on high return markets and products has meant the Group has continued to deliver profitable, cash-generative growth.
The cash remittance objectives for the Group and the growth and profitability targets for the Asia business announced at our December 2010 investor conference remain on track to be delivered in 2013. These challenging objectives, alongside our progressive dividend policy, demonstrate our commitment to provide both growth and cash to shareholders.
There have been a number of changes to the Board during the year. Bridget Macaskill stepped down in September, having served as a non-executive director of the Company since September 2003. She had been a member of the Remuneration Committee since
2003 and became its Chairman in May 2006. She had also been a member of the Nomination Committee since 2004. Lord Turnbull succeeded her as Chairman of the Remuneration Committee and became a member of the Nomination Committee. In December we announced that Kathleen O’Donovan, who has served as a non-executive director for almost nine years, including chairing the Audit Committee from May 2006 to September 2009, would retire from the Board on 31 March 2012. I would like to acknowledge the considerable contribution both Bridget and Kathleen have made to the Group during their time here.
We also announced the appointment of two new non-executive directors, Kai Nargolwala and Alistair Johnston, who joined on 1 January 2012. Kai was non-executive Chairman of Credit Suisse Asia Pacific and will sit on the Risk and Remuneration Committees. From 1998 to 2007, he worked for Standard Chartered PLC where he was a Group Executive Director responsible for Asia Governance and Risk. Alistair brings extensive global markets, international management and accounting experience from many years at KPMG. He joined KPMG in 1973 and was a partner from 1986 to 2010. During this time he held a number of senior leadership positions including being a Global Vice Chairman from 2007 to 2010. He has joined the Audit Committee.
It is with sadness that we note the passing in February 2012 of Lord Carr of Hadley, former Chairman of Prudential. During his 13 years as a Prudential director, and particularly in his time as Chairman from 1980 to 1985, Lord Carr brought to our organisation the benefits of his wide experience of public and business life.
As Chairman, I have always been proud of how Prudential and its staff strengthen the communities in which we operate. I strongly believe that organisations have a responsibility not only to do well but, where possible, to do good. We achieve this in a number of ways: through offering our customers financial security; through our role as a long-term investor in businesses and infrastructure; and through our corporate responsibility activities.
Our operating performance by business unit Prudential Corporation Asia Our medium and long-term growth opportunities are driven by the rapidly expanding middle class across the region, with its strong appetite for savings and protection products. Although the global economic environment has been more challenging in recent times, we continue to believe that our prospects in the region are exciting, as indicated by our commitment to double our key metrics of IFRS operating profit and new business profit between 2009 and 2013.
Across Asia, we continue to innovate both in products and technology, where our investment drives improvements in operational efficiency, helps manage persistency and ensures that we can continue to meet profitably the evolving demands of our customers. Our business is aided by a positive regulatory environment as governments in the region seek to increase insurance penetration, recognising the social role and economic benefits of life insurance as a key provider of long-term capital.
In South East Asia, our ‘sweet spot’, our growth has been largely led by the rising market of Indonesia as well as the more developed economies of Hong Kong, Singapore and Malaysia. These operations are generating sustainable growth and value, supporting our investments in more emerging markets such as the Philippines, Vietnam and Thailand.
Jackson’s strategy focuses on capturing this opportunity while balancing value, volume, capital efficiency, cash generation, balance sheet strength and strict pricing discipline. Our capital has primarily been directed towards higher-margin and more capital-efficient variable annuities. Our approach to pricing and hedging is conservative and enables us to mitigate the impact of macroeconomic challenges and ensure that we are able to meet our commitments to our customers.
Policyholder behaviour across our book of in-force policies continues to trend in line with our assumptions. Jackson is financially strong, with a risk-based-capital ratio of 429 per cent at the end of 2011, after paying a large remittance to the Group in June 2011.
Prudential UK Like Jackson in the US, Prudential UK is well positioned to help British ‘baby boomers’ as they approach retirement. In the UK, like our other chosen markets, in terms of new business, we focus on the lines of business where we have a clear competitive advantage and can generate attractive returns on capital invested; and we manage our in-force book for value.
After two successive years of extremely high net sales, it was our expectation that net fund flows would revert closer to historic levels in 2011. This was amplified by the macroeconomic environment in Continental Europe, particularly in the second half. However, in the UK, sales remain strong, demonstrating M&G’s strength across asset classes and distribution channels. As at December 2011, we have been number one in retail sales for 13 consecutive quarters1.
Regarding our asset management activities in Asia, we announced in November 2011 that our Asian asset management business would be rebranded Eastspring Investments. It is already a market-leading onshore third party fund management business. This new branding will enable it to establish a more cohesive regional presence, and to market its Asian expertise in Europe and North America. The business had a good year, growing profits by over 11 per cent in spite of a challenging environment characterised by weak stock market performance and the impact of the natural disaster in Japan.
Therefore, in parallel to continuing our preparation for eventually implementing the Solvency II rules, we also evaluate actions to mitigate the possible negative effects. We regularly review the range of options available to us to maximise the strategic flexibility of the Group. Among these options is consideration of optimising the Group’s domicile, including as a possible response to an adverse outcome on Solvency II.
The Board will maintain its focus on delivering a growing dividend, which will continue to be determined after taking into account the Group’s financial flexibility and our assessment of opportunities to generate attractive returns by investing in specific areas of the business. The Board believes that in the medium-term a dividend cover of around two times is appropriate.
Life APE new business sales, profits and investment in new business Balancing capital consumption and value optimisation
3 Net liability flows are defined as movements in shareholder-backed policyholder liabilities arising from premiums (net of charges), surrenders, maturities and deaths.
6 For 2011, IGD amounts are estimated. Both 2010 and 2011 are stated before final dividend.
The continued growth in the profits of our Asian life insurance business was one of the highlights of our 2011 results, as Asia passed an important milestone becoming the largest contributor 1 to Group IFRS operating profit.
Business review | Chief Financial Officer’s overview 2011 was a productive year for Prudential during which we delivered strong performance across all of our key metrics and made clear progress towards our 2013 ‘Growth and Cash’ financial objectives.
At a Group level, the key headlines show that EEV new business profit (‘new business profit’) increased by 6 per cent to £2,151 million (2010: £2,028 million2), IFRS operating profit based on longer-term investment returns (‘IFRS operating profit’) increased by 7 per cent to £2,070 million (2010: £1,941 million) and underlying free surplus generation increased by 16 per cent to £1,983 million (2010: £1,714 million). These results were delivered during a particularly challenging macroeconomic environment and are testament to the quality of our franchises across Asia, the US and the UK.
Jackson delivered new business profit of £815 million (2010: £761 million), up 7 per cent compared to 2010, based on APE sales of £1,275 million (2010: £1,164 million). Our new business margin in the US remains attractive at 64 per cent (2010: 65 per cent). We continued to focus on variable annuities over the course of 2011 and APE sales in this product line grew by 15 per cent to £1,091 million (2010: £948 million). We remain a top three player in US variable annuities3 and continue to balance value, risk and capital.
In the UK, we delivered new business profit of £260 million (2010: £365 million) and total APE sales of £746 million (2010: £820 million), down 29 per cent and 9 per cent respectively. These declines are primarily due to the level of bulk annuity activity achieved in 2010, which was not repeated in 2011, as there were fewer attractive opportunities in which to deploy our capital in that segment of the market. At a retail level, we delivered new business profit of £231 million (2010: £257 million) and APE sales of £712 million (2010: £725 million) as we continue to apply our value over volume approach, focusing on the product lines that produce the most attractive IRRs and payback periods. In 2011 we delivered a retail new business margin of 32 per cent, down from 35 per cent in 2010, due to lower volumes of higher margin individual annuities.
In asset management, we have delivered £4.5 billion of net inflows over 2011 (2010: £8.9 billion). This is a good performance in what was a challenging year for asset managers. At the end of 2011, our total funds under management were £351 billion, of which £111 billion are external assets. M&G produced £4.4 billion (2010: £9.1 billion) of net inflows in the period (£3.9 billion retail, £0.5 billion institutional), an excellent result given the market backdrop. M&G has ranked number 1 in the UK retail market for gross and net sales over the last 13 consecutive quarters based on data to the end of December 20111. At 31 December 2011 it had external funds under management of £91.9 billion, 3 per cent higher than at the beginning of the year. External funds comprise £44.2 billion (2010: £42.5 billion) of retail and £47.7 billion (2010: £46.8 billion) of institutional assets. Adding these funds to internal amounts, M&G’s total funds under management were £201.3 billion. Eastspring Investments reported retail and institutional net inflows of £633 million in 2011 (2010: £1.8 billion). At the end of 2011, Eastspring Investments had £50.3 billion of funds under management, of which £19.2 billion were external assets.
The continued growth in the profits of our Asian life insurance business was one of the highlights of our 2011 results, as Asia passed an important milestone becoming the largest contributor2 to Group IFRS operating profit. Asia’s long-term business IFRS operating profit was up 32 per cent in 2011 to £709 million (2010: £536 million) with particularly strong performances coming from our businesses in Indonesia, Singapore and Hong Kong. We continue to see significant opportunities to grow both the size and the productivity of our distribution channels across South East Asia while maintaining good penetration of high margin health and protection insurance, and this should aid strong ongoing IFRS performance. Asia’s long-term EEV operating profit, a measure of the economic value creation in the year, grew by 22 per cent in 2011 to £1,764 million (2010: £1,450 million), further underlining the creation of sustainable value by these operations.
2 If long-term business is considered separately from asset management and UK general insurance commission.
In the UK long-term business IFRS operating profit was up by 1 per cent from £673 million in 2010 to £683 million in 2011, despite 2010 benefiting from a single large bulk annuity deal, which contributed £63 million to the result (2011: £23 million). Our UK business continues to focus on the sustained delivery of IFRS profits. The strength of the with-profits fund, which currently has a surplus estate of £6.1 billion, provides a secure platform to support future IFRS profits and cash generation. EEV operating earnings reduced by 9 per cent in 2011 to £853 million (2010: £936 million), principally reflecting the reduction in new business profits discussed above.
In asset management IFRS operating profit was up 22 per cent to £461 million compared to £378 million in 2010. M&G (including Prudential Capital) delivered a record performance, growing IFRS operating profit by 26 per cent to £357 million, (2010: £284 million) due to rising revenues which increased by 15 per cent on the prior year and a lower cost-income ratio of 60 per cent (2010: 63 per cent). Eastspring Investments produced a good performance as rising revenues and a fall in the costincome ratio to 62 per cent (2010: 64 per cent) drove IFRS operating profit higher by 11 per cent to £80 million (2010: £72 million).
Capital generation We take a disciplined approach to capital allocation across the Group. Over the last few years we have taken several important steps to improve the efficiency and effectiveness of the capital allocation process, emphasising an unbiased focus on the products and geographies with the most attractive profitability characteristics. This has improved not only our returns on capital invested, but also our capital strength and capital fungibility. In 2011 we have continued to produce significant amounts of free capital, which we measure as free surplus generated.
In 2011, we generated £2,536 million of underlying free surplus before reinvestment in new business from our life in-force and asset management businesses, up 8 per cent from £2,359 million in 2010. We reinvested £553 million of the free surplus generated in the period into writing new business. The majority of this reinvestment (£297 million) was into Asia, which remains the primary destination for investment within the Group. In the US, we invested £202 million in new business with a continued emphasis on variable annuities as we capitalised on the ‘baby boomer’ demand for the product and a weakened competitive environment following the financial market challenges of the last few years. In the UK, we invested £54 million in new business and our product focus remains annuities and with-profits bonds. The IRRs on this invested capital were more than 20 per cent in Asia, the US, and the UK, with payback periods of three years, one year and four years respectively.
Of the remaining free surplus generated after reinvestment in new business, £1,105 million was remitted from the business units to Group. This cash was used to meet central costs of £195 million, service net interest payments of £282 million and meet dividend payments of £642 million. Furthermore, an aggregate £205 million was paid to secure new distribution agreements in Asia and to the UK tax authorities following the settlement reached in 2010.
‘Growth and Cash’ financial objectives The following discussion contains forward-looking statements that involve inherent risks and uncertainties. Prudential’s actual future financial condition or performance or other indicated results may differ materially from those indicated in any such forward-looking statement, due to a number of important factors (including those discussed under the heading ‘Risk factors’ in this document). See the discussion under the heading ‘Forward-looking statement’ at the end of this report.
At our 2010 investor conference, entitled ‘Growth and Cash’, we announced new financial objectives demonstrating our confidence in continued rapid growth in Asia, and increasing levels of cash remittances from all of our businesses. These objectives were defined as follows: (i) Asia growth and profitability objectives1: To double the 2009 value of IFRS life and asset management pre-tax operating profit in 2013 (2009: £465 million); and To double the 2009 value of new business profits in 2013 (2009: £713 million).
As mentioned in the Group Chief Executive’s report we believe we remain on track to achieve these objectives. Below we set out in more detail our progress towards these objectives based on our results in 2011.
Objectives for cumulative period 1 January 2010 to 31 December 2013 Actual Objective
* Total Asia operating profit from long-term business and Eastspring Investments after development costs.
† Net remittances from Asia in 2010 included a one-off remittance of £130 million, representing the accumulation of historic distributable reserves.
§ In 2009, the net remittances from the UK include the £150 million arising from the pro-active financing techniques used to bring forward cash emergence of the in-force book during the financial crisis. The 2010 net remittances include an amount of £120 million representing the releases of surplus and net financing payments.
Capital position, financing and liquidity The Group has continued to maintain a strong capital position. At 31 December 2011, our IGD surplus is estimated at £4.0 billion (2010: £4.3 billion), with coverage a very strong 2.75 times the requirement. All of our subsidiaries maintain strong capital positions at the local regulatory level. As mentioned above, Jackson’s RBC ratio at the end of 2011 was 429 per cent.
In addition to our strong capital position, on a statutory (Pillar 1) basis the total credit default reserve for the UK shareholder annuity funds also contributes to protecting our capital position in excess of the IGD surplus. This credit default reserve, as at 31 December 2011, was £2.0 billion, notwithstanding the positive steps taken through 2011 to improve the credit quality of the £26.8 billion asset portfolio (measured on a statutory basis). This represents 33 per cent of the portfolio spread over swaps, compared with 43 per cent at 31 December 2010, when bond spreads over swap rates were much lower. Importantly, it is equivalent to a default rate of 7.6 per cent over the life of these investments, considerably higher than what has been experienced historically for the types of fixed income securities that we hold.
‘ All of our businesses are now remitting considerable amounts of cash to Group and this is in line with our strategy as we seek to move away from the historical reliance on the UK.’
Our financing and liquidity position remained strong throughout the year. In December of 2011 we redeemed ¤500 million of Tier 2 subordinated notes at their first call date. This redemption was effectively pre-financed via an issuance of US$550 million of Tier 1 subordinated notes in January of 2011, which raised £340 million net of transaction costs. The next call on external financing is in December 2014 on the US$750 million of Perpetual Subordinated Capital Securities. Our central cash resources amounted to £1.2 billion at the end of 2011, a strong position.
The increases on both reporting bases are the result of the Group’s strong operating performance, offset by the relatively muted effect of the investment markets on the business, reflecting both the quality of the asset portfolio and the effectiveness of our proactive approach to risk management.
B u sin e ss rev iew 12m+ life customers 365,000+ agents
Market overview The European debt crisis is driving significant uncertainty in the global economy, however, Asia looks set to remain a world economic powerhouse as although lower external demand is impacting growth, regional and domestic demand remains robust.
Over the last decade Asia’s sustained economic growth has resulted in the rapid growth of the Asian middle class and now this is one of the fastest growing population groupings in the world. Although Asia currently has less than 25 per cent of the world’s middle class population, the Organisation for Economic Cooperation and Development (OECD) sees this figure doubling in the next 15 years. This middle class now have increasing disposable income, assets and lifestyles they want to protect and the recognition of a need to plan their own financial futures, independent of any state provisions.
u sin e ss rev iew65% New business margin (% APE)
The size and significance of Asian insurers has increased in recent years. A consequence of this has been their increased presence in the capital markets. Today there is far more disclosure and analysis of the financial performance of the businesses than was the case a few years ago, but there is still some way to go before the industry has common reporting standards and accounting practices. Market leadership is still typically gauged by simple sales metrics although this is changing as metrics that emphasise value generated using a risk-based assessment of returns to policyholders and shareholders are becoming more prevalent. Regulators are now taking a broader view of market leadership too; leaders are expected to behave in an exemplary manner at all times, to drive improvements in all aspects of the business and to champion a variety of social initiatives.
Total APE sales 1,660 1,501 11 1,491 11 NBP1 1,076 902 19 900 20 NBP margin (% APE)1 65% 60% 60 % Total IFRS operating profit* 709 536 32 533 33 Total EEV operating profit* 1,764 1,450 22 1,438 23 * Operating profit from long-term operations excluding Eastspring Investments, development costs and Asia regional head office costs.
‘ Prudential has a diverse range of successful bank distribution partnerships across the region that includes regional relationships with international banks such as Standard Chartered and local ones such as E.Sun in Taiwan.’
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Financial performance Prudential Asia remains well on track to deliver its 2013 new business profit, IFRS operating profit and cash remittance targets despite the more challenging external market conditions seen during 2011 where, for example, the MSCI Asia Pacific Excluding Japan Index was down 15 per cent and economic growth rates moderated.
Prudential’s bancassurance model generated 29 per cent of APE in 2011 with a growth rate of 37 per cent over prior year. New relationships that include our first full year of operations with UOB contributed 16 percentage points of this growth but our longestablished relationships with other partners including SCB, Maybank and SingPost also performed well, collectively growing 22 per cent over the prior year and reflecting our ongoing successes in generating value for our partners.
The new business mix for 2011 reflects our ongoing focus on regular premium savings with protection. The proportion of regular premium business remains high at 91 per cent of APE and in line with prior years. The proportion of protection business in the APE mix increased to 30 per cent from 27 per cent in the previous year while the proportion of linked business reduced to 32 per cent compared to 41 per cent in prior year principally due to a lower contribution from India and a move towards non linked policies in that market.
