Chairman’s statement 02 Group Chief Executive’s report 04 02 Strategic report
At a glance 10 Our business model 12 Our distribution 14 Our performance 16 Our businesses and their performance 18 Chief Financial Officer’s report on the 2017 financial performance 33 Report on the risks facing our business and how these are managed 48 Corporate responsibility review 64 03 Governance
Additional unaudited financial information 362 Risk factors 391 Glossary 398 Shareholder information 402 How to contact us 406
By helping to take the financial risk out of life’s big decisions, Prudential creates long-term value for our customers, our shareholders and the communities we serve. Adding more to life.
Notes 1 Underlying free surplus generated comprises underlying free surplus generated from the Group’s long‑term business (net of investment in new business) and that generated from asset management operations. Further information is set out in note 11 of the EEV basis results.
5 Before allowing for second interim ordinary dividend. 6 Further information on actual and constant exchange rates basis is set out in note A1 of the IFRS financial statements.
IFRS operating profit based on longer‑term investment returns £4,699m £4,256m 10% 6%
The international Group will combine the exciting growth potential of our Asia, US and Africa businesses, meeting the growing needs of customers in these markets. These businesses will form a leading international Group focused on the largest insurance markets globally with significant growth prospects.
Both independent groups will be headquartered in London, which we regard as the pre‑eminent city from which to operate global financial service businesses, and both are expected to meet the criteria for inclusion in the FTSE100.
The Board believes this demerger is in the interests of all our stakeholders. Customers will receive greater focus, employees will be more closely aligned with their businesses and we believe shareholders will benefit from investments in both companies.
Our strong full year results demonstrate the positive momentum across all our businesses.
Our impact Throughout the demerger process, we will continue to hold ourselves to the highest standards to ensure that both businesses deliver long‑term sustainable returns.
In view of this performance and our confidence about the outlook for the Group, the Board has decided to increase the full‑year ordinary dividend by 8 per cent to 47 pence per share. In line with this, the Directors have approved a second interim ordinary dividend of 32.5 pence per share (2016: 30.57 pence per share).
The Board now has a vital role to play stewarding the separation process, working with management and ensuring that every part of the Group continues to deliver for customers. This task makes ensuring a strong and diverse Board more important than ever. There were a number of changes to the Board in 2017 in both non‑executive and executive roles, reflecting the strength of our succession planning.
This has enabled us to recruit high‑calibre candidates with a diverse set of skills and expertise and ensured continuity while minimising disruption. I would like to thank Ann Godbehere, Tony Wilkey and Penny James for their significant contribution during their tenures, and to welcome Mark FitzPatrick, Tom Watjen and James Turner to the Board. The global market for talent continues to be highly competitive and our priority remains to ensure that we have the best possible executive and non‑executive team. We have committed to focusing particularly on strengthening gender diversity, alongside diversity of skills, in our succession planning in 2018.
Ensuring the effectiveness of the Board also remains a priority for me as Chairman. An external independent evaluation was conducted at the end of 2017 to consider how the Board can improve and work together more effectively. I was pleased that the review concluded that the Board’s strengths included creating a collegiate and constructive environment, effective use of time and materials, and strong risk and control oversight.
Our shareholders and other stakeholders A well governed company engages regularly and effectively with its shareholders, responding to their challenges and taking their ideas and concerns seriously. At Prudential, we have open and constructive dialogue with investors via a regular and comprehensive programme of engagement. I have personally found this active engagement hugely valuable and fully commit to continuing this dialogue. Shareholder input is vital to ensuring well informed Board discussions.
Our communities Prudential provides important benefits to society through our core business activities. In addition to these benefits, Prudential is a responsible business that invests in our local communities, which we strongly believe is in the interests of all our stakeholders.
Our purpose is to help remove uncertainty from life’s big events. Whether that’s starting a family, saving for a child’s education or planning for retirement, we provide our customers with financial peace of mind, enabling them to face the future with greater confidence. We also invest our customers’ money actively in the real economy, helping not only to improve the lives of individuals and families, but also to build stronger communities and drive the cycle of growth.
We have continued to develop our products and our capabilities in order to improve the way we meet customers’ needs. We are creating new, better and more personalised products, and we have a flexible, collaborative approach to incorporating the best digital technologies into our operations, while also leveraging our global scale to share new insights across our businesses at pace. The result is constant improvement in the way we serve our customers, providing value both to them and to our shareholders.