EEV profits from our in-force business of £688 million are up 25 per cent on prior year mainly driven by higher unwind as the scale of the book continues to grow. We continue to review and update our models to reflect evolving experience trends and for year end 2011 we made a number of changes that resulted in a net positive assumption change of £10 million. This included net positive changes, mainly on mortality and morbidity, totalling £150 million that were offset by a remodelling of withdrawal and lapse trends. The main contributor to this negative adjustment was Malaysia where in the second half of 2011 we decided to strengthen our assumptions to reflect our recent experience on our PruSaver product riders in Malaysia where policyholders that had accumulated gains on the savings component of their unit-linked policies realised some of these when markets were high while continuing to make their regular premium payments. This amounted to a negative charge to in-force profits of £108 million and remodelling of lapse trends in other markets such as India amounted to a net £32 million. Actual net experience variances for the year were positive £65 million reflecting better than expected performances. The assumption changes and variances remain very small in the context of total EEV shareholders’ funds of £8.5 billion.
During 2011, shareholder-backed business policyholder liabilities have increased to £18.3 billion (2010: £17.7 billion). Our strong business momentum saw net insurance inflows of £1.8 billion (up 42 per cent on last year’s equivalent amount of £1.3 billion), which were offset by falls in market value. As expected outflows including those from partial withdrawals are at a lower run rate than 2010, both in absolute terms and when expressed as a percentage of opening policyholder liabilities.
CITIC-Prudential remains one of the leading foreign joint ventures in a market that remains dominated by domestic players. We have true multi-channel distribution with a high quality agency force and a diverse range of national, regional and foreign bank partners covering many of the major cities and provinces in China’s more developed eastern regions. Sales for 2011 were £59 million, 2 per cent higher than the prior year.
During the second half of 2011 the market conditions became increasingly challenging with general concerns about the economy reflected by the MSCI China index being down 18 per cent for the year. It remains challenging to recruit and retain good agents in this competitive market. Sales through the bank channel were also impacted by new regulations prohibiting sales by non-bank staff.
Agency APE grew at 9 per cent driven by increases in the number of active agents and increased case sizes as a new par product has proven to be particularly attractive. Bancassurance sales through Standard Chartered Bank (SCB) grew at a faster pace than agency at 29 per cent demonstrating the strength of this long-term relationship and the significance of the bank channel in Hong Kong. Bancassurance sales accounted for 41 per cent of the total (2010: 37 per cent).
The strong new business APE growth at 28 per cent to £363 million has been primarily driven by the ongoing, rigorously managed, expansion of the agency force to 142,000 at the end of 2011. Active manpower increased by 18 per cent as our method of recruiting, training and licensing continues to be effective and we increased productivity by 7 per cent. Although still small relative to our agency force, the volume of new business from the bank channel increased by over 81 per cent (accounting for 5 per cent of the total) and has high potential for the future. We are the leader in Syariah products with a 54 per cent market share, contributing 15 per cent of new business sales.
New business growth in Malaysia of 9 per cent to £223 million reflects the continued success of our agency channel and the development of our bank partnership channel which has performed very strongly. Prudential remains a strong market leader with agent recruits up 11 per cent on prior year and the total number of active agents up 9 per cent. We also had great success with bank distribution, up 164 per cent over prior year driven by increased activity with SCB and the launch of our Malaysian UOB partnership in April 2011.
Singapore recorded an excellent year with APE of £235 million up 34 per cent on prior year. The principal driver of growth was the partnership channel where we have a cross section of partners enabling us to access a broad customer range. This was our first full year partnering with UOB, who achieved a 154 per cent sales growth. Sales through our other principal partners also grew strongly with Maybank up 67 per cent, SCB up 38 per cent and SingPost up 23 per cent. Partnership channel sales amounted to £97 million (2010: £51 million).
Agency numbers in Singapore remain in line with prior year but agency productivity continues to grow strongly.
Taiwan is now mainly focused on bank distribution with partners E.Sun and SCB although it does have growing direct marketing and worksite marketing activities, up 21 per cent and 33 per cent respectively in 2011.
Market overview The United States is the world’s largest retirement savings market. Each year, many of the 78 million ‘baby boomers’1 reach retirement age, which will trigger a shift from savings accumulation to retirement income generation for more than US$10 trillion of accumulated wealth over the next decade2.
In such an environment, Jackson’s asset and liability management continues to incorporate equity and interest rate exposure on an aggregate basis in order to ensure that total economic risk is hedged effectively within our established policy limits. Jackson continues to adapt its hedging programme to market conditions in order to ensure continued strong risk management. Despite historically low interest rates, volatile equity markets and the fluctuations in equity volatility experienced in 2011, Jackson’s hedging programme continued to perform well, mitigating the impact of the macroeconomic challenges and supporting our robust capital position. Jackson’s approach to pricing and hedging has always been to adopt a conservative stance and we believe that this positions Jackson well to outperform its peers during periods of market dislocation. Policyholder behaviour in 2011 continued to trend in line with both our pricing and reserving expectations.
Financial performance IFRS pre-tax operating profit was £694 million in 2011, down 17 per cent from £833 million in 2010. As previously indicated, this reduction was due to the expected accounting impact of accelerated deferred acquisition cost (DAC) amortisation of £232 million (2010: £11 million), which masked an underlying increase in earnings driven by higher fee income on separate account assets.
‘ Jackson’s product diversity allows the company to quickly adapt to changing market conditions and sustain appropriate sales levels in all phases of the business cycle.’
Acquisition costs have increased in absolute terms compared to 2010 due to the growth in sales volumes. However, acquisition costs as a percentage of APE have decreased to 70 per cent for 2011, compared to 73 per cent for 2010.
The DAC amortisation charge increased in 2011 to £619 million (2010: £334 million). This comprises a core charge of £387 million (2010: £323 million) and an accelerated charge of £232 million (2010: £11 million). The higher core charge is in line with the increase in fee income and spread profits. The accelerated charge reflects the anticipated additional amortisation of £166 million relating to the reversal of the benefit received in 2008 from the mean reversion formula and a charge of £66 million caused by lower than assumed separate account returns.
The net unrealised gain position has increased from £1,210 million at 31 December 2010 to £2,057 million at 31 December 2011 due primarily to the continued decline in the US Treasury rates. Gross unrealised losses decreased from £370 million at 31 December 2010 to £246 million at 31 December 2011.
Jackson’s strategy of proactively managing fixed annuity (FA) volumes resulted in APE sales of £47 million, 44 per cent lower than in 2010. Jackson ranked 14th in sales of traditional deferred fixed annuities through the third quarter of 2011, with a market share of 1.9 per cent, compared to eighth with a 3.4 per cent market share for the full year 20103.
The variable annuity new business margin of 69 per cent in 2011 decreased from 72 per cent in 2010. The adverse effect on margin of the 142 bps decline in 10-year Treasury rates was largely mitigated by pricing actions taken over the past 15 months and a favourable shift in VA business mix. The fixed indexed annuity new business margin remained flat at 41 per cent in 2011. Lower assumed target spreads and future reinvestment yields have resulted in a decrease in the fixed annuity new business margin from 34 per cent to 29 per cent.
In 2011, Jackson invested £202 million of free surplus to write £1,275 million of new business APE (2010: £300 million and £1,164 million, respectively). The reduction in capital consumption year-on-year principally reflects the benefit of lower costs generated by economies of scale and favourable business mix in 2011. Jackson wrote a higher proportion of variable annuity business, which consumes lower levels of initial capital and has lower initial reserving requirements as a result of product changes effected at the end of 2010.
Jackson’s RBC level at the end of 2011 was 429 per cent, which compares to 483 per cent in 2010. Jackson continues to have in place a SSAP 865 permitted practice which has the effect of valuing the interest rate hedge programme at cost, thereby not recognising in the RBC ratio the significant mark to market gains on this programme that arose from the decline in interest rates during 2011. The RBC ratio would be 482 per cent (2010: 470 per cent) without the permitted practice. Jackson’s RBC ratio remains at an appropriate level despite net remittances of £322 million during 2011, a testament to both the strength of Jackson’s balance sheet and the effectiveness of the hedging programme.
BrandscapeTM 2011 3 Source: LIMRA 4 Source: AnnuitySpecs 5 Statement of Statutory Principle
Market overview The UK life & pensions market, which is mature and the third largest in the world, is characterised by a concentration of wealth in the 45 to 74 age group and an ageing population, as the ‘baby boomers’ get older and progressively move into retirement.
Many of these individuals are insufficiently prepared financially for the prospect of spending longer in retirement and as a result, are considering extending their working lives while adopting a more flexible approach towards retirement. Prudential UK is well positioned to help the ‘baby boomers’ and subsequent generations meet their financial needs both as they approach and during retirement through its range of market leading with-profits and annuity products.
In 2011 Prudential UK continued to pursue a value over volume strategy, actively choosing to compete selectively in the retirement savings and income markets, and balancing the writing of new business with sustainable cash generation and capital preservation.
Sales of individual annuities of APE £179 million were 13 per cent lower than in 2010 as Prudential UK continues proactively to manage the flow of external conventional new business to control capital consumption. The proportion of with-profits annuity sales continues to increase, from 22 per cent in 2010 to 25 per cent in 2011.
Onshore bonds sales of APE £178 million were 7 per cent up on 2010, including with-profits bonds sales of APE £160 million, which increased by 9 per cent despite challenging market conditions. During 2011, Prudential UK reintroduced the PruFund Protected Growth Fund, with a range of guarantees added to both the Growth and Cautious funds. The PruFund range comprised 74 per cent of with-profits bond sales, driven by customer demand for products offering smoothed investment returns and optional capital guarantees. Since inception in 2004, PruFund has accumulated £5.4 billion funds under management. 2011 also saw the launch of four new Risk Managed PruFunds, which combine the strengths of our PruFund proposition with elements of the risk-managed approach adopted by our unit-linked Dynamic Portfolios.
The strength and performance track record of Prudential UK’s With-Profits Fund is widely recognised. Despite extreme market volatility in 2011 the Fund continues to provide customers with solid returns over medium to long-term time horizons. This strong performance has shown that with-profits, when invested in an actively managed and financially strong fund like Prudential’s, continues to be a very attractive medium to long-term investment.
Retail sales of APE £712 million (excluding credit life and bulk annuities) were 2 per cent below last year, a reflection of Prudential’s strategy to allocate capital to opportunities that play to the core strengths of the business rather than pursuing top-line sales growth. Retail EEV new business profit at £231 million was 10 per cent below 2010 (£257 million). Retail new business margin reduced to 32 per cent, 3 per cent down on 2010, primarily driven by a changing business mix of lower shareholder-backed annuity sales and higher sales of corporate pensions.
IFRS total operating profit was 1 per cent above the previous year at £723 million. Of this total, £293 million (2010: £310 million) relates to with-profits and £390 million (2010: £363 million) to shareholder-backed business reflecting higher annuity profits. Commission received on Prudential-branded General Insurance products contributed £40 million to IFRS operating profit in 2011, £6 million lower than in 2010 as the book of business originally transferred to Churchill in 2004 is, as expected, decreasing.
EEV total operating profit of £893 million was down 9 per cent, mainly due to the fall in new business profits. Life in-force profits were higher at £593 million (2010: £571 million). The contribution from the unwind of the discount on the opening embedded value was lower by £65 million reflecting the 151 bps reduction in long-term gilt yields. The effect of this was offset by higher experience profits and £79 million favourable assumption change arising from the reduction in the long-term tax rate to 25 per cent.
Underlying free surplus generated from the long-term in-force business in the UK amounted to £503 million (2010: £529 million). Of this total, £54 million (2010: £65 million) was reinvested in writing shareholder-backed business at attractive average IRRs.
During 2011 Prudential UK remitted cash of £297 million to the Group, comprising £223 million from the annual with-profits transfer to shareholders and £74 million from the shareholder-backed business. The business aims to generate £350 million per annum of sustainable cash remittances by 2013, supported by the strength of the with-profits business and surpluses arising from the large book of shareholder-backed annuities, maintained into the future by the pipeline of maturing individual and corporate pensions.
Eastspring, Prudential’s asset management business in Asia, manages investments for Asian third-party retail and institutional clients in addition to investments of Prudential’s Asian, UK and US life companies.
In the institutional marketplace, M&G’s approach centres on leveraging capabilities developed primarily for the Prudential internal funds to create higher margin external business opportunities. This has allowed M&G to offer third-party clients, such as pension funds, an innovative range of specialist fixed income and related strategies, including private debt opportunities in leveraged finance, and infrastructure investment.
M&G continues to execute against its strategy and deliver strong performance for both clients and its shareholder, the Prudential Group. M&G’s 2011 financial performance continues the momentum from the strong full year results recorded in 2010.
Business performance In 2011, M&G attracted gross inflows of £26.0 billion and net inflows of £4.4 billion, with retail funds contributing the lion’s share of the net position with £3.9 billion. After two successive years of extremely high net sales, it was our expectation that net fund flows would revert to somewhat lower levels in 2011 especially in light of the economic headwinds experienced over the year. However, while net sales are indeed lower, they remain strong. Our ability to maintain this sales performance over the year again demonstrates our strength and depth across all the main asset classes and distribution channels.
Underlying profit before performance-related fees 280 229 22 229 22 Performance-related fees 21 17 24 17 24
Operating profit from asset management operations 301 246 22 246 22 Operating profit from Prudential Capital 56 38 47 38 47
Retail Our expertise and strong performance have been recognised by independent authorities within the industry and we have won an array of awards for our funds and as a group. These include M&G being awarded the prestigious 2011 Old Broad Street Research Outstanding Investment House Award for the second year running.
The European funds industry suffered net outflows of ¤69.3 billion in 2011 – only the second time in the past decade (net outflows were ¤298 billion in 2008)1. This result masks a significant divide between the first half of the year, which saw net inflows of ¤96 billion, and the second half with net outflows of around ¤165 billion. It also masks a divide between markets where investors have been the greatest net buyers (notably the UK) and where they have been in significant net outflow (Continental Europe) as 21 out of 33 markets suffered full year outflows.
Despite this challenging flow environment, M&G’s Retail business generated positive net sales in the final quarter. In our core UK market, gross inflows of £2.7 billion were generated over the quarter with corresponding net inflows of over £1.1 billion. Over the full year to 31 December 2011, M&G’s UK Retail business has received gross inflows of £11.2 billion, representing an increase of 10 per cent on 2010 levels. At the net level, the UK Retail business recorded inflows of £4.3 billion, a modest fall of only 3 per cent on 2010 results.
3 Source: Lipper FMI. (February 2012, data as at December 2011). SalesWatch. Thomson Reuters
‘ Sales performance over the year again demonstrates our strength and depth across all the main asset classes and distribution channels.’
Institutional M&G’s Institutional business had a strong fourth quarter pushing the business into positive territory for the full year with net inflows of £490 million. The outflows experienced over the year included, as expected, a number of segregated clients withdrawing money from public debt funds due to asset allocation decisions. Additionally, outflows also reflected the contractual return of £696 million in capital to investors in mature closed-ended debt structures.
M&G’s Institutional business continues to benefit from its innovative approach to investment. The Alternative Credit team has raised £200 million of capital for a UK social housing fund, the first fund of its kind to capitalise on the income-generating nature of the sector. This is the second instance of M&G creating a fund to assist organisations starved of bank loans since the onset of the credit crisis. The M&G UK Companies Financing Fund (UKCFF), M&G’s loan facility for UK quoted companies, has now made total commitments of £710 million across eight loans, five of which were extended over 2011. Total commitments of £1.4 billion have been raised since its launch in 2009.
The M&G Secured Property Income Fund combines the expertise of both M&G’s Fixed Income Team, with its extensive credit research capability, and PRUPIM, the real estate fund management arm of the M&G Group and its core capability in real estate investment analysis. The Fund, which offers pension fund investors an alternative means of managing their inflation liabilities, passed through a net asset value (NAV) of £1 billion during the final quarter. £350 million in total was added to the NAV in 2011. Fund performance is strong, investor interest remains high and we continue to work hard at maintaining a suitable pipeline of acquisition opportunities.
The business has consolidated its position in a period of difficult and volatile markets, focusing on liquidity across the Prudential Group, management of the existing asset portfolio and conservative levels of new investment. Development of new product and infrastructure has continued, helping to maintain the dynamism and flexibility necessary to identify and realise opportunities for profit within acceptable risk parameters. Prudential Capital is committed to working closely with other business units across the Prudential Group to exploit opportunities and increase value creation for Prudential as a whole.
In November 2011, Prudential announced that its Asian Fund Management operations would be rebranded Eastspring Investments.
Market overview PPM America (PPMA) manages assets for Prudential’s US, UK and Asian affiliates. PPMA also provides other affiliated and unaffiliated institutional clients with investment services including collateralised debt obligations (CDOs), private equity funds, institutional accounts, and mutual funds. PPMA’s strategy is focused on managing existing assets effectively, maximising the benefits derived from synergies with our international asset management affiliates, and leveraging investment management capabilities across the Prudential Group. PPMA also pursues third-party mandates on an opportunistic basis.
Financial performance Curian reported an IFRS basis operating profit of £6 million in 2011 compared to £1 million in 2010.
Market overview National Planning Holdings, Inc. (NPH) is Jackson’s affiliated independent broker-dealer network. The business is comprised of four broker-dealer firms, including INVEST Financial Corporation, Investment Centers of America, National Planning Corporation, and SII Investments.
Financial performance NPH generated revenue of £491 million in 2011, up from £449 million in 2010, on gross product sales of £8.6 billion. The network continues to achieve profitable results, with 2011 IFRS operating profit of £14 million, a 27 per cent increase from £11 million in 2010. At 31 December 2011, the NPH network had 3,636 registered advisers, up from 3,461 at year end 2010.
International Financial Reporting Standards (IFRS) basis results* Statutory IFRS basis results
Results bases The basis of preparation of the statutory IFRS basis results and supplementary IFRS basis information is consistent with that applied for the full year 2010 results and financial statements. The EEV basis results have been prepared in accordance with the European Embedded Value Principles issued by the CFO Forum of European Insurance Companies in May 2004 and expanded by the Additional Guidance on EEV disclosures published in October 2005. Life insurance products are, by their nature, long-term and the profit on this business is generated over a significant number of years. Accounting under IFRS alone does not, in Prudential’s opinion, fully reflect the value of future profit streams. Prudential considers that embedded value reporting provides investors with a measure of the future profit streams of the Group’s in-force long-term businesses and is a valuable supplement to statutory accounts. There has been no change to the basis of presentation of the EEV results from the 2010 results and financial statements.
Exchange translation – Actual Exchange Rate (AER) and Constant Exchange Rate (CER) The comparative results have been prepared using previously reported exchange rates (AER basis) except where otherwise stated. In particular results on a constant exchange rate (CER) basis are shown for the analysis of IFRS and EEV operating profit based on longer-term investment returns.
Operating profit based on longer-term investment returns Consistent with previous reporting practice, the Group provides supplementary analysis of IFRS profit before tax attributable to shareholders and analyses its EEV basis results, so as to distinguish operating profit based on longer-term investment returns from other elements of total profit. On both the IFRS and EEV bases, operating earnings per share are calculated using operating profits based on longer-term investment returns, after related tax and non-controlling interests. These profits exclude short-term fluctuations in investment returns and the shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes. The operating profit based on longer-term investment returns for 2010 also excludes the costs associated with the terminated AIA transaction and the gain arising upon the dilution of the Group’s holding in PruHealth.
Insurance Groups Directive capital surplus (as adjusted) The surpluses shown for 2011, which is estimated, and 2010 are before allowing for the final dividends for 2011 and 2010 respectively.
Accounting policy change to be applied in 2012 In October 2010, the Emerging Issues Task Force of the US Financial Accounting Standards Board issued new guidance on accounting for Deferred Acquisition Costs (DAC), effective for reporting periods commencing after 15 December 2011. These proposals restrict the acquisition costs that can be deferred to future periods to those costs that are directly incremental to acquiring a new contract. Although Prudential does not report in accordance with US GAAP, under the accounting policies applied in accordance with IFRS 4, US GAAP is used to measure the insurance assets and liabilities of Jackson and certain of Prudential’s Asian operations. Prudential has therefore chosen, as an accounting improvement, to adopt from 1 January 2012 the new US GAAP DAC proposals for these entities. This change will first be applied in the 2012 half year financial report and there is no impact on the results included in this announcement for 2011 and 2010. However, on adoption of the new policy, which will be applied retrospectively, the 2011 IFRS operating profit based on longer-term investment returns will be altered from £2,070 million to £2,027 million, profit before tax attributable to shareholders will be altered from £1,943 million to £1,828 million, and shareholders’ funds at 31 December 2011 will be altered from £9,117 million to £8,564 million. Further details, together with the equivalent impacts on the 2010 results and shareholders’ funds, can be found in note III(a) of the Additional unaudited financial information. The change of policy has no effect on the regulatory capital position of the Group or on the overall EEV basis results, other than the presentational analysis of EEV shareholders’ funds between the component representing IFRS basis shareholders’ equity and the component representing additional shareholders’ retained profit recognised on the EEV basis.
Insurance business Long-term business: Asia 709 536 32 533 33 US 694 833 (17) 803 (14)
Asset management business: M&G (including Prudential Capital) 357 284 26 284 26 Eastspring Investments 80 72 11 73 10 Curian 6 1 500 1 500 US broker-dealer and asset management 18 21 (14) 20 (10)
Total IFRS basis operating profit based on longer-term investment returns 2,070 1,941 7 1,909 8
This reflects the UK government’s decision to change the basis of indexation from RPI to CPI.
In 2011, the Group’s IFRS operating profit based on longer-term investment returns was £2,070 million, an increase of 7 per cent from 2010.
In Asia, IFRS operating profit for long-term business increased by 32 per cent from £536 million in 2010 to £709 million in 2011. Profits from in-force business grew by 29 per cent between the two periods from £593 million to £763 million, reflecting the continued growth of the business in the region. New business strain of £54 million (2010: £56 million1) was lower despite higher sales due to favourable product and country mix.
New business strain in 2010 was £1 million. 2 Before non-recurring items.
In Prudential’s UK business, total IFRS operating profit was slightly higher than the prior year at £723 million (2010: £719 million), with long-term business generating £683 million (2010: £673 million). The year-on-year comparisons are distorted by the effect of bulk annuity transactions which are infrequent and vary in size between financial periods. Our approach to these is very selective and we will only write this business when it meets our strict profitability criteria. Two such transactions were completed in 2011 contributing £23 million to IFRS profits, compared to one transaction in 2010 with an IFRS profit contribution of £63 million.
Total operating profit for 2011 from M&G and Prudential Capital was £357 million, an increase of 26 per cent from £284 million in 2010. This performance is driven by improved revenues reflecting the strong net inflows received in recent periods, with funds under management of £201 billion at 31 December 2011, compared with £198 billion at 31 December 2010, together with a continued focus on cost discipline which saw a three percentage point reduction in the cost/income ratio.
Eastspring Investments reported operating profits of £80 million, an increase of 11 per cent from the £72 million recognised in 2010. This improvement is driven both by increased operating revenues from higher average funds under management during 2011 and continued cost discipline resulting in a two percentage point improvement in the cost/income ratio.
IFRS basis results – analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver
Notes (i) Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding
(ii) Acquisition cost ratio represents shareholder acquisition costs as a percentage of total APE (including £7 million of sales for Japan in 2010). (iii) Following the reduction in 2010 of the Group’s interest in the PruHealth and PruProtect businesses from 50 per cent to 25 per cent, the profits of
Fee income has increased by £182 million to £870 million, driven by the 20 per cent increase in the Group’s average unit-linked liabilities, which principally reflects the £7.0 billion net inflows into Jackson separate’s accounts in 2011. The fee income margin has increased from 121 bps to 127 bps in 2011 as Jackson contributes a greater proportion to the total, where the fee margin is higher.
Administration expenses have also increased to £1,043 million, reflecting the growth of the business in the year, while the margin remains constant at 83 bps.
Operating income* 727 202 122 338 1,389 Operating profit based on longer-term investment returns 301 80 56 24 461
Average funds under management (FUM)† £199.8bn £51.1bn Margin based on operating income† 36bps 40bps Cost/income ratio‡ 60% 62%
Average funds under management (FUM)† £186.5bn £47.2bn Margin based on operating income† 34bps 40bps Cost/income ratio‡ 63% 64%
* Operating income is net of commissions and includes performance related fees. † Margin represents operating income as a proportion of the funds under management (FUM). Opening and closing FUM have been used to derive the average.
‡ Cost/income ratio is calculated as, cost as a percentage of income excluding performance-related fees, and for M&G carried interest on private equity investments.
At Eastspring Investments, fee margin has been maintained at 40 bps. The margin reflects higher retail margins arising from new administration fees for offshore funds and higher margins in Taiwan, offset by a decrease in institutional margins due to a shift in asset mix from higher margin equity funds, in favour of lower margin fixed income funds. Equity markets correction experienced in Asia and globally in 2011 has contributed to this asset mix shift. Continued focus on costs has seen cost/income ratio decrease from 64 per cent in 2010 to 62 per cent in 2011.
PruCap’s operating profit increased during 2011, reflecting the ongoing active management of the portfolio in the period.
Profit before tax attributable to shareholders 1,943 1,461 Tax charge attributable to shareholders’ profit(i) (449) (25) Non-controlling interests (4) (5)
Profit for the year attributable to equity holders of the Company 1,490 1,431
Note (i) In 2010, tax charge attributable to shareholders’ profit includes a credit of £158 million which primarily relates to the impact of a settlement
IFRS basis profit after tax The total profit before tax attributable to shareholders was £1,943 million in 2011, compared with £1,461 million in 2010. The improvement reflects the increase in operating profit based on longer-term investment returns, and the fact that in 2010 the profit was reduced by the terminated AIA transaction costs of £377 million.
IFRS short-term fluctuations in investment returns Short-term fluctuations in investment returns for our insurance operations comprise negative £92 million for Asia, negative £95 million for US operations and positive £159 million in the UK.
The negative short-term fluctuations of £92 million for our Asian operations in part reflects equity market falls in Taiwan and a partial reversal of unrealised gains recognised in prior years on the Group’s investment in China Life Insurance Company of Taiwan.
The positive short-term fluctuations of £159 million for our UK operations principally reflect net valuation gains arising in the period on fixed income assets backing the capital of the shareholder-backed annuity business.
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes The shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes of positive £21 million mainly reflects favourable experience in the year in respect of the Scottish Amicable scheme combined with the impact of assumption changes, primarily from lower inflation and lower expected salary increases, applied to the liabilities of both the Scottish Amicable and M&G schemes.
The effective rate of tax at the total IFRS profit level was 23 per cent (2010: 2 per cent). Adjusting the rate in 2010 to exclude the exceptional tax credit of £158 million gives an underlying tax rate at the total IFRS profit level of 13 per cent. In both 2011 and 2010, we have benefited from a reduction in the main UK corporate tax rate from 28 per cent to 26.5 per cent. In 2010, and to a lesser extent in 2011, we also benefited from utilising carried forward tax losses for which no deferred tax asset was previously established.
Asset management business: M&G 357 284 26 284 26 Eastspring Investments 80 72 11 73 10 Curian 6 1 500 1 500 US broker-dealer and asset management 18 21 (14) 20 (10)
In 2011, Prudential Group’s total EEV basis operating profit based on longer-term investment returns was £3,978 million, an increase of 8 per cent from 2010.
Long-term business profit generated by the Group increased by 5 per cent to £4,043 million. This profit comprises: • New business profit of £2,151 million (2010: £2,028 million1); • In-force profit of £1,897 million (2010: £1,817 million); and
• Negative £5 million for other items including development expenses (2010: negative £5 million).
New business profit at £2,151 million was 6 per cent higher than last year, which compares with the equivalent increase in new business APE of 6 per cent. Group new business margin was unchanged at 58 per cent as pricing actions coupled with favourable changes in business mix fully mitigated the downward pressure on margins from the significant declines in long-term interest rates.
In 2011, at £688 million (2010: £549 million), Asia was the highest contributor to the Group’s life in-force profit for the first time. In Asia we have seen improvements in overall experience and operating assumption changes, with a positive impact for the year of £75 million (2010: negative £24 million). This positive trend primarily reflects favourable mortality and morbidity experience partially offset by the effect of strengthening partial withdrawals lapse assumptions in Malaysia following the review undertaken in 2011.
Other income and expenditure totalled a net expense of £536 million compared with £494 million in 2010. The £42 million increase principally reflects the higher interest payable on core structural borrowings on the US$550 million Tier 1 subordinated note issued in January, the proceeds of which were used to redeem the ¤500 million Tier 2 notes in December 2011.
EEV basis operating profit based on longer-term investment returns 3,978 3,696 Short-term fluctuations in investment returns: Insurance operations (787) (55)
Mark to market value movements on core borrowings (14) (164) Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 23 (11) Effect of changes in economic assumptions (158) (10) Costs of terminated AIA transaction – (377) Gain on dilution of Group holdings – 3
Profit before tax 2,922 3,107 Tax charge attributable to shareholders’ profit(i) (776) (530) Non-controlling interests (4) (4)
Note (i) In 2010 tax charge attributable to shareholders’ profit includes a credit of £158 million which primarily relates to the impact of a settlement
EEV basis profit after tax and non-controlling interests Short-term fluctuations in investment returns EEV operating profit is based on longer-term investment return assumptions rather than actual investment returns achieved. Short-term fluctuations in investment returns represent the difference between the actual investment return and those assumed in arriving at the reported operating profit.
Short-term fluctuations in investment returns for insurance operations of negative £787 million comprise negative £155 million for Asia, negative £491 million for our US operations and negative £141 million in the UK.
For our Asian business, short-term fluctuations of negative £155 million (2010: positive £287 million) reflects the effect on future fee income of the lower than assumed equity market returns in 2011, partially offset by valuation gains on bonds backing shareholder capital arising from the fall in interest rates.
For our UK business, the short-term fluctuations in investment returns were negative £141 million (2010: positive £336 million). This reflects the actual return on the with-profits fund in 2011 of 3.2 per cent being lower than the longer-term assumed rate of 5.1 per cent, partly offset by higher than expected returns on the bonds backing the capital of the shareholder annuity business, following the fall in yields in 2011.
Effect of changes in economic assumptions The effect of changes in economic assumptions of negative £158 million, comprises positive £279 million for Asia, negative £144 million for the US and negative £293 million for the UK.
In our US business, the reduction in long-term yields and the associated decrease in risk discount rates has a positive effect on future fixed annuity spread profits which broadly offset the negative effect on future variable annuity fee income. The overall negative effect of £144 million principally reflects the prudent decision taken by Jackson to increase the allowance for future credit defaults following the widening of credit spreads in the second half of 2011.
Note (i) The exceptional tax credit in 2010 relates to a £158 million credit
which primarily relates to the impact of a settlement agreed with the UK tax authorities.
In line with 2010, shareholders on the principal register and Irish branch register will be able to participate in a Dividend Reinvestment Plan.
Net increase in shareholders’ funds 1,086 1,760 1,430 2,934 Shareholders’ funds at beginning of year 8,031 6,271 18,207 15,273
Comprising: Long-term business Free surplus(b) 2,839 2,748 Required capital 3,447 3,415
business (net of new business investment and market related movements), less the cash paid to the holding company, market movements, and other items.
(c) The increase in net worth in the period principally reflects the free surplus generated in the period, offset by cash paid to the holding company, changes to required capital and other items.
IFRS Statutory IFRS basis shareholders’ funds at 31 December 2011 were £9.1 billion. This compares to £8.0 billion at 31 December 2010 and represents an increase of £1.1 billion, equivalent to 14 per cent.
The movement primarily reflects the profit for the period after tax and non-controlling interests of £1,490 million and the increase in the level of net unrealised gains on Jackson’s debt securities of £312 million from the position at 31 December 2010, offset by the payment of dividends of £642 million and exchange translation losses of £100 million.
EEV On an EEV basis, which recognises the shareholders’ interest in long-term business, shareholders’ funds at 31 December 2011 were £19.6 billion, an increase of £1.4 billion from the 31 December 2010 level, equivalent to 8 per cent. This increased level of shareholders’ funds primarily reflects the profit after tax of £2,142 million, offset by the negative effects of exchange movements of £158 million and dividend payments of £642 million.
The shareholders’ funds at 31 December 2011 relating to long-term business of £19.7 billion comprise £8.5 billion (up 15 per cent from year end 2010) for our Asian long-term business operations, £5.1 billion (up 6 per cent from year end 2010) for our US long-term business operations and £6.1 billion (up 1 per cent from year end 2010) for our UK long-term business operations.
Total movement during the period 83 807 Free surplus at 1 January 3,338 2,531
Comprised of: Free surplus relating to long-term insurance business 2,839 2,748 Free surplus of other insurance business 29 33 IFRS net assets of asset management businesses excluding goodwill 553 557
Note (i) During the first half of 2011 the Group altered its assumptions for future statutory increases to pension payments for its UK defined benefit
Value created through investment in new business by life operations 2011 £m
Free surplus invested in new business (297) – (297) (202) (54) (553) (553)
Net worth invested in new business (200) – (200) 30 23 (147) (147)
Post-tax new business profit for the year 811 – 811 530 195 1,536 1,536
Free surplus invested in new business (278) (2) (280) (300) (65) (643) (645)
Value created through investment in new business by life operations continued CER
Free surplus invested in new business (275) (2) (277) (288) (65) (628) (630)
Net worth invested in new business (191) (2) (193) (28) 42 (177) (179)
Value of in-force created by new business 862 1 863 505 224 1,591 1,592
In the US, investment in new business was £202 million, 33 per cent lower than 2010 (£300 million) and contrasts to a 10 per cent increase in APE new business sales. For each £1 million of free surplus invested we generated £2.6 million of post-tax new business contribution to embedded value (2010: £1.7 million). This higher return reflects both a higher proportion of variable annuity business being sold in the year, with a reduced proportion of more capital intensive fixed annuities, product changes which reduce the reserving requirements and marketing cost efficiency. The average free surplus undiscounted payback period for business written in 2011 was one year (2010: one year).
US net 322 80 Asia paid to the Group Long-term business 289 330 Other operations 55 33 344 363 Group invested in Asia Long-term business (50) (63) Other operations (88) (67)
Cash and short-term investments at end of period 1,200 1,232 * Including central finance subsidiaries.
Holding company cash flow We continue to manage cash flows across the Group with a view to achieving a balance between ensuring sufficient net remittances from the businesses to cover the progressive dividend (after corporate costs) and maximising value for shareholders through the retention of the free surplus generated at business unit level, so that it can be reinvested in the profitable opportunities available to the Group. On this basis, the holding company cash flow statement at an operating level should ordinarily balance close to zero before exceptional cash flows, but, from time to time, additional remittances from business operations will be made to provide the Group with greater financial flexibility at the corporate centre.
Operating holding company cash flow for 2011 before the shareholder dividend was £809 million, £100 million higher than 2010. After deducting the higher level of shareholder dividend paid following the upward rebasing at the end of 2010 and the cancellation of the scrip dividend option, the operating holding company cash flow was positive £167 million (2010: £260 million).
The holding company received £1,105 million of net cash remittances from the business units in 2011, an increase of £170 million from 2010.
The Group’s UK asset management operations remit substantially all of their annual post-tax earnings to the Group. M&G and PruCap collectively remitted £280 million (2010: £202 million).
Since then principal and interest repayments have reduced the cash available to be remitted to the Group by these businesses. Based on our current plans, the remaining balance of £145 million will impact the net remittances from these businesses in 2012.
During the first half of 2011 we raised £340 million, net of costs, from the issue of new subordinated debt. Substantially all of these proceeds (£333 million) were used to repay the ¤500 million Tier 2 subordinated debt in December 2011.
Goodwill attributable to shareholders 1,465 1,466 Investments 250,605 239,297 Holding company cash and short-term investments 1,200 1,232 Other 20,310 18,811
225,770 214,804 Core structural borrowings of shareholders’ financed operations (IFRS book value basis) 3,611 3,676 Other liabilities including non-controlling interest 24,562 24,119
Share capital and premium 2,000 1,983 IFRS basis shareholders’ reserves 7,117 6,048
IFRS basis shareholders’ equity 9,117 8,031 Additional EEV basis retained profit 10,520 10,176
The increase reflects positive net flows (premiums less surrenders and maturities/deaths) of £9,006 million in 2011 (2010: £9,695 million), driven by strong inflows in the US (£7,824 million) and Asia (£1,839 million). Net flows in Asia have increased by 42 per cent to £1,839 million in 2011 (2010: £1,298 million). Additionally, the rate of surrenders in Asia (expressed as a percentage of opening liabilities) was 4.4 per cent in the second half of 2011, an improvement compared with 5.1 per cent in the first half of 2011 and 6.4 per cent in the second half of 2010. The overall rate of surrender in 2011 was 9.8 per cent compared with 13.8 per cent in 2010.