In March 2018 the Group announced its intention to demerge its UK and Europe businesses (‘M&G Prudential’) from Prudential plc, resulting in two separately listed companies, with different investment characteristics and opportunities. Our businesses share common heritage, values and purpose. Looking forward, we believe we will be better able to focus on meeting our customers’ rapidly evolving needs and to deliver long‑term value to investors as two separate businesses. On completion of the demerger, shareholders will hold interests in both Prudential plc and M&G Prudential.
As in previous years, we comment on our performance in local currency terms (expressed on a constant exchange rate basis) to show the underlying business trends in a period of currency movement.
Asia US UK and Europe * Segmental earnings of key businesses and excludes other income and expenditure.
Group IFRS operating profit was 6 per cent5 higher at £4,699 million (up 10 per cent on an actual exchange rate basis). IFRS operating profit from our Asia life insurance and asset management businesses grew by 15 per cent5, reflecting continued broad‑based business momentum across the region, with double‑digit5 growth in eight out of 12 life insurance markets. In the US, Jackson’s total IFRS operating profit increased by 3 per cent5, due mainly to growth in fee income on higher asset balances, which outweighed the anticipated reduction in spread earnings. In the UK and Europe, M&G Prudential’s total IFRS operating profit was 10 per cent higher than the prior year, reflecting 6 per cent growth in the IFRS operating profit generated from insurance business and 18 per cent growth in that generated from asset management.
The Group’s capital generation is underpinned by our large and growing in‑force business portfolio, and focus on profitable, short‑payback business. Overall underlying free surplus generation6 decreased by 1 per cent5 to £3,640 million, with higher contributions in Asia and the UK and Europe, offset by higher restructuring costs and a lower contribution from our US business. 2016 benefited from the impact of a US transaction to enhance local capital efficiency that was not repeated in 2017.
Cash remittances to the Group increased to £1,788 million, with Asia the largest contributor7 at £645 million. The Group’s overall performance supported an 8 per cent increase in the 2017 full year ordinary dividend to 47 pence per share.
The Group remains robustly capitalised, with a 2017 year‑end Solvency II cover ratio8,9 of 202 per cent. Over the period, IFRS shareholders’ funds increased by 10 per cent to £16.1 billion, reflecting profit after tax of £2,390 million (2016: £1,921 million on an actual exchange rate basis) net of other movements that included dividend payments to shareholders of £1,159 million and adverse foreign exchange movements of £470 million. EEV shareholders’ funds increased by 15 per cent to £44.7 billion, equivalent to 1,728 pence per share10,11.
New business profit11 increased by 12 per cent5 to £3,616 million (up 17 per cent on an actual exchange rate basis), driven by improved business mix in Asia, higher UK volumes and the favourable effect of tax reform in the US.
In Asia, we continue to develop our capabilities and reach, which build scale and enhance quality. Our strategic emphasis on increasing sales from health and protection business has contributed to a 12 per cent5 increase in new business profit in Asia. Our asset management business, Eastspring Investments, has again seen growth, with its total assets under management up 18 per cent12 to £138.9 billion and IFRS operating profit also up 18 per cent5 to £176 million.
In the US we remain focused on meeting the retirement income needs of the growing generation of baby boomer retirees and expanding our operations into the large asset pools of the fee‑based advisory market. Although the evolving regulatory environment continues to cause industry sales disruption, in 2017 Jackson delivered positive separate account net inflows of £3.5 billion, with separate account assets reaching £130.5 billion, an increase of 19 per cent5. In December 2017 the US enacted a major tax reform package, including a reduction in the corporate income tax rate from 35 per cent to 21 per cent effective from 1 January 2018. While this led to a £445 million charge in the income statement from re‑measuring deferred tax balances on the IFRS balance sheet, we expect the tax changes to be positive in the long term. The US effective tax rate is expected to fall from the current rate of circa 28 per cent to circa 18 per cent in the future.
Adding more to life: Helen, Prudential Hong Kong ‘I’ve always considered good health to be very important to my life. It’s great that Prudential offered me access to myDNA Pro, which has given me key insights into my genetic risk profiles. The first step was to do a DNA test, which showed my body to be sensitive to carbohydrate and fat intake due to my genetic makeup. Based on these findings, the personal health coach I chose as part of the programme helped me set a weight loss goal and plan to maintain a healthier lifestyle, including changing my dietary habits and ensuring I incorporated more cardio workouts into my exercise regime. With these, I have been able to maintain a healthy weight and am now in an overall better shape.