Shareholders’ net borrowings and ratings The Group’s core structural borrowings at 31 December 2011 totalled £3.6 billion on an IFRS basis, compared with £3.7 billion at 31 December 2010.
In addition to our core structural borrowings set out above, we also have in place an unlimited global commercial paper programme. As at 31 December 2011, we had issued commercial paper under this programme totalling £736 million, US$2,539 million, ¤342 million, CHF62 million and AU$12 million. The central treasury function also manages our £5 billion medium-term note (MTN) programme, covering both core and non-core borrowings. In April and October 2011 we refinanced an existing internal £200 million issue under this programme. In total, at 31 December 2011 the outstanding subordinated debt under the programme was £835 million, US$1,300 million and ¤20 million, while the senior debt outstanding was £550 million. In addition, our holding company has access to £2.1 billion of syndicated and bilateral committed revolving credit facilities, provided by 17 major international banks, expiring between 2013 and 2017. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 31 December 2011. The commercial paper programme, the MTN programme and the committed revolving credit facilities are all available for general corporate purposes and to support the liquidity needs of our holding company and are intended to maintain a strong and flexible funding capacity.
We manage the Group’s core debt within a target level consistent with our current debt ratings. At 31 December 2011, the gearing ratio (debt, net of cash and short-term investments, as a proportion of EEV shareholders’ funds plus net debt) was 10.9 per cent, compared with 11.8 per cent at 31 December 2010. Prudential plc has strong debt ratings from Standard & Poor’s, Moody’s and Fitch. Prudential’s long-term senior debt is rated A+, A2 and A from Standard & Poor’s, Moody’s and Fitch, while short-term ratings are A-1, P-1 and F1 respectively.
The actuarial valuation of the M&G pension scheme as at 31 December 2008 demonstrated the scheme to be 76 per cent funded. Based on this valuation, deficit funding amounts designed to eliminate the actuarial deficit over a five year period have been agreed with £14.1 million being paid in each of 2010 and 2011 and £9.3 million per annum for the subsequent three years. In 2011, the Group agreed with the Trustee to pay an additional funding of £1.2 million per annum from January 2012 until the conclusion of the actuarial valuation as at 31 December 2011, which is currently in progress.
As at 31 December 2011, on the Group IFRS statement of financial position, the shareholders’ share of the net liabilities for these UK schemes amounted to a £17 million liability net of related tax relief (2010: £83 million). The total share attributable to the PAC with-profits fund amounted to a liability of £38 million net of related tax relief (2010: £99 million). The adoption by the Group in 2011 of the UK government’s decision to use the CPI in place of the RPI as the basis for inflationary increases to pensions, affected the IAS 19 valuation of certain tranches of the Group’s schemes. This resulted in a credit to pre-tax IFRS operating profit of £42 million. The impact of this change on the shareholders’ share of pension liabilities, net of related tax relief and the total share attributable to the PAC with-profits fund, net of related tax relief, was a reduction of £31 million and £22 million, respectively.
A. Group risk appetite Prudential defines and monitors aggregate risk limits based on financial and non-financial stresses for its earnings volatility, liquidity and capital requirements.
Earnings volatility: the objectives of the limits are to ensure that: a the volatility of earnings is consistent with the expectations of stakeholders, b the Group has adequate earnings (and cash flows) to service debt, expected dividends and to withstand unexpected shocks, and c earnings (and cash flows) are managed properly across geographies and are consistent with funding strategies.
The two measures used to monitor the volatility of earnings are European Embedded Value (EEV) operating profit and International Financial Reporting Standards (IFRS) operating profit, although EEV and IFRS total profits are also considered.
Capital requirements: the limits aim to ensure that: a the Group meets its internal economic capital requirements, b the Group achieves its desired target rating to meet its business objectives, and c supervisory intervention is avoided.
The two measures used are the EU Insurance Groups Directive (IGD) capital requirements and internal economic capital requirements. In addition, capital requirements are monitored on a local statutory basis.
Financial risks Market risk • The risk of loss for our business, or of adverse change in the financial situation, resulting, directly or indirectly, from fluctuations in the level or volatility of market prices of assets and liabilities.
Insurance risk • The risk of loss for our business or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of a number of insurance risk drivers. This includes adverse mortality, longevity, morbidity, persistency and expense experience.
The key financial and non-financial risks and uncertainties faced by the Group, that have been considered by the Group Risk Committee during the year, and our approaches to managing them, are described below.
B.1 Financial risks a Market risk i Equity risk In the UK business, most of our equity exposure is incurred in the with-profits fund, which includes a large inherited estate estimated at £6.1 billion as at 31 December 2011 (2010: £6.8 billion), which can absorb market fluctuations and protect the fund’s solvency. The inherited estate itself is partially protected against falls in equity markets through an active hedging policy.
In Asia our shareholder exposure to equities is minimal and is mainly attributed to revenue from unit-linked products. From a capital perspective, we have a small exposure to falling equity markets from the with-profits businesses.
It is our philosophy not to compete on price; rather, we seek to sell at a price sufficient to fund the cost we incur to hedge or reinsure our risks and to achieve an acceptable return for shareholders.
We use a macro approach to hedging that covers the risks inherent across the US business. Within this macro approach we make use of the natural offsets that exist between the variable annuity guarantees and the fixed index annuity book, and then use a combination of over-the-counter (OTC) options and exchange traded derivatives to hedge the remaining risk, considering significant market shocks and limiting the amount of capital we are putting at risk. Internal positions are generally netted before any external hedge positions are considered. The hedging programme also covers the fees on variable annuity guarantees.
ii Interest rate risk Interest rate risk arises primarily from Prudential’s investments in long-term debt and fixed income securities. Interest rate risk also exists in policies that carry investment guarantees on early surrender or at maturity, where claim values can become higher than the value of backing assets as a result of rises or falls in interest rates.
In the UK, the investment policy for the shareholder-backed annuity business is to match the annuity payments with the cash flows from investments. As a result, assets and liabilities are closely matched by duration. The impact on profit of any residual cash flow mismatching can be adversely affected by changes in interest rates; therefore the mismatching position is regularly monitored. The guarantees written in the with-profits business also give rise to some interest rate discounting risk (ie falling rates result in an increase in the cost of guarantees) albeit these impacts are in the first instance absorbed by the with-profits fund and not IFRS shareholders’ equity.
iii Foreign exchange risk Prudential principally operates in the UK, the US, and in 13 countries and territories in Asia and the Middle East. The geographical diversity of our businesses means that we are inevitably subject to the risk of exchange rate fluctuations. Prudential’s international operations in the US and Asia, which represent a significant proportion of our operating profit and shareholders’ funds, generally write policies and invest in assets denominated in local currency. Although this practice limits the effect of exchange rate fluctuations on local operating results, it can lead to significant fluctuations in our consolidated financial statements when results are expressed in pounds sterling.
The Group held the following total investments at 31 December 2011.
The table below presents the balances of investments related to shareholder-backed operations.
The below table presents the balances of debt securities at 31 December 2011.
UK The UK’s debt portfolio on an IFRS basis is £78.0 billion as at 31 December 2011, including £47.6 billion within the UK with-profits fund. Shareholders’ risk exposure to the with-profits fund is limited as the solvency is protected by the large inherited estate. Outside the with-profits fund there is £6.2 billion in unit-linked funds where the shareholders’ risk is limited, with the remaining £24.2 billion backing the shareholders’ annuity business and other non-linked business (of which 78 per cent is rated AAA to A, 20 per cent BBB and 2 per cent non-investment grade). The UK shareholder-backed portfolio did not experience any default losses in 2011.
Within the RMBS portfolio of £2.6 billion, the portion guaranteed by US government sponsored agencies is 60 per cent. Another 18 per cent of the portfolio is non-agency prime and Alt-A investments with pre-2006/2007 vintages, where experience has been much more positive than later vintages. Our exposure to the 2006/2007 vintages totals £343 million of which £337 million is invested in the senior part of the capital structure. The actual exposure to non-senior 2006/2007 Prime and Alt-A RMBS is only £6 million. The total RMBS portfolio has an average fair value price of 92 cents on the dollar.
Jackson’s debt securities experienced total credit-related losses in 2011 of £52 million (2010: £213 million). This includes net recoveries on sales of previously impaired bonds of £10 million (2010: loss of £89 million) and IFRS write-downs of £62 million (2010: £124 million). Of this amount of write-downs, £21 million (2010: £71 million) was in respect of RMBS securities. In addition to the amounts for debt securities, there were £28 million (2010: £12 million) of write-downs on Jackson’s commercial mortgage loan portfolio. In 2011 and 2010 Jackson did not have any defaults in its debt securities portfolio.
Continental Europe Italy 43 52 Spain 1 33 44 85 Germany 598 602 Other Europe (principally Isle of Man and Belgium) 48 62 690 749 United Kingdom 3,254 2,801 United States 2,448 2,615 Other, predominantly Asia 2,850 332 iii) Exposure to bank debt securities Prudential expects that any second order sovereign credit exposures would most likely be concentrated in the banking sector. The Group’s bank exposure is a function of its core investment business, as well as of the hedging and other activity undertaken to manage its various financial risks. Prudential relies on public information, such as the results of the July 2011 European Banking Authority (EBA) stress tests to identify banks with large concentrations of indirect exposure.
Of the £58.4 billion of debt securities backing shareholder business (excluding holdings attributable to external holders of consolidated unit trusts), 4 per cent or £2.1 billion was in Tier 1 and Tier 2 hybrid bank debt. A further £2.2 billion was in the form of senior debt.
The Group’s exposure to derivative counterparty credit risk is subject to the same framework of Group-wide operational limits and monitoring as our invested credit risk. Where appropriate, we will reduce our exposure, purchase credit protection or make use of additional collateral arrangements to control our levels of counterparty credit risk.
B.2 Non-financial risk Prudential is exposed to operational, business environment and strategic risk in the course of running its businesses.
Prudential’s systems and processes incorporate controls that are designed to manage and mitigate the operational risks associated with its activities. The Prudential Group Governance Manual was developed to make a key contribution to the sound system of internal control that the Group is expected to maintain under the UK Corporate Governance Code and the Hong Kong Code on Corporate Governance Practices. Group Head Office and business units confirm that they have implemented the necessary controls to evidence compliance with the Manual.
The Group has an operational risk management framework in place that facilitates both the qualitative and quantitative analysis of operational risk exposures. The output of this framework, in particular management information on key operational risk and control assessments, scenario analysis, internal incidents and external incidents, is reported by the business units and presented to the Group Operational Risk Committee. This information also supports business decision-making and lessons-learned activities; the ongoing improvement of the control environment; and determination of the adequacy of Prudential’s corporate insurance programme.
Solvency II represents a regulatory risk due to the uncertainty of what the rules will be when finalised, their potential impacts, and the timing of their introduction. The risks are that the Group may not be able to respond sufficiently quickly to the strategic implication of the change given levels of uncertainty around the content and timing; operational risk in terms of the scale and complexity of the delivery and uncertainty over timelines; and the additional capital that the Group may be required to hold. Solvency II is covered in more detail in the Capital Management section below.
• Net impact of £0.1 billion arising from issuance of the US$550 million perpetual subordinated Tier 1 securities in January 2011 and repayment of the ¤500 million subordinated notes in December 2011.
Stress testing As at 31 December 2011, stress testing of our IGD capital position to various events has the following results: • An instantaneous 20 per cent fall in equity markets from 31 December 2011 levels would reduce the IGD surplus by £350 million; • A 40 per cent fall in equity markets (comprising an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period) would reduce the IGD surplus by £900 million; • A 100 bps reduction (subject to a floor of zero) in interest rates would reduce the IGD surplus by £650 million; and
• Credit defaults of 10 times the expected level would reduce IGD surplus by £500 million.
A key aspect of Solvency II is that the assessment of risks and capital requirements are intended to be aligned more closely with economic capital methodologies. Companies may be allowed to make use of internal economic capital models if approved by the local regulator.
The European Parliament is currently discussing the Omnibus II Directive which, once approved, will amend certain aspects of the Solvency II Directive, including the anticipated implementation date as described above. The Omnibus II Directive is expected to be finalised during 2012.
In addition the European Commission is continuing to develop, in consultation with stakeholders including industry, detailed rules that complement the high-level principles in the Solvency II Directive, referred to as ‘implementing measures’. These are not expected to be finalised until later in 2012. Further guidance and technical standards are also currently being developed by the European Insurance and Occupational Pensions Authority (EIOPA). These are expected to be subject to a formal consultation and are unlikely to be finalised before early 2013.
Over the coming months we will be progressing our implementation and remaining in regular contact with the FSA as we continue to engage in the ‘pre-application’ stage of the approval process for the internal model.
C.4 Risk mitigation and hedging We manage our actual risk profile against our tolerance of risk. To do this, we maintain risk registers that include details of the risks we have identified and of the controls and mitigating actions we employ in managing them. Any mitigation strategies involving large transactions such as a material derivative transaction are subject to review at Group level before implementation.
u sin e ss rev iew Business review | Other corporate information
In 2011, the new business profit mix in our Asian insurance business was derived 60 per cent (2010: 59 per cent) from health and protection products, 27 per cent (2010: 32 per cent) from unit-linked products and 13 per cent (2010: 9 per cent) from non-linked products.
Unit-linked products combine savings with protection, with the cash value of the policy depending on the value of the underlying unitised funds. Participating products provide savings with protection where the basic sum assured can be enhanced by a profit share (or bonus) from the underlying fund as determined at the discretion of the insurer. Non-participating products offer savings with protection where the benefits are guaranteed or determined by a set of defined market-related parameters. Accident and health products provide mortality or morbidity benefits and include health, disablement, critical illness and accident cover. These products are commonly offered as supplements to main life policies, but can also be sold separately.
Policyholder and insurer share the profits from participating policies (typically in a 90:10 ratio) in the same way as with-profits business in the UK. With unit-linked products, shareholders receive the profits arising from managing the policy, its investments and the insurance risk. Policyholders within the underlying unitised fund receive investment gains. The profits from accident and health and non-participating products come from any surplus remaining after paying policy benefits.
Unit-linked products tend to have higher profits on the EEV basis of reporting than traditional non-linked products, as expenses and charges are better matched and solvency capital requirements are lower. At the end of 2011, we were offering unit-linked products in all markets except Thailand.
In Malaysia and Indonesia, Prudential also offers life insurance policies that are constructed to comply with Islamic principles otherwise known as Takaful. The main principles are policyholders co-operate among themselves for the common good, uncertainty is eliminated in respect of subscription and compensation and there is no investment in prohibited areas such as gambling or alcohol.
In addition to the life products described above, we offer mutual fund investment products in India, Taiwan, Japan, Singapore, Malaysia, Hong Kong, Korea, Vietnam and China, thus enabling customers to participate in debt, equity and money market investments. We are also licensed in the United Arab Emirates. Eastspring Investments (our asset management business in Asia) earns a fee based on assets under management.
Fixed index annuities are similar to fixed annuities, in that the contract holder pays a premium that is credited to the contract holder’s account, and also in that interest is periodically credited to the contract holder’s account. An annual minimum interest rate is guaranteed, although actual interest credited may be higher and is linked to an equity index over the product’s index option period. Profit comes primarily from the spread between the return earned on investments and the amounts credited to the contract holder’s account, less expenses, which include the costs of hedging the equity component of the interest credited to the contract. The net hedge results are reflected in short-term fluctuations. Fixed index annuities are subject to early surrender charges for the first five to 12 years of the contract. During the surrender charge period, the contract holder may cancel the contract for the surrender value. The fixed index book provides natural offsetting equity exposure to the guarantees issued in connection with our variable annuity products, which allows for efficient hedging of the net equity exposure.
The contract holder can allocate the premiums between a variety of variable sub-accounts, with a choice of fund managers and/or guaranteed fixed-rate options. As with a unit-linked fund, the contract holder’s premiums allocated to the variable accounts are held separately from Jackson’s general account assets. The value of the portion of the separate account allocated to variable sub-accounts fluctuates with the underlying investments. Variable annuity policies are subject to early surrender charges for the first four to nine years of the contract. During the surrender charge period, the contract holder may cancel the contract for the surrender value. Jackson offers one variable annuity that has no surrender charges and also offers a choice of guaranteed benefit options within their variable annuity product portfolio, which customers can elect and pay for. These options include the guaranteed minimum death benefit (GMDB), which guarantees that, upon death of the owner, the beneficiary receives a minimum value regardless of past market performance. These guaranteed death benefits might be expressed as the return of original premium, the highest past anniversary value of the contract, or as the original premium accumulated at a fixed rate of interest. In addition, there are three other types of guarantees: guaranteed minimum withdrawal benefits (GMWB), guaranteed minimum accumulation benefits (GMAB) and guaranteed minimum income benefits (GMIB).
As the investment return on the separate account assets is attributed directly to the contract holders, Jackson’s profit arises from the fees charged on the contracts, less the expenses incurred, which include the costs of hedging and the eventual payment of benefits guarantees. The net hedge results are reflected in short-term fluctuations. In addition to being a profitable book of business in its own right, the variable annuity book also provides an opportunity to utilise the offsetting equity risk among various lines of business to manage in a cost-effective manner our equity exposure. Profits in the variable annuity book of business will continue to be subject to the impact of market movements on both sales and allocations to the variable accounts and the effects of the economic hedging programme. While risk is hedged on an economic basis, the nature and duration of the hedging instruments, which are recorded at fair value through the income statement, will fluctuate and produce some accounting volatility. Management continues to believe that, on a long-term economic basis, the equity exposure remains well managed.
Life insurance Jackson also sells several types of life insurance including term life, universal life and variable universal life. Term life provides protection for a defined period of time and a benefit that is payable to a designated beneficiary upon the insured’s death. Universal life provides permanent individual life insurance for the life of the insured and includes a savings element. Variable universal life is a life insurance policy that combines death benefit protection with the ability for the policyholder account to be invested in separate account funds. The Jackson life insurance book has also delivered consistent profitability, driven primarily by favourable mortality experience.
Institutional products Jackson’s institutional products division markets institutional products such as traditional Guaranteed Investment Contracts (GICs), Funding Agreements and Medium Term Note (MTN) funding agreements. The institutional product offerings also include Jackson’s funding agreements issued to the Federal Home Loan Bank. Institutional products are distributed directly to investors, through investment banks, or through funding agreement brokers. Jackson sold no institutional products during 2010 or 2009, as available capital was directed to support higher- margin variable annuity sales. In 2011, Jackson re- entered the institutional market on a limited and selective basis, taking advantage of the high returns available at particular times during the year.
United Kingdom In common with other UK long-term insurance companies, Prudential UK’s products are structured as either with-profits (or participating) products, or non-participating products including annuities in payment and unit-linked products. Depending on the structure, the level of shareholders’ interest in the value of policies and the related profit or loss varies.
The profits from almost all of the new non-participating business accrue solely to shareholders. Such business is written in the non-profit sub-fund within PAC’s long-term fund, or in various shareholder-owned direct or indirect subsidiaries. The most significant of these is Prudential Retirement Income Limited (PRIL), which also writes all new immediate annuities arising from vesting deferred annuity policies in the with-profits sub-fund of PAC. There is a substantial volume of in-force non-participating business in PAC’s with-profits sub-fund and that fund’s wholly owned subsidiary Prudential Annuities Limited (PAL), which is closed to new business. Profits from this business accrue to the with-profits sub-fund.
In May 2004 the CFO Forum, representing the Chief Financial Officers of 19 European insurers, published the European Embedded Value Principles (expanded by the Additional Guidance of EEV Disclosures published in October 2005), that provide consistent definitions, a framework for setting actuarial assumptions, and a more explicit approach to the underlying methodology and disclosures. So for example: • The allowance for risk is explicit for EEV through: (i) an allowance for the cost of capital (at the higher of economic capital and the local statutory minimum), (ii) stochastic or other appropriate modelling of financial options and guarantees to ensure that an allowance for their cost is irrespective of their value at the balance sheet date, and (iii) an explicit allowance in the risk discount rate for financial and non-financial risks; • EEV specifically allows for the look-through into profits arising in shareholder service companies, most notably the profit arising in investment management companies from managing the insurance companies funds for covered business; • There are extensive disclosures required for EEV on all aspects of the calculations, including the methodology adopted and the analysis of return.
The EEV basis is a value-based method of reporting in that it reflects the change in value of the business over the accounting period. This value is called the shareholders’ funds on the EEV basis which, at a given point in time, is the value of future profits expected to arise from the current book of long-term insurance business plus the net worth of the company. In determining these expected profits, full allowance is made for the risks attached to their emergence and the associated cost of capital, and takes into account recent experience in assessing likely future persistency, mortality and expenses.
EEV basis results are prepared by first of all setting ‘best estimate’ assumptions, by product, for all relevant factors including expenses, surrender levels and mortality. Economic assumptions as to future investment returns and inflation are generally based on a combination of market data and long-term assumptions. These assumptions are used to project future cash flows. The present value of the future cash flows is then calculated using a discount rate which reflects both the time value of money and the risks associated with the cash flows. The risk discount rate is determined by adding a risk margin to the appropriate risk free rate of return. The actual outcome may differ from that projected, in which case the effect will be reflected in the experience variances for that year.
u sin e ss rev iew Business review | Corporate responsibility review
Corporate Responsibility (CR) is integral to the way we do business at Prudential. Our CR activities during 2011 continued to be guided by the Chairman, Harvey McGrath.
This review gives an overview of our activities and progress. Prudential also publishes an annual CR report which is available online at www.prudential.co.uk
These themes demonstrate our CR commitments and principles to our stakeholders and provide clarity to our businesses on where they should focus their CR efforts and resources in the context of their individual markets.
We are in no doubt that good customer service and performance are critical to our reputation and, across all our markets, we constantly monitor this and take action when required. In 2011 our customer service and performance continued to be recognised through a number of awards and industry rankings.
Our four global CR themes 1. Our customers Using our financial strength, knowledge and skills to provide fair and transparent products, which meet customers’ needs.
2. Our people Recruiting, developing and retaining the best people for the best-performing business.
4. Our communities Supporting our communities through donations, employee volunteering and long-term partnerships with charitable organisations that make a real difference.
‘ Sustainability is integral to the way we do business. We have long-term liabilities and investments, and our commitments to our customers and our employees, as well as our support for communities and our responsibility towards the environment, are rooted in our aim of continuing to deliver strong financial performance sustainably.’
‘Best-in-Class for Japan Equity in Asia’, Benchmark Fund of the Year Awards 2011 in Singapore
Prudential UK Five-star rating in the ‘Financial Adviser Service Awards’ in the investment providers and packagers category for a third year running, and five stars for life and pensions
Five-star rating from independent product research company Defaqto for several investment and pension products
Financial News Awards for Excellence in Institutional Asset Management, ‘Fixed Income Manager of the Year 2011’
The majority of critical illness cover in the region only provides benefits at the more advanced stages of illness, which can leave a financial burden during the early stages of diagnosis. To help provide greater peace of mind – and enable customers to seek earlier-stage treatment and recovery – last year we launched PRUearly stage crisis cover, which provides financial support in the early stages of diagnosis.
The prestigious Top 1,000 Asia Brands survey, published in 2011 by Campaign Asia-Pacific and based on over 3,000 consumer interviews from across the region, placed Prudential in the top quartile of all brands in the region for trust and reputation.
This has also been validated by our brand-tracking studies in 2011, with increased trust scores in Singapore, Hong Kong and Malaysia.
The United States is the world’s largest retirement saving market, with more than 78 million ‘baby boomers’2 moving into retirement each year.
Our UK customer service performance is continuously monitored through a telephone research service which gauges customer experience1. Throughout 2011 we achieved a 96.6 per cent satisfaction level. This compares with a financial industry average of 91.8 per cent. Of those customers who had contact with the new Customer Relationship Team, 98 per cent agreed that they felt valued as a result.
We are one of 23 members of the Association of British Insurers that participate in an annual Life & Savings Benchmarking Study, which seeks to drive continuous improvement through monitoring customers’ experiences. In 2011 we began a programme of service initiatives designed to make it easier for customers to deal with us. This is already delivering results, as evidenced by our overall satisfaction score for customer service rising to 84 per cent in 2011/12 – up from 81 per cent in 2010, which is the current industry average.
We are committed to responding to customer concerns quickly and efficiently. The details of our approach to customers are published on the Prudential UK website in line with FSA guidance at www.pru.co.uk/about_us/complaints_data/ Prudential UK fell into the best-performing 15 per cent of financial companies included in data published by the Financial Ombudsman Service.
At a time when security is a particularly high priority for customers, M&G’s retail business launched the European M&G Inflation Linked Corporate Bond Fund, enabling savers to protect their investments in corporate bonds from rising prices.
M&G continues to have one of the highest trust scores among sector peers. For the intermediary audience we ranked number one for trustworthiness1, and for private investors we ranked, on average, within the top two most trusted asset management brands in 20112.
Informing global debates As a business that is built around a long-term perspective, we actively participate in global debates and policy considerations that affect our customers by sharing our knowledge and insights.
This Index, sponsored by Prudential, is a detailed study evaluating the preparedness of 20 of the world’s emerging and established economies resulting from demographic changes.
We are also actively engaged with a number of institutions, such as the International Centre for Financial Regulation, in promoting the understanding of the broader socio-economic contribution made by insurance. As part of this we have been promoting the need to ensure that this is properly recognised as a key part of the debate around future rule-making in the sector.
Our people Across the Group, we employ more than 26,000 people. It is vital to our continued success that we create an environment that develops and retains committed and motivated people, people who are able to achieve excellence and deliver outstanding performance for our customers, our shareholders and our communities.
Employee engagement Across Prudential we encourage an ongoing dialogue with our employees through events such as ‘open forums’. These allow employees to hear directly from their executive teams and raise questions. There are also a number of employee consultation forums in place, such as the M&G Staff Consultative Committee and the UK Employee Forum within Prudential UK. Our UK business also has a long-standing relationship with the union Unite. In addition, our dedicated intranet sites allow us to share information.
Across our businesses we also encourage employee volunteering to support charitable organisations and we recognise that such initiatives not only bring advantages to the charities but also provide development opportunities for our employees. For example, employees from our Asian businesses travelled to Japan and spent time supporting recovery efforts following the earthquake in March; while, in the UK, we provide time for employees to act as mentors through the Social Mobility Foundation.
Diversity At Prudential we provide opportunities for our people regardless of their gender, ethnicity, disability status, age, religion, caring responsibilities or sexual orientation. Our policies are guided by the principles of the UN’s Universal Declaration of Human Rights and the International Labour Organisation’s core labour standards. These are also incorporated into our Group Code of Business Conduct, which sets individual standards of employee behaviour. This is made available to all employees on our Group intranet.
Talent management Talent management takes place at both overall Group level and locally within each of our businesses. All employees are encouraged to take responsibility for driving their own development and agreeing a development plan with their manager. To support them, Prudential provides ongoing development activities.
• Momentum – which recruits talented individuals early on in their careers and, through structured development and role rotations, prepares them for senior roles within the organisation.
At a local level, building a strong technical and commercial leadership pipeline is essential to the success of our business strategy. Some examples of our commitment to developing talent within our businesses are: • Prudential Corporation Asia: Identifying the right talent and leaders is critical to supporting the expansive growth of our Asian business. In 2011 we cascaded a consistent approach to our development centres, where we identify the next generation of leaders. We believe there is considerable untapped talent in our employee base and building leadership capability will continue to be a focus in 2012.
Performance and reward The performance objectives of our employees are linked to the delivery of business goals. Throughout the year, employees are engaged in regular reviews with their managers to understand how they are performing against their objectives.
Each individual contributes to the success of the Group and should be rewarded accordingly. Our reward system ensures that overall Group and specific Business Unit results, as well as individual performance and behaviours, are fairly reflected in each employee’s remuneration. These policies and structures are regularly reviewed to ensure that they are appropriate and competitive in the markets in which we operate, and that they remain aligned with our business plans and priorities.
Protecting the environment We recognise that protecting the environment is an important part of managing a sustainable business, and that an effective environmental strategy is good both for the planet and for business efficiency.
We aim to ensure that we minimise the impact of our activities on the environment. Our strategy focuses on reducing the direct impact of the properties we occupy as well as the properties we manage through PRUPIM, which is a top-20 global real estate fund manager, with £15.8 billion of assets under management (at 31 December 2011).
Reducing our direct impact: occupied properties We monitor energy consumption, carbon dioxide emissions, water consumption, waste, paper use, recycling and travel at all our UK sites, and at Jackson’s main premises in North America in Lansing, Michigan, Denver, Colorado, and Nashville, Tennessee.
In July 2011 we submitted the first year of energy consumption figures as part of the UK government’s Carbon Reduction Commitment (CRC), a mandatory energy efficiency scheme for qualifying UK public and private sector organisations.1 The government is committed to reducing national carbon emissions by 80 per cent from 1990 levels by 2050. A central part of its strategy is the introduction of the CRC, which encourages organisations to develop energy management strategies that promote a better understanding of energy use.
Under the CRC, we submitted figures covering all properties occupied in the UK by Prudential companies and the PRUPIM investment property portfolio between April 2010 and March 2011.
In the US, Jackson has also focused on reducing energy use. For example, high-efficiency, extreme-density air-conditioning units were installed during the construction of a new data centre. Jackson also installed two units at its existing data centre, to increase energy efficiency and cooling capacity. In addition, low-energy lighting has been installed at its headquarters.
Note 1 To qualify for the CRC companies must have at least one half-hourly meter, settled on the half-hourly market across the whole organisation, with total half-hourly electricity consumption over 6,000 MWh after usage for transport and domestic accommodation have been excluded.
In 2011, PRUPIM revised its Responsible Investment Strategy to reflect its new focus on fund management. This strategy delivers a sector-leading approach to managing and responding to the growing range of environmental and social issues that can have an impact on property values, helping to protect and enhance fund and asset performance for clients. The strategy focuses on four areas: ensuring portfolio resilience, driving environmental improvements, building strong relationships, and responsibility in its own operations.
PRUPIM’s focus on delivering environmental improvements across its managed portfolio saw it reduce its carbon emissions intensity in 2010/11 by an average of 9 per cent at UK shopping centres and ISO 14001-accredited offices, compared to a 2008/09 baseline. Nearly 63 per cent of waste from UK shopping centres was diverted from landfill. Water consumption across the entire UK investment portfolio was reduced by 12 per cent in 2010/11 compared to a 2008/09 baseline.1
Financial education Financial education forms an important part of our educational activity. We believe that encouraging people to be financially literate helps to underpin overall economic development and success for communities. This is particularly true for young people at times of economic volatility.
Recognising Asian children’s media habits, a dedicated website – www.cha-ching.com – was developed with digital resources for parents and educators. Eighteen million website page views were recorded in the first four months of the programme, with an average website visit duration in excess of nine minutes.
In addition to on-air and online presence, we work closely with non-governmental organisations and government agencies to bring Cha-Ching to schools incorporating interactive money management activities for students.
During 2011, we also continued to run our highly successful financial training seminars for women – ‘Investing in Your Future’ – and this year more than 4,500 women in China, Indonesia and Vietnam took part. The events, supporting women with lower incomes, were first launched in China in 2004 to help women who are often responsible for planning their families’ financial needs, but who traditionally had limited financial training. Approximately 32,000 women have attended the seminars to date.
In the UK we have continued our partnerships with a range of organisations in support of financial education, including Citizens Advice, the Personal Finance Education Group and The Schools Network. Through our work with these organisations, thousands of adults and children are developing essential financial literacy skills, to make decisions that will have a positive effect on their financial welfare.
We also support projects that encourage people from lowincome backgrounds into leading educational institutions. M&G has a longstanding relationship with the Social Mobility Foundation – www.socialmobility.org.uk – which helps high-achieving young people from low-income backgrounds to get into top universities and professions. The Social Mobility Foundation is supported through charitable donations, formal internships and mentors drawn from senior employees, who are matched with students to provide guidance and support. The charity Springboard for Children also received assistance from M&G in 2011, supporting literacy programmes in schools.
Our intention for the future is to increase the level of support we provide to education. Especially in the UK, where the difficult economic conditions mean that youth unemployment is a growing problem, there is an increasing need for initiatives that can drive educational improvement and help get people into work. As part of that ambition, in 2012 we plan to increase our commitment to apprenticeship schemes in the UK, as well as establishing further long-term partnerships with charities working in education.
In 2011, M&G continued to support children and youth organisations working with disadvantaged young people. This included support for: Leap, a UK charity specialising in youth and conflict resolution; Kids Company, which provides practical, emotional and educational support to vulnerable inner-city children; and Blind in Business, which helps blind and partially sighted students to make the transition from education to employment. Last year, selected employees from Prudential UK were trained to mentor young people on a one-to-one basis for 12 months.
Employee volunteering In 2011, 7,209 employees across the Group volunteered in their communities on a range of projects, an increase of nearly 21 per cent in the number of volunteers compared with 2010. At Prudential UK alone, 40 per cent of employees took part in volunteering during 2011. Activities across the Group varied from supporting financial literacy through programmes such as the Investing in Your Future seminars and the Insurance Education Programme in Asia, providing support to local charities benefiting children and the elderly in the US, and mentoring schoolchildren, supporting the elderly and skills- sharing with charities in the UK. We recognise that employee volunteering brings benefit not only to the charities but also to the development of our people, and we actively encourage colleagues to participate in our volunteering programmes.
Chairman’s Challenge Winner 2011 Each year employees across the Group vote for the shortlisted project they believe has made the greatest impact. In 2011, the winning project, as voted for by employees, was ‘Learning about Earning’. This programme – in partnership with Prestasi Junior, the Indonesian branch of Junior Achievement – benefited over 200 street children at a safe house in Jakarta, through the commitment of over 170 employees from our Indonesian business, who helped children to develop basic communication and financial skills.
Disaster relief The Group maintains a disaster relief fund which can be activated to support relief efforts following disasters in countries where we operate. Our commitment to disaster relief also often goes beyond financial aid, with our people helping on the ground.
Donations We calculate our community investment spend using the internationally recognised London Benchmarking Group standard. This includes cash donations to registered charitable organisations, as well as a cash equivalent for in-kind contributions.
In 2011, the Group spent £9.1 million supporting community activities, an increase of 21.3 per cent on 2010.
The direct cash donations to charitable organisations amounted to £7.2 million, of which approximately £2.8 million came from our EU operations, which are principally our UK insurance operation and M&G.
The cash contribution to charitable organisations from our EU operations is broken down as follows: education £1,211,000; social and welfare £1,371,000; environment and regeneration £27,000; cultural £74,000 and staff volunteering £93,000.
In the UK, we have signed up to the Prompt Payment Code, launched in December 2008 by the UK Department for Business, Enterprise and Regulatory Reform. In 2011, our trade creditor days, based on the ratio of amounts that were owed to trade creditors at the year end to the aggregate of the amounts invoiced by trade creditors during the year, were 22 days.
Procurement practices in Prudential UK have been successfully accredited with the Chartered Institute of Purchasing and Supply (CIPS) certification, an industry benchmark of recognised good practice.
Harvey is Chairman of Governors of Birkbeck College and trustee of a number of charities. These include New Philanthropy Capital, a research based charity which gives advice and guidance to donors and charities; the Royal Anniversary Trust, which operates the Queen’s Anniversary Prizes for Higher and Further Education; Children and Families Across Borders (CFAB), which protects the rights and welfare of children and vulnerable adults across borders; icould, an online careers resource; and the Prince’s Teaching Institute, which promotes subject based professional development for teachers. Harvey will retire from the Board in 2012 once a successor has been found. Age 60.
Tidjane Thiam Group Chief Executive Tidjane Thiam has been an executive director of Prudential since 25 March 2008. He was the Chief Financial Officer until 30 September 2009 and became Group Chief Executive with effect from 1 October 2009.
& Company and one of the leaders of their Financial Institutions practice before joining Aviva in 2002.
Robert Devey Executive Director Rob Devey has been an executive director of Prudential and Chief Executive, Prudential UK and Europe since November 2009. Rob joined Prudential from Lloyds Banking Group where he worked from 2002 in a number of senior leadership roles across insurance and retail banking. Prior to joining Lloyds Banking Group Rob was a consultant with the Boston Consulting Group (BCG) in the
John Foley Executive Director John Foley has been an executive director of Prudential and Group Chief Risk Officer since January 2011. He joined Prudential as Deputy Group Treasurer in 2000 before being appointed Managing Director, Prudential Capital (formerly Prudential Finance (UK))
Michael McLintock Executive Director Michael McLintock has been an executive director of Prudential since September 2000. He is also Chief Executive of M&G, a position he held at the time of M&G’s acquisition by Prudential in 1999. Michael joined M&G in 1992. He previously also served on the board of Close Brothers Group plc as a non-executive director from 2001 to 2008. Since October 2008, he has been a Trustee of the Grosvenor Estate and was appointed as a non-executive director of Grosvenor Group Limited in March 2012. He has also been a member of the Finance Committee of the MCC since October 2005. Age 50.
Keki Dadiseth FCA Independent non-executive director and member of the Remuneration Committee Keki Dadiseth has been an independent non-executive director of Prudential since April 2005. He is a member of the Remuneration Committee and was a member of the Audit Committee from 2005 to 2007. During 2006, he was appointed as a non-executive director of ICICI Prudential Life Assurance Company Limited and ICICI Prudential Trust Limited. Keki is also a director of Britannia Industries Limited, Piramal Healthcare Limited, Siemens Limited, The Indian Hotels Company Limited and Godrej Properties Limited, all of which are quoted on the Bombay Stock Exchange. In addition, he acts as adviser to Goldman Sachs, Fleishman-Hillard Inc and Chairman of Marsh & McLennan Companies Group, India. He is Chairman of the Breach Candy Hospital Trust and a trustee for a number of Indian charities. Keki is the non-executive Chairman of Omnicom India Marketing Advisory Services Private Limited, an unquoted Indian company, and is also a board member of various other unquoted Indian companies. He serves as Chairman of Sony India Pvt Ltd and Senior Advisor to Sony Group in India.
He served the Government of Australia as Chairman of the Food Industry Council and as a Member of the Industry Council of Australia, and was also a member of the Advisory Committee for an APEC (Asia-Pacific Economic Cooperation) Food System, a Member of The Turkish Prime Minister’s Advisory Group and the WTO (World Trade Organization) Business Advisory Council in Switzerland.
Ann is also a non-executive director of Rio Tinto plc, Rio Tinto Limited, UBS AG, Ariel Holdings Limited, Atrium Underwriting Group Limited and Atrium Underwriters Limited. From its nationalisation in 2008 until January 2009, Ann was Interim Chief Financial Officer and Executive Director of Northern Rock. Ann joined the Board of British American Tobacco plc in October 2011 as a non-executive director. Age 56.
Alistair was a partner of KPMG from 1986 to 2010. He joined KPMG (then Peat Marwick Mitchell) in 1973 and held a number of senior leadership positions. These included Vice Chairman of UK Financial Services and Head of UK Insurance Practice, International Managing Partner – Global Markets and UK Vice Chairman. Latterly he served as a Global Vice Chairman of the firm from 2007 to 2010.
Alistair acted as a non-executive director of the Foreign & Commonwealth Office from 2005 to 2010 and chaired the audit committee until 2009. He was an Association Member of BUPA until January 2012. Alistair is a member of the Strategy and Development Board and a Visiting Professor at Cass Business School. In February 2012 Alistair was appointed as a Trustee of the Design Museum in London. Age 59.
Paul Manduca Senior independent non-executive director and member of the Audit, Remuneration and Nomination Committees Paul Manduca has been an independent non-executive director of Prudential since October 2010 and succeeded James Ross as the Board’s Senior Independent Director in January 2011. He joined the Audit and Remuneration Committees in November 2010 and became a member of the Nomination Committee in January 2011.
Paul was appointed as a non-executive director of Wm Morrison Supermarkets Plc (Morrisons) in September 2005. He was the Senior Independent
Kaikhushru Nargolwala FCA Independent non-executive director and member of the Risk and Remuneration Committees Kai Nargolwala has been an independent non-executive director of Prudential and a member of the Risk and Remuneration Committees since January 2012. Until December 2011 he was the non-executive Chairman of Credit Suisse Asia Pacific, having joined Credit Suisse in 2008 as a member of the Executive Board and CEO of the Asia Pacific region.
From 1998 to 2007, Kai worked for Standard Chartered PLC where he was a Group Executive Director responsible for Asia Governance and Risk. His responsibilities included developing strategy and business performance across Asia, as well as strategic merger and acquisition activity. Prior to that, he spent 19 years at Bank of America and from 1990 was based in Asia as Group Executive Vice President and Head of the Asia Wholesale Banking Group. From 2004 to 2007, he was a nonexecutive director at Tate & Lyle plc and at Visa International, where he served on the Asia Pacific Board.
Previously, Kathleen was a non-executive director and Chairman of the Audit Committees of Great Portland Estates PLC, EMI Group plc and the Court of the Bank of England, and a non-executive director of O2 plc. From 1991 to 2002, Kathleen was Chief Financial Officer of BTR and Invensys and prior to that she was a partner at Ernst & Young. Kathleen will retire from the Prudential Board on 31 March 2012. Age 54.
Non-Executive Directors 15 Kaikhushru Nargolwala FCA 16 Kathleen O’Donovan ACA 17 Lord Turnbull KCB CVO
Compliance with the Corporate Governance Codes UK Corporate Governance Code Prudential plc has a premium listing on the London Stock Exchange and is subject to the UK Corporate Governance Code (the ‘UK Code’). The UK Code was published by the Financial Reporting Council (‘FRC’) in May 2010 and is applicable to financial reporting periods beginning on or after 29 June 2010.
A copy of the UK Code can be viewed on the FRC’s website www.frc.org.uk/corporate/ukcgcode.cfm
For the financial year ended 31 December 2011, the Board confirms that it has complied with the provisions of the UK Code.
Code on Corporate Governance Practices (Hong Kong) Prudential plc also has a primary listing on the main board of the Stock Exchange of Hong Kong and is subject to the Code on Corporate Governance Practices (the ‘HK Code’) in Appendix 14 to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the ‘Hong Kong Listing Rules’).
The HK Code is issued by the Stock Exchange of Hong Kong and can be viewed on their website www.hkex.com.hk/eng/ rulesreg/listrules/mbrules/documents/appendix_14.pdf
The principles of the UK and HK Codes (the ‘Corporate Governance Codes’) have been applied as set out below and in the Directors’ remuneration report, which can be found on pages 134 to 157.
The Board has approved a governance framework which maps out the internal approvals processes and those matters which may be delegated. These principally relate to the operational management of the Group’s businesses and include pre-determined authority limits delegated by the Board to the Group Chief Executive for further delegation by him in respect of matters which are necessary for the effective day-to-day running and management of the businesses. The chief executive of each business unit has authority for the management of that business unit and has established a management board comprising its most senior executives.
The Board has Terms of Reference which specifically set out matters reserved for its decision. The Terms of Reference are regularly reviewed and enable the Board to exercise effective control over the Group’s affairs. These include approval of the annual and interim results, strategy and corporate objectives, operating plans, significant transactions and matters affecting the Company’s share capital. Under the internal governance framework, all business units are required to seek approval from the Board for matters above pre-determined authority limits.
In the ordinary course of business, Board and Committee papers are provided to the Directors approximately one week in advance of each meeting.
The senior independent director is also responsible for leading the performance evaluation of the Chairman.
The table below details the number of Board and Committee meetings attended by each director during the year. Where directors were not able to attend a meeting, their views were canvassed by the Chairman prior to the meeting.
Figures in brackets indicate the maximum number of meetings which the individual could have attended in the period in which they were a Board or Committee member.
5 Was unable to attend certain of the meetings due to illness. 6 Two board meetings were unscheduled and called at short notice.
Effectiveness Composition At the date of this report, the Board comprised the Chairman, seven executive directors and nine independent non-executive directors.
On 1 January 2012, Kai Nargolwala and Alistair Johnston joined the board as non-executive directors. Kathleen O’Donovan will step down from the Board on 31 March 2012 after serving almost nine years, and Harvey McGrath, Chairman of the Board, has signalled his intention to retire once a suitable successor has been found.
The Board, or the members in a general meeting, may appoint directors up to a maximum total number of 20 as set out in the Company’s Articles of Association. The removal and resignation of the Company’s directors is governed by the relevant provisions of the Companies Act 2006, the UK and HK Codes and the Company’s Articles of Association.
Terms of appointment for non-executive directors Non-executive directors are usually appointed for an initial three-year term commencing with their election by shareholders at the first Annual General Meeting following their appointment by the Board. Each appointment is reviewed towards the end of the three-year term against performance and the requirements of the Group’s businesses. The terms and conditions of all directors’ appointments are available for inspection at the Company’s registered office during normal business hours and at the Annual General Meeting.
Non-executive directors are typically expected to serve for two terms of three years from their initial election by shareholders although the Board may invite them to serve for an additional period. Directors serving a third term are subject to rigorous annual review.
Succession planning The Board is actively engaged in succession planning for both executive and non-executive roles to ensure that Board composition is regularly refreshed and that the Board retains its effectiveness at all times. This is delivered through an established review process that is applied across all businesses and covers both director and senior management succession and development and also through the work of the Nomination Committee as described more fully on page 122. The Board considers annually the outcome of the review and actions arising from the review are implemented as part of the management development agenda.
Gender diversity The Company seeks, through its diversity policy, to encourage the recruitment and retention of talented women at all levels. Furthermore, the Board remains committed to inclusion in all its forms and believes that leading companies seek out, and not simply tolerate, diversity.
The inclusion of women extends to the plc Board and is an important consideration during searches for new Board members. Prudential embraces the proposition that more women on boards would be advantageous to companies as well as to society at large. We remain duty bound to recruit the best available talent, and although the Board does not endorse quotas, it does commit to having an increasing representation of women in senior positions in the Company and on the Board.
Throughout the year the non-executive directors were considered by the Board to be independent in character and judgement and met the provisions for independence as set out in the UK and HK Codes. The Company has received confirmation of independence from each of the independent non-executive directors as required by the Hong Kong Listing Rules.
Alistair Johnston was a partner in the Company’s auditor, KPMG, from 1986 to 2010. However, he did not audit the Prudential Group and he no longer has any financial or other interest in KPMG. The Board does not consider that this former relationship with KPMG affects Alistair’s status as an independent director of Prudential.
Performance evaluation Prudential continued its programme of annual evaluation of the performance of the Board and its Committees in respect of 2011, in line with the requirements of the UK Code. The aim is to continue to improve the effectiveness of the Board and its Committees and enhance the Group’s performance.
Executive directors are subject to regular review and the Group Chief Executive individually appraises the performance of each of the executive directors as part of the annual Group-wide performance evaluation of all staff.
Directors’ interests Individual directors’ interests are set out on page 147 of the Directors’ Remuneration Report.
The Board was satisfied that during 2011 the Chairman’s other commitments did not hinder the day-to-day performance of his duties for the Group and that he had the commitment and capability to make himself available under unforeseen circumstances. The major commitments of the Chairman, including changes during the year where applicable, are detailed in his biography on page 108.
Directors’ indemnities and protections The Company has arranged appropriate insurance cover in respect of legal action against directors and senior managers of companies within the Prudential Group. In addition, the Articles of Association of the Company permit the directors and officers of the Company to be indemnified in respect of liabilities incurred as a result of their office. Prudential also provides protections for directors and certain senior managers of companies within the Group against personal financial exposure they may incur in their capacity as such. These include qualifying third party indemnity provisions (as defined where relevant by the Companies Act 2006) for the benefit of directors of Prudential plc and other such persons including, where applicable, in their capacity as directors of other companies within the Group. These indemnities were in force during 2011 and remain in force.
The Business Review provides further detail on Prudential’s risk appetite and exposures on pages 80 to 90 and corporate responsibility activities on pages 95 to 106.
The system is regularly reviewed and complies with the UK and HK Codes. In complying with the UK Code, the Group follows the 2005 Turnbull Guidance relating to the sections of the Code dealing with risk management and internal control. The Board reviewed the effectiveness of the system of internal control in February 2012, covering all material controls, including financial, operational and compliance controls, risk management systems and the adequacy of the resources, qualifications and experience of staff of the issuer’s accounting and financial reporting function. The system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and gives reasonable, but not absolute assurance. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period and up to the date of this report.
The internal control and risk management systems described above and also under the sections on Risk Governance on pages 124 and 125 and the Group Audit Committee on page 120, cover the Company’s financial reporting process and the Group’s process for the preparation of consolidated financial statements.
Committees The Board has established audit, remuneration, nomination and risk committees as principal standing committees of the Board. Each committee has written terms of reference which are kept under regular review. These committees are key elements of the Group’s corporate governance framework and reports on each committee are included below.
The Committee’s terms of reference, which are approved by the Board and kept under regular review, are available on our website at www.prudential.co.uk/prudential-plc/aboutpru/ corporategovernance/ Alternatively, copies may be obtained by writing to the Company Secretary at the registered office.
Full biographical details of the members of the Committee are set out in their biographies on pages 110 to 112.
During 2011, the Committee met on 10 occasions and details of Committee members’ attendance is set out on page 114.
The Committee also received in-depth presentations on a range of topics and received the minutes of both the Disclosure Committee and the Assumptions Approval Committee. Further information on the Disclosure Committee appears under the heading US corporate governance and regulations on page 128. The Assumptions Approval Committee reviews the economic assumptions to be used for EEV reporting, business planning, forecasting and the IAS19 valuation of the three UK defined benefit pension schemes.
In addition, the Committee is regularly briefed by management on developments in International Financial Reporting Standards.
The findings were reviewed by the Group-wide Internal Audit business unit audit director in conjunction with the Chairman and discussed by the respective business unit audit committees. In addition, the Chairman of each business unit audit committee has confirmed that, in their opinion, the current members have the appropriate balance of skills, knowledge and expertise to oversee the relevant business unit.
Group-wide Internal Audit The Committee regards its relationship with the internal audit function as pivotal to the effectiveness of its own activities. Group-wide Internal Audit plays an important role in supporting the Committee to fulfil its responsibilities under the UK and HK Codes, as well as the Sarbanes-Oxley Act, and provides independent assurance on the Company’s processes of identification and control of risk. Each of the Group’s business units has an internal audit team, the heads of which report to the Group-wide Internal Audit Director. Internal audit resources,
G o v e rn a n ce plans and work are overseen by the Committee and by the business unit audit committees. Total approved internal audit headcount across the Group was 136 at 31 December 2011. The Group-wide Internal Audit Director reports functionally to the Committee and for management purposes to the Chief Financial Officer.
The Committee assesses the effectiveness of the internal audit function by means of regular reviews, some of which are carried out by external advisers, and through ongoing dialogue with the Group-wide Internal Audit Director. An external review of Group-wide internal audit arrangements and standards was undertaken in respect of the period 1 January 2010 to 31 March 2011, the findings of which were reported to the Committee in detail in July 2011. The purpose of the review was to ensure that the activities and resources of internal audit continue to be effectively organised to support the oversight responsibilities of the Committee. The review, performed by PwC, confirmed that Group-wide Internal Audit is ‘Generally Conforming’ with the Institute of Internal Auditors (IIA) International Standards, the highest classification available.
The Committee approved the Group-wide Internal Audit annual audit plan of assurance work to be undertaken during 2012.
External audit The Committee has a key oversight role in relation to the external auditor, KPMG Audit Plc, whose primary relationship is with the Committee. The Group’s Auditor Independence Policy ensures that the independence and objectivity of the external auditor is not impaired. The policy sets out four key principles which underpin the provision of non-audit services by the external auditor, namely that the auditor should not: • audit its own firm’s work,
• have a mutuality of financial interest with the Group, or
All services provided by the auditor under this policy are provided in accordance with a pre-approved budget and are reviewed by the Committee and approved where necessary. The Committee regularly reviews and updates the policy to ensure alignment with the latest standards and best practice in establishing, maintaining and monitoring auditor independence and objectivity.
Fees payable to the auditor During the year ended 31 December 2011 the Committee approved fees of £13.3 million to its auditor, KPMG Audit Plc, for audit services and other services supplied pursuant to relevant legislation. In addition, the Committee approved fees of £2.9 million to KPMG for services not related to audit work which accounted for 18 per cent of total fees paid to the external auditor in the year. In accordance with the Group’s Auditor Independence Policy, all services were approved prior to work commencing and each of the non-audit services was confirmed to be permissible for the external auditor to undertake as defined by the Sarbanes-Oxley Act. The Committee reviewed the non-audit services being provided to the Group by KPMG at regular intervals during 2011. A summary of fees payable to the auditor for the year ended 31 December 2011 is provided in Note I6 to the Group financial statements.
Auditor performance and independence As part of its work during the year, the Committee assessed the performance of the external auditor, its independence and objectivity, and the effectiveness of the audit process. In addition to questioning the external auditor, which is a regular feature of meetings, the review of the effectiveness of the external audit process was conducted through a questionnairebased exercise administered by Group-wide Internal Audit. The Committee reviewed the external audit strategy and received reports from the auditor on its own policies and procedures regarding independence and quality control, including an annual confirmation of its independence in line with industry standards.
Re-appointment of auditor The Group operates a policy under which at least once every five years a formal review is undertaken by the Committee to assess whether the external audit should be re-tendered. The external audit was last put out to competitive tender in 1999 when the present auditor was appointed. Since 2005 the Committee has annually considered the need to re-tender the external audit service. It again considered this in February 2012 and concluded that there was nothing in the performance of the auditor requiring a change. In line with the Auditing Practices Board Ethical Statements and the Sarbanes-Oxley Act, the lead audit partner, who was appointed by KPMG Audit Plc in 2007, will be replaced by a new lead audit partner in respect of the 2012 financial year.
Review of Committee effectiveness As part of the performance evaluation of the Board, the Committee undertook an externally facilitated performance assessment of the qualitative aspects of its performance during the year. The results of this assessment will be reviewed by the Board in March 2012. In addition, an internal evaluation was carried out addressing compliance with various regulations and codes of conduct applicable to the Committee, and the results of that assessment were reported to the Committee in December 2011. The Committee is satisfied, taking into account the findings of the internal review, that it had been operating as an effective audit committee throughout the year. Further reviews of the effectiveness of the Committee will be undertaken regularly and will from time to time be conducted by external consultants.
The responsibilities of the Nomination Committee (the ‘Committee’) and the activities it carried out during the year are set out below.
Membership The Committee is comprised of independent non-executive directors and the Chairman, as set out below: • Harvey McGrath (Chairman)
Meetings The Committee meets at least twice a year to consider the Board composition and membership of the principal Committees and to consider the suitability of all directors standing for re-election at the AGM. In addition, the Committee meets to consider candidates for appointment to the Board. The Group Chief Executive is closely involved in the work of the Committee and is invited to attend and contribute to meetings.
The appointments of Kai Nargolwala and Alistair Johnston, made by unanimous decision of the Board, was the culmination of a comprehensive search process which commenced in the first half of the year under the direction of the Committee. With the assistance of external search consultants, a number of candidates meeting the criteria set by the Committee were identified. As part of the process, Alistair and Kai met the Chairman and Group Chief Executive, as well as a number of other directors prior to being appointed to the Board. The Committee will continue to play a key role in the search for a successor to the current Chairman, Harvey McGrath.
The Committee also provides oversight in respect of the Group Chief Risk Officer’s responsibilities and the Group Chief Risk Officer has open access to the Committee Chairman and the Committee.
In performing its duties, the Committee has access to employees and their relevant expertise across the Group and to the services of the Group Chief Risk Officer, the Group-wide Internal Audit Director and the Company Secretary. The Committee may also seek external professional advice at the Group’s expense.
Responsibilities The Committee’s principal business during the year consisted of the following: • Reviewing the Group risk, capital and liquidity management framework, as well as the Group’s risk appetite, its risk policies and standards, including the parameters used and methodologies and processes adopted for identifying and assessing risks; • Reviewing the material and emerging risk exposures of the Group, including market, credit, insurance, operational, liquidity and economic and regulatory capital risks as well as regulatory and compliance matters; • Overseeing the Group’s processes and policies for determining risk tolerance and reviewing management’s measurement and effectiveness of the Group’s risk tolerance levels; • Receiving and reviewing Group-wide Internal Audit Reports on the risk management function; • Assisting the Board in reviewing the risks inherent in the business plans; and
Membership The Committee is comprised of independent non-executive directors as set out below: • Howard Davies (Chairman)
The Chairman of the Board, the Group Chief Executive, the Chief Financial Officer and the General Counsel and Company Secretary are invited to attend the meetings. The Group Chief Risk Officer is closely involved in the work of the Committee and is invited to attend and contribute to the meetings. The Group-wide Internal Audit Director and the Group Risk Director are also invited to attend.
The Chairman reviewed the work of the Committee, and the risk framework with the Financial Services Authority as part of the regular processes of supervision. The Committee received regular reports from the Group-wide Internal Audit Director, the Group Executive Risk Committee, the Group Operational Risk Committee and the Group Credit Risk Committee. Further information on these committees appears on pages 124 and 125.
Organisation Prudential’s risk governance framework requires that all of the Group’s businesses and functions establish processes for identifying, evaluating and managing the key risks faced by the Group. The framework is based on the concept of ’three lines of defence’ (LoD): risk management, risk oversight and independent assurance.
As described in this Corporate Governance Report, primary responsibility for strategy, performance management and risk control lies with the Board, which has established the Risk Committee to assist in providing leadership, direction and oversight, and with the Group Chief Executive and the chief executives of each business unit.
Risk management (1st LoD): Balance Sheet and Capital Management Committee: Meets monthly to monitor the Group’s liquidity and oversee the activities of Prudential Capital.
Risk oversight (2nd LoD): Risk exposures are monitored and reviewed by Group-level risk committees chaired by the Group Chief Risk Officer or the Chief Financial Officer.
Group Audit Committee 1st Line of Defence 2nd Line of Defence 3rd Line of Defence
Group Operational Risk Committee: Reports to the Group Executive Risk Committee and meets quarterly to oversee the Group’s non-financial (operational, business environment and strategic) risk exposures.
The committees’ oversight is supported by the Group Chief Risk Officer with functional oversight provided by: Group Security: Develop and deliver appropriate security measures to protect the Group’s staff, physical assets and intellectual property.
Principles and objectives Risk is defined as the uncertainty that Prudential faces in successfully implementing its strategies and objectives. This includes all internal or external events, acts or omissions that have the potential to threaten the success and survival of Prudential.
Communication: Communicate the Group risk, capital and profitability position to internal and external stakeholders and rating agencies.
Culture: Foster a risk management culture, providing quality assurance and facilitating the sharing of best practice risk measurement and management across the Group.
The Group Risk Committee is provided with regular reports on the activities of the Group Risk function and where it affects the results of assurances under Turnbull, the Group Audit Committee receives appropriate reporting. Reports to the Group Risk Committee include information on the activities of the Group Executive Risk Committee, the Group Operational Risk Committee and Group Credit Risk Committee, as well as reports from Group-wide Internal Audit.
The Group maintains a corporate website www.prudential.co.uk containing a wide range of relevant information for private and institutional investors, including the Group’s financial calendar. The shareholder information section on pages 476 and 477 contains further details which may be of interest to shareholders.
The Company believes the Annual General Meeting is an important forum for both institutional and private shareholders and encourages all its shareholders to vote. Shareholders are given the opportunity during annual general meetings to put questions to the Board on matters relating to the Group’s operations and performance.
Company constitution The Company is governed by the Companies Act 2006, other applicable legislation and regulation as well as by provisions of its Articles of Association. The Memorandum and Articles of Association are available on our website at www.prudential.co.uk/prudential-plc/aboutpru/memorandum
In compliance with the Hong Kong Listing Rules, the Company has maintained a sufficiency of public float throughout the period.
As at 12 March 2012, Trustees held 0.31 per cent of the issued share capital of the Company under the various plans in operation.
Rights to dividends under the various schemes are set out in note I4 on page 363.
Restrictions on transfer In accordance with English company law, shares may be transferred by an instrument of transfer or through an electronic system (currently CREST) and transfer is not restricted except that the directors may in certain circumstances refuse to register transfers of shares, but only if such refusal does not prevent dealings in the shares from taking place on an open and proper basis. If the directors make use of that power, they must send the transferee notice of the refusal within two months.
Some of the Company’s employee share plans include restrictions on transfer of shares while the shares are subject to the plan. All directors are required to obtain a number of qualification shares within one year of appointment, which they would also be expected to retain under guidelines approved by the Board and as described on page 143 of the Directors’ Remuneration Report.
Significant shareholdings As at 31 December 2011, the Company had received notification of interests in the shares of Prudential plc, in accordance with Rule 5.1.2 R of the Disclosure and Transparency Rules of the Financial Services Authority, from Capital Research and Management Company, BlackRock Inc., Norges Bank and Legal and General Group plc that they held 9.91 per cent, 4.99 per cent, 4.03 per cent and 3.99 per cent respectively of the Company’s ordinary issued share capital at the time of notification. No further notifications have been received between the end of 2011 and the date of this report.
Authority to issue shares The directors require authority from shareholders in relation to the issue of shares by the Company. Whenever shares are issued the Company has to offer the shares to existing shareholders pro rata to their holdings unless it has been given authority by shareholders to issue shares without offering them first to existing shareholders. The Company seeks authority from its shareholders on an annual basis to issue shares up to a maximum amount and to issue up to 5 per cent of its issued share capital without observing pre-emption rights, in line with relevant regulations and best practice. Dis-application of statutory pre-emption procedures is also sought for rights issues. The Company’s 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 Annual General Meeting. An ordinary resolution and a special resolution to approve the renewal of these authorities respectively will be put to shareholders at the Annual General Meeting on 17 May 2012.
• review and consider, and where applicable follow up on, matters raised by other components of the disclosure process. These may include, to the extent they are relevant to the disclosure process, any matters to be raised with the Group Audit Committee, the internal auditors or the external auditor on the Company’s internal controls.
The provisions of Section 404 of the Act require the Company’s management to report on the effectiveness of internal controls over financial reporting in its annual report on Form 20-F, which is filed with the US Securities and Exchange Commission. To comply with this requirement to report on the effectiveness of internal control, the Group has documented and tested its internal controls over financial reporting in the format required by the Act. The annual assessment and related report from the external auditor will be included in the Group’s annual report on Form 20-F.
Financial reporting The directors have a duty to report to shareholders on the performance and financial position of the Group and are responsible for preparing the financial statements on pages 163 to 382 and the supplementary information on pages 385 to 432. It is the responsibility of the auditor to form independent opinions, based on its audit of the financial statements and its audit of the EEV basis supplementary information; and to report its opinions to the Company’s shareholders and to the Company. Its opinions are given on pages 384 and 434.
Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the Group. The criteria applied in the preparation of the financial statements are set out in the statement of directors’ responsibilities on pages 383 and 433.
The directors are further required to confirm that the directors’ report includes a fair review of the development and performance of the business, with a description of the principal risks and uncertainties. Such confirmation is included in the statement of directors’ responsibilities on pages 383 and 433.
The Chief Financial Officer’s Review provides, on pages 80 to 90, a description of the Group’s risk and capital management, which includes a description of the Group’s liquidity position. These risks are also discussed in Note C to the financial statements on page 215. The Group has considerable internal and external financial resources and the directors believe that the Group is well placed to manage its business risks successfully.
The directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware; and each director has taken all the steps that he or she ought to have taken as a director to make himself or herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
At no time during the year did any director hold a material interest in any contract of significance with the Company or any subsidiary undertaking.
For the year ended 31 December 2011, none of the directors of the Company, their associates or any shareholders of the Company (which have, to the knowledge of the directors of the Company, owned more than 5 per cent of the Company’s issued share capital) had any interest in the Group’s major customers.
Post-balance sheet events Note I11 of the Notes on the Group financial statements and Additional disclosures
In addition, the risk factors set out on pages 466 to 470 and the additional unaudited financial information set out on pages 436 to 463 are incorporated by reference into this directors’ report.
Dear Shareholder I am pleased to present the Remuneration Committee’s report on directors’ remuneration for the year to 31 December 2011.
Our aims The primary aims of our remuneration policy remain unchanged: • To attract and retain the high calibre executives required to lead and develop the Group, and
Rewarding strong performance The financial results presented earlier in this Annual Report show that the Group delivered increases in new business profits, IFRS profits and cash generation during 2011. This growth outstripped both the stretching targets set by the Committee at the start of 2011 and market expectations, notwithstanding challenging global market conditions. These results were achieved whilst maintaining better than adequate levels of capital and working within the Group’s risk appetite. The 2011 bonuses awarded to executive directors recognise this outstanding achievement.
Reviewing the structure of remuneration for the future The structure of remuneration arrangements for Prudential’s executive team has remained substantially unchanged since 2006. During the course of 2012, the Remuneration Committee will undertake a review of these arrangements to ensure that the Group’s reward structure continues to give the Company a competitive advantage in the international talent market and that it aligns the pay of executives with the Group’s business strategy and ambitions. This review will take account of the new regulatory requirements of Solvency II and evolving guidelines, regulations and legislation. Information about any resulting proposals and changes will be provided in the Committee’s report for 2012.
The directors’ remuneration report has been prepared by the Remuneration Committee (the ‘Committee’) and has been approved by the Board. Shareholders will be given the opportunity to approve the report at the Annual General Meeting on 17 May 2012.
In 2011, the Committee met seven times. Key activities at each meeting are shown in the table below: Meeting Key activities
September 2011 • Review the structure of remuneration for staff in the Group Risk function; • Monitor performance against long-term incentive targets to the mid year; • Agree the timeline for the review of executive remuneration structure.
December 2011 • Note the level of participation in the Company’s all-employee share plans; • Review the requirements of the latest governance guidelines and consultations; • Provide feedback on a number of executive remuneration structure alternatives; • Consider the initial draft 2011 Directors’ remuneration report; • Review the salaries and incentive opportunities for executive directors in 2012; • Consider the measures to be used for 2012 annual bonuses; • Approve the shareholding guidelines policy; • Approve the Committee’s Terms of Reference and 2012 work plan; • Appoint the independent adviser to the Remuneration Committee.
Remuneration principles The primary aims of our remuneration policy are: • To attract and retain the high calibre executives required to lead and develop the Group, and
In order to achieve these aims, the Committee applies the following principles: • A substantial portion of total remuneration is delivered through performance-related reward with the highest levels of reward only being paid for the highest levels of achievement; • A significant element of performance-related reward is provided in the form of shares; • The total remuneration package for each executive director is set with reference to the relevant employment market; • The performance of executive directors responsible for business units is measured at both a business unit and Group level; • Performance measures include absolute financial measures and relative measures, as appropriate, to provide alignment between achieving results for shareholders and the rewards for executives; • Reward structures are designed to deliver fair and equitable remuneration for all employees; and
Summary of main components of remuneration and related requirements The table below summarises the Company’s policies as they were applied during 2011: Element Purpose Approach
Adopts appropriate compensation structures and reward payouts to attract high calibre executive directors.
Based on the scope of role and market position, as well as the individual’s contribution and experience, taking into account total remuneration, market movement of salaries in comparator organisations and salary increases for employees generally.
Executive directors have annual bonus plans based on the achievement of Group and business unit financial performance measures and personal objectives. 2011 Group and business unit targets focused on profitability, cash flow and capital preservation.
All executive directors participate in the Group Performance Share Plan (GPSP) under which awards vest based on relative TSR (Total Shareholder Return, a combination of share price growth and dividends paid) performance relative to an index of international insurers.
The structure of plans is determined by local market practice and legislation. Executive directors are eligible to participate in allemployee plans on the same basis as other employees in their location.
Set at an appropriate level. Executive directors receive benefits, for example participation in medical insurance schemes, health assessments, the use of a car and driver, and security arrangements.
The level of the Company’s pension contribution is related to competitive practice in the executive directors’ employment markets.
Components of 2011 remuneration On a policy basis, the package for 2011 offered the following proportions of fixed and variable and short- and long- term
‘Good’ performance results in the payment of 2011 annual bonus at plan and 2011 long-term incentive awards vesting at the threshold level.
‘Superior’ performance generates maximum payment of 2011 annual bonuses and 2011 long-term incentive awards vesting in full.
Rob Devey Chief Executive, UK & Europe £550,000 0% £550,000 John Foley Group Chief Risk Officer n/a 0% £550,000 Michael McLintock Chief Executive, M&G £350,000 0% £350,000 Nic Nicandrou Chief Financial Officer £550,000 0% £550,000 Barry Stowe Chief Executive, PCA HKD8,000,000 0% HKD8,000,000 Tidjane Thiam Group Chief Executive £900,000 0% £900,000 Mike Wells President & CEO, JNL n/a 0% $1,000,000
Note John Foley and Mike Wells became executive directors on 1 January 2011.
Annual bonus Performance measures The 2011 annual bonus plans for the majority of executive directors included Group and business unit performance measures based on: • IFRS operating profit; • EEV operating profit; • Holding company cash flow; and
Executive directors’ bonus opportunities, the weighting of performance measures for 2011 and the proportion of annual bonuses deferred are set out opposite.
ire cto rs’ re m u n e ratio n rep o rt 2011 Executive directors’ bonus opportunities, the weighting of performance measures and the proportion of annual bonuses deferred: Maximum bonus opportunity (% of salary)
Details of the awards made under these plans in 2011 can be found on pages 151 and 152.
The vesting schedule for outstanding GPSP awards is set out below: % of award vesting x index x index x index x index x index
Peer Companies used within the Index for 2011 GPSP awards: Aegon, Allianz, Aviva, Axa, Generali, ING, Legal & General, Manulife, Old Mutual and Standard Life
On 31 December 2011, the performance period for the 2009 GPSP award (which began on 1 January 2009) came to an end. The peer group used for this award was the 10 companies listed above plus Friends Provident (Friends Provident is included in the calculation until its delisting in November 2009). Since the peer group’s TSR index was 100 at the start of the 2009 to 2011 performance period and was 120 at the end of the period, (as illustrated below) in order for the 2009 GPSP awards to vest in full, Prudential’s TSR index over the period had to increase from 100 to at least 144 (ie 120 x 1.2). The Committee believes that this is a stretching requirement that requires exceptional performance, relative to other international insurance companies, for awards to be released in full.
Prudential’s TSR performance over this period was 201.84, equal to 169 per cent of the peer index. The Committee, having satisfied itself about the quality of the Company’s underlying financial performance, confirmed vesting of 100 per cent of the 2009 GPSP award (for reference, 100 per cent of the 2008 GPSP award vested).
The line chart below compares Prudential’s Total Shareholder Return (TSR) during the three years from 1 January 2009 to 31 December 2011 with that of the peer group against which TSR is measured for the purposes of the GPSP.
Business Unit Performance Plan (BUPP) For executives with regional responsibilities, the Business Unit Performance Plan (BUPP) provides awards which vest subject to performance over a three-year period.
The Committee therefore felt that it was appropriate to revise the performance conditions attached to outstanding awards to align them with the business plan and the long-term objectives of the Asian business. Vesting of these awards will now be dependent on the new business profit, IFRS profit and cash remittance performance of the Asian business. Each of these measures will determine vesting of one third of each award. For the 2009, 2010 and 2011 BUPP awards, performance will be measured over the periods 2009 to 2011, 2010 to 2013 and from 2011 to 2014 respectively. The Committee is satisfied that these conditions are more relevant than the original SCV measure and that they are broadly equivalent in their degree of stretch. This revision is also consistent with the change made to the performance condition of the UK BUPP award in 2010.
UK BUPP In 2009, 2010 and 2011 Rob Devey was granted UK BUPP awards. Given the cash-generative priorities of the UK business unit, UK BUPP awards are assessed using the same relative TSR measure applied to GPSP awards. As a result, all Rob Devey’s outstanding UK BUPP awards have the same TSR conditions applied to them as the GPSP awards made in the same year.
On 31 December 2011, the performance period for the 2009 UK BUPP (which began on 1 January 2009) came to an end. As illustrated by the chart opposite, Prudential’s TSR over this period was equal to 169 per cent of the peer index. The Committee, having satisfied itself as to the quality of the business unit’s underlying financial performance, confirmed vesting of 100 per cent of Rob Devey’s 2009 UK BUPP award (for reference, no current executive director had a 2008 UK BUPP award).
On 31 December 2011, the performance period for the 2009 award under the M&G Executive Long-Term Incentive Plan (which began on 1 January 2009) came to an end. M&G’s profit grew by 103 per cent over the period and M&G’s investment performance was in the second quartile. The Committee, having satisfied itself about the quality of M&G’s underlying financial performance, confirmed vesting of Michael McLintock’s 2009 award with a value of £2.96 per share (for reference, the 2008 award vested with a value of £2.62 per share).
Save As You Earn (SAYE) schemes UK-based executive directors are eligible to participate in the Prudential HM Revenue & Customs (HMRC) approved UK SAYE scheme and Barry Stowe is invited to participate in the equivalent International Share Ownership Scheme. These schemes allow employees to save towards the exercise of options over Prudential plc shares with the option price set at the beginning of the savings period at a discount of up to 20 per cent of the market price.
Participants elect to enter into savings contracts of up to £250 per month for a period of three or five years. At the end of this term, participants may exercise their options within six months and purchase shares. If an option is not exercised within six months, participants are entitled to a refund of their cash savings plus interest if applicable under the rules. Shares are issued to satisfy those options which are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and any other option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at the proposed date of grant.
Share Incentive Plan (SIP) UK-based executive directors are also eligible to participate in the Company’s HMRC approved Share Incentive Plan (SIP). This allows all UK-based employees to purchase Prudential plc shares up to a value of £125 per month from their gross salary (partnership shares). For every four partnership shares bought, an additional matching share is awarded which is purchased by Prudential on the open market. Dividend shares accumulate while the employee participates in the plan. Partnership shares may be withdrawn from the scheme at any time. If the employee withdraws from the plan within five years, matching shares are forfeited.
Shareholding guidelines As a condition of serving, all executive and non-executive directors are required to have beneficial ownership of a minimum of 2,500 ordinary shares in the Company. This interest in shares must be acquired within 12 months of appointment to the Board if the director does not have such an interest upon appointment.
Notes 1 Based on the shar e price as at 31 December 2011 (£6.39). Calculated using base salaries on 31 December 2011. 2 Shareholdings for Barry Stowe and Mike Wells include American
Depositary Receipts (ADRs). One ADR is equivalent to two Prudential plc shares.
Pensions and long-term savings For executive directors based in the UK and Asia, it is the Company’s policy to provide a supplement in lieu of pension of 25 per cent of base salary. This includes, where relevant, any Company contributions to the staff defined contribution pension, which UK executive directors may choose to join and which has no salary cap. Executives are provided with life assurance cover of up to four times salary plus a dependants’ pension.
Michael McLintock participates in a contributory defined benefit scheme that provides a target pension of two thirds of final pensionable earnings on retirement at age 60 for an employee with 30 years or more potential service, for which his contribution is 4 per cent of base salary. Michael McLintock participates on the same basis as other employees who joined M&G at the same date. Benefits under the plan are subject to a notional scheme earnings cap (set at £123,600 for the 2010/11 tax year and at £129,600 for the 2011/12 tax year) which replicates the HMRC earnings cap in force before A-Day (6 April 2006). Michael McLintock is entitled to supplements based on his salary above the notional earnings cap.
Other executive directors based in the UK and Asia have elected to receive their pension benefits in the form of a cash supplement. Barry Stowe also receives a payment to the Hong Kong Mandatory Provident Fund.
In December 2011 the Remuneration Committee undertook a review of the compensation levels of the executive directors. The Committee considered the performance, experience and internal relativities for each director as well as the business performance of Prudential over recent financial years (illustrated opposite).
To provide context for this review, each director’s remuneration was benchmarked against appropriate market reference point(s). The Committee felt that the benchmarks used represent the markets from which Prudential would be most likely to recruit future executives, and to which the Group might lose leaders, if reward were not to be competitive. The benchmarks used are set out below: Director Role Benchmark(s) used to assess remuneration
Over the same period (2007 to 2011), the base salary for the Group Chief Executive has been largely unchanged while total remuneration delivered to the Group Chief Executive rose by an average of 4.8 per cent per annum on a compound basis; substantially lower than the growth in the key performance metrics (illustrated opposite) used to assess business performance.
In 2012, executive directors will be rewarded on the basis set out below: Director
John Foley Group Chief Risk Officer £610,000 160% 40% of total bonus 250.0% – 250.0%
Michael McLintock Chief Executive, M&G £360,000 note 1 50% of bonus above
Notes 1 Michael McLintock’s annual bonus and long-term incentive opportunity under the M&G Executive LTIP are based on M&G’s performance both in absolute terms and relative to its peers. In line with practice in the asset management sector, there is no specified maximum incentive award. Michael’s total remuneration is subject to an overriding cap such that his total remuneration should not be greater than 3 per cent of M&G’s annual IFRS profits.
2 Mike Wells’ maximum annual bonus figure is comprised of 160 per cent of salary and a 10 per cent share of the Jackson senior management bonus pool based on the target performance of Jackson.
Base salary Cash bonus for 2012, paid in 2013 Deferred bonus for 2012, vesting in 2016 2012 LTIP Award, vesting in 2015%26
‘Superior’ performance generates maximum payment of annual bonuses in respect of 2012 and 2012 long-term incentive awards vesting in full.
Rob Devey 1 July 2009 12 months 12 months John Foley 8 December 2010 12 months 12 months Michael McLintock 21 November 2001 6 months 12 months Nic Nicandrou 26 April 2009 12 months 12 months Barry Stowe 18 October 2006 12 months 12 months Tidjane Thiam 20 September 2007 12 months 12 months Mike Wells(note 1) 15 October 2010 12 months 12 months
Note 1 The contract for Mike Wells is a renewable one-year fixed term contract. The contract is renewable automatically upon the same terms and conditions unless the Company or the director gives at least 90 days’ notice prior to the end of the relevant term.
Policy on external appointments Subject to the Group Chief Executive’s or Chairman’s approval, executive directors are able to accept external appointments as non-executive directors of other organisations. Any fees paid may be retained by the executive director. During 2011, Michael McLintock received £45,000 as a trustee of another organisation (for reference, Michael McLintock received £42,500 for this role in 2010). Other directors served as non-executive directors on the boards of educational and cultural organisations without receiving a fee for such services.
Non-executive director Appointment by the Board Initial election by shareholders at AGM Notice period Expiration of current term of appointment
Keki Dadiseth1 1 April 2005 AGM 2005 6 months AGM 2012 Howard Davies 15 October 2010 AGM 2011 6 months AGM 2014 Michael Garrett1 1 September 2004 AGM 2005 6 months AGM 2012 Ann Godbehere 2 August 2007 AGM 2008 6 months AGM 2014 Alistair Johnston2 1 January 2012 AGM 2012 6 months AGM 2015 Bridget Macaskill3 1 September 2003 AGM 2004 6 months n/a Paul Manduca 15 October 2010 AGM 2011 6 months AGM 2014 Kaikhushru Nargolwala2 1 January 2012 AGM 2012 6 months AGM 2015 Kathleen O’Donovan4 8 May 2003 AGM 2004 6 months n/a James Ross5 6 May 2004 AGM 2005 6 months n/a Lord Turnbull 18 May 2006 AGM 2006 6 months AGM 2012
Non-executive directors’ fees Non-executive directors are not eligible to participate in annual bonus plans, long-term incentive plans or pension arrangements. Their fees are determined by the Board and reflect their individual responsibilities, including chairmanship and membership of committees where appropriate. The Board reviews fees annually and revised fees, for the first time since 2008, with effect from 1 July 2011 (see the table below for details of the fee structure in place from this date). The fee levels established in 2011 recognise the impact that the increased size, complexity and the burden of regulatory scrutiny of the Group have had on the time commitment required from non-executive directors since fee levels were last varied in 2008.
Basic fee 85,000 Audit Committee Chairman – additional fee 70,000 Audit Committee member – additional fee 25,000 Remuneration Committee Chairman
– additional fee 25,000 Risk Committee Chairman – additional fee 60,000 Risk Committee member – additional fee 25,000 Senior Independent Director – additional fee 50,000
Please see the table on page 148 for details of the fees received by individual non-executive directors during 2011.
Until July 2011, non-executive directors used the net value of £25,000 of their total annual fees to purchase shares in the Company. In July 2011, this arrangement was replaced with a share ownership requirement for non-executive directors, described below.
In July 2011, a new share ownership requirement for nonexecutive directors was introduced. Non-executive directors are required to hold shares with a value equivalent to one times the annual basic fee (excluding additional fees for chairmanship and membership of any committees). Non-executive directors will be expected to attain this level of share ownership within three years of the implementation of this requirement (or within three years of their date of appointment, if later). The Chairman is required to hold shares with a value equivalent to one times his annual base fee and is expected to attain this level of share ownership within five years of the date of his appointment.
Chairman’s letter of appointment and benefits Harvey McGrath was appointed as a non-executive director on 1 September 2008 and became Chairman on 1 January 2009. He is paid an annual fee of £500,000. A contractual notice period of 12 months by either party applies. Harvey McGrath is provided with life assurance cover of four times his annual fees and the use of a car and driver. No pension allowance is paid and he is not a member of any Group pension scheme. Harvey McGrath is also entitled to medical insurance coverage but he has not taken up this benefit.
Notes 1 Alistair Johnston was appointed to the Board on 1 January 2012. 2 Bridget Macaskill retired from the Board on 30 September 2011. 3 Kaikhushru Nargolwala was appointed to the Board on 4 Nic Nicandrou’s interest in shares on 12 March 2012 includes his monthly purchases made under the SIP plan in January, February and March 2012.
Non-executive directors Keki Dadiseth(note 4) 102 102 Howard Davies 153 153 Michael Garrett 93 93 Ann Godbehere 158 158 Bridget Macaskill(note 5) 65 65 Paul Manduca 156 156 Kathleen O’Donovan 98 98 James Ross(note 6) 33 33 Lord Turnbull 129 129
4 Keki Dadiseth was paid allowances totalling £8,997 in respect of his accommodation expenses in London whilst on the Company’s business as is the usual practice for directors who are not resident in the UK.
Value of anticipated releases from LTIPs in respect of performance periods ending 31 December 2010‡
Non-executive directors Keki Dadiseth(note 4) 87 87 Howard Davies 27 27 Michael Garrett 77 77 Ann Godbehere 119 119 Bridget Macaskill 89 89 Paul Manduca 18 18 Kathleen O’Donovan 87 87 James Ross 108 108 Lord Turnbull 88 88
4 Keki Dadiseth was paid allowances totalling £10,083 in respect of his accommodation expenses in London whilst on the Company’s business as is the usual practice for directors who are not resident in the UK.
Nick Prettejohn The 2009 Directors’ remuneration report provided details of the remuneration arrangements that would apply to Nick Prettejohn after he resigned from the position of Chief Executive UK & Europe. These arrangements were implemented as intended by the Committee.
The performance condition attached to the 2008 GPSP award was met in full and 100 per cent of the proportion of the award which was outstanding was released in 2011. Achievement of the SCV performance measure attached to the 2008 UK BUPP award was not achieved and so no part of the award vested.
The performance condition attached to the 2009 GPSP award was met in full and 100 per cent of the proportion of the award which was outstanding will be released during 2012. Achievement of the SCV performance measure attached to the 2009 UK BUPP award was 12.5 per cent per annum (on a compound basis), so 87.5 per cent of the outstanding portion of this award will be released during 2012.
Clark Manning Clark Manning stepped down from his role as President and Chief Executive of Jackson and as an executive director on 31 December 2010. Clark Manning remained Chairman of Jackson until 30 April 2011 and acted in an advisory role until 31 December 2011. The 2010 Directors’ remuneration report provided details of the remuneration arrangements that would apply to Clark Manning after his resignation. These arrangements were implemented as intended by the Committee.
• The performance condition attached to the 2008 GPSP award was met in full and 100 per cent of the award was released in 2011.
No awards were made to Clark Manning under any long-term incentive plan during 2011 and none will be made in any subsequent year.
No other amounts were paid during the financial year or were receivable by directors (or past directors) in connection with leaving the organisation.
ire cto rs’ re m u n e ratio n rep o rt
Directors’ outstanding long-term incentive awards Share-based long-term incentive awards The table below sets out the outstanding share awards under the Group Performance Share Plan and Business Unit Performance Plan.
Mike Wells( note 2) JNL PSP (note 4) 2007 85,500 700.0 85,500 – 31 Dec 10
Notes 1 The awards made in 2009, 2010 and 2011 for Barry Stowe were made in ADRs (1 ADR = 2 Prudential plc shares). The figures in the table are represented in terms of Prudential shares.
JNL Performance Share Plan. This maximum number of shares may be released if stretch performance targets are achieved. 5 At 31 December 2011, Prudential’s TSR performance was 168.7 per cent of the TSR performance of the peer index. On this basis, it is anticipated that awards granted under this plan in 2009 will vest in full. This will result in 120,898 shares vesting for Rob Devey, 92,022 shares for Michael McLintock, 316,328 shares for Nic Nicandrou, 196,596 shares for Barry Stowe and 299,074 shares for Tidjane Thiam under this plan. Dividend equivalents will be released on these vested shares.
6 At 31 December 2011, the performance period of the 2009 BUPP awards came to an end. Over the performance period the new business profit, IFRS profit and cash remittance achieved by the Asian business meant that it is anticipated that 86.50 per cent of the award will vest. This will result in 170,055 shares being released to Barry Stowe under this plan. Since the UK BUPP uses the same TSR performance measure as the GPSP, it is anticipated that 120,897 shares will be released to Rob Devey under this plan. No current executive director participated in the 2009 JNL BUPP. Dividend equivalents will be released on these vested shares.
Mike Wells JNL LTIP 2007 699 858 – 31 Dec 10
Note Under the M&G Executive LTIP, the value of each unit at award is £1. The value of units changes based on M&G’s profit growth and investment performance over the performance period. For the 2008 award of 1,141,176 units, the unit price at the end of the performance period was £2.62. This resulted in a payment of £2,989,881 to Michael McLintock. For the 2009 award of 1,830,189 units, the unit price at the end of the performance period was £2.96, which will result in a payment of £5,417,359 to Michael McLintock during 2012.
2 In 2009 and 2010 a scrip dividend equivalent and in 2011 a DRIP dividend equivalent were accumulated on these awards. 3 This award attracts dividends in the form of cash rather than shares.
Nic Nicandrou Shares held in Trust 2010 303 222 55 16 596
Note The table above provides information about shares purchased under the SIP together with Matching shares (awarded on a 1:4 basis) and Dividend shares. The total number of shares will only be released if Nic Nicandrou remains in employment for five years.
Notes 1 Tidjane Thiam made a total gain of £665 on the exercise of SAYE options during 2011 (2010: £nil). 2 No price was paid for the award of any option. 3 The highest and lowest share prices during 2011 were 777 pence and 509 pence respectively.
Dilution Releases from Prudential’s GPSP and BUPP are satisfied using new issue shares rather than by purchasing shares in the open market. Shares relating to options granted under all-employee share plans are also satisfied by new issue shares. The combined dilution from all outstanding shares and options at 31 December 2011 was 0.2 per cent of the total share capital at the time. Deferred shares will continue to be satisfied by the purchase of shares in the open market.
Directors’ pensions and life assurance The Company’s pension policy is set out on page 143. Details of directors’ pension entitlements under HMRC approved defined benefit schemes and supplements in the form of contributions to pension arrangements paid by the Company are set out in the following table: No enhancements to retirement benefits were paid to or receivable by directors or former directors other than the discretionary pension increases awarded to all pensioners which have been made during the year.
Notes 1 As required by the Companies Act remuneration regulations. 2 As required by Stock Exchange Listing rules. 3 The transfer value equivalent has been calculated in accordance with the M&G Group Pension Scheme’s transfer basis. 4 This table includes employer contributions to defined contribution plans. Supplements in the form of cash are included in the table on page 148. 5 Total contributions to directors’ pension and life assurance arrangements in 2011, including cash supplements for pension purposes, were £957,960 (2010: £624,921) of which £100,960 (2010: £44,608) related to money purchase schemes.
Company TSR performance (unaudited information) As required by the Companies Act, the line chart below compares Prudential’s Total Shareholder Return (TSR) during the five years from 1 January 2007 to 31 December 2011, with that of the peer group against which TSR is measured for the purposes of the Group Performance Share Plan. Our performance is also shown relative to the FTSE 100 since Prudential is a major company within this index. This chart is prepared using the methodology stipulated in the Companies Act remuneration regulations: Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011
Prudential TSR v FTSE 100 and peer group total returns index % over the five years to December 2011
Pension contributions* – – – Bonuses paid or receivable 12 18 23 Share-based payments and other * Pension contributions payable in the period were less than £150,000 in each period.
Financial statements and European Embedded Value (EEV) basis supplementary information 160 Summary of statutory and supplementary International Financial Reporting Standards (IFRS) basis and EEV basis results 162 Index to Group financial statements 163 Consolidated income statement 164 Consolidated statement of comprehensive income 165 Consolidated statement of changes in equity 167 Consolidated statement of financial position 169 Consolidated statement of cash flows 170 Notes on the Group financial statements 371 Balance sheet of the parent company 372 Notes on the parent company financial statements 383 Statement of directors’ responsibilities in respect of the Annual Report and the financial statements 384 Independent auditor’s report to the members of Prudential plc 385 EEV basis supplementary information 391 Notes on the EEV basis supplementary information 433 Statement of directors’ responsibilities in respect of the EEV basis supplementary information 434 Independent auditor’s report to Prudential plc on the EEV basis supplementary information 435 Additional unaudited information
Summary of statutory and supplementary IFRS and EEV basis results Year ended 31 December 2011
Short-term fluctuations in investment returns on shareholder-backed business 192 £(148)m £(123)m Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 192 £21m £(10)m Costs of terminated AIA transaction 192 – £(377)m Gain on dilution of Group holdings 192 – £30m
Operating earnings per share after related tax and non-controlling interests (excluding 2010 exceptional tax credit) IFRS note B2 196 63.9p 62.0p
Short-term fluctuations in investment returns 387 £(907)m £(30)m Mark to market value movements on core borrowings 387 £(14)m £(164)m Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 387 £23m £(11)m Effect of changes in economic assumptions 387 £(158)m £(10)m Costs of terminated AIA transaction 387 – £(377)m Gain on dilution of Group holdings 387 – £3m Profit from continuing operations before tax attributable to shareholders (including actual investment returns) 387 £2,922m £3,107m
Operating earnings per share after related tax and non-controlling interests (including 2010 exceptional tax credit) 415 115.7p 113.2p
Results bases The basis of preparation of the statutory IFRS basis results and supplementary IFRS basis information is consistent with that applied for the 2010 results and financial statements. The EEV basis results have been prepared in accordance with the European Embedded Value Principles issued by the CFO Forum of European Insurance Companies in May 2004 and expanded by the Additional Guidance on EEV disclosures published in October 2005. Life insurance products are, by their nature, long-term and the profit on this business is generated over a significant number of years. Accounting under IFRS alone does not, in Prudential’s opinion, fully reflect the value of future profit streams. Prudential considers that embedded value reporting provides investors with a measure of the future profit streams of the Group’s in-force long-term businesses and is a valuable supplement to statutory accounts. There has been no change to the basis of presentation of the EEV results from the 2010 results and financial statements.