I’ve been very impressed by the genetics‑based recommendations and level of personal guidance provided by the programme. Huge thanks to my coach and Prudential for all the support and motivation.’
In the UK, both our UK life and asset management businesses performed well in 2017. PruFund new business APE sales increased 36 per cent to £1.2 billion, while M&G saw record net inflows of £17.3 billion from external clients. Overall M&G Prudential assets under management4 reached £351 billion, up from £311 billion at 31 December 2016.
A successful strategy Our performance is based on our clear, consistent and successful strategy, which is focused on long‑term opportunities arising from structural trends in our markets around the world.
The growing and increasingly wealthy middle classes of the region are under‑ protected. In Asia, out‑of‑pocket healthcare spend makes up 42 per cent of total health expenditure15, compared with just 12 per cent in the US and 9 per cent in the UK. While in a more developed market such as the UK insurance penetration is equivalent to 7.5 per cent16 of GDP, in Asia that figure is just 2.4 per cent16, giving an idea of the scale of the growth opportunity that remains in our Asian markets. The gap between the insurance cover of people in the region and what they need in order to maintain the living standards of their families has been estimated at circa £35 trillion17. We help to bridge that gap with a broad range of solutions across 14 markets in the region. We are in the top three in nine of our markets in Asia18, and we have 15 million life customers, with access to total markets of more than 3.3 billion people.
In Asia, our broad‑based portfolio of businesses continues to drive the growth of the Group. We are constantly improving the range and quality of the products we offer in the region, developing our multi‑channel distribution platform to ensure that those products reach as many customers as possible and improving our capabilities throughout our operations, not least by accessing new innovations in digital technology.
We develop products that meet the needs of our customers, whether that is for more personalised features or products aimed at new areas of the market and in 2017 we launched a number of new health and protection products in Indonesia, Vietnam, Singapore, Malaysia and Hong Kong.
Prudential’s Group Executive Committee Mike Wells is advised and assisted by the Group Executive Committee, which comprises our Executive Directors and a team of functional specialists.
Back, left to right: Tim Rolfe, Julian Adams, Al‑Noor Ramji, Anne Richards, Jonathan Oliver, Alan Porter.
www.prudential.co.uk Annual Report 2017 Prudential plc 07 01 G roup overview 02 Strategic report 03 G
Eastspring is well placed for the anticipated growth in Asia’s retail mutual fund market. To prepare further, we have strengthened our in‑house investment teams, entered into new strategic partnerships and made significant progress in systems and operating model upgrades. In addition, Eastspring recognises that environmental, social and governance (ESG) factors can be material to investment returns, particularly in the long term, and has become a signatory to the United Nations‑supported Principles for Responsible Investment (PRI), joining M&G Prudential asset management.
In the United States, we are continuing to develop our business to ensure we capture the opportunity presented by the millions of Americans moving into retirement now and over the coming years. Regulatory and industry changes are creating new areas of growth potential and we are adapting our offering to meet those opportunities. During 2017, in response to evolving conditions in the hybrid adviser segment of the market, Jackson launched Perspective Advisory II, an advisory version of our flagship product, Perspective II. We also announced the formation in November of our Private Wealth & Trust group, a specialised team focused on complex planning, investment management and tax mitigation strategies for high‑net‑worth clients. At the same time, we are improving communication for customers, and our initiatives in this area last year included the launch of a new website, the Financial Freedom Studio, where consumers can learn about financial planning for retirement, aimed at simplifying the language and focusing on planning for lifetime income.
We continue to invest in our capabilities and our people across the organisation. In July we welcomed Mark FitzPatrick to our executive team as Chief Financial Officer, succeeding Nic Nicandrou, who took over from Tony Wilkey as Chief Executive of Prudential Corporation Asia. Mark brings with him significant experience and knowledge of the sector, and I am confident that Nic will lead our Asian business to further success. In March 2018 James Turner was appointed Group Chief Risk Officer, bringing fresh perspective and additional leadership capacity to our executive team.
2 IFRS operating profit is management’s primary measure of profitability and provides an underlying operating result based on longer‑term investment returns and excludes non‑operating items. Further information on its definition and reconciliation to profit for the period is set out in note B1 of the IFRS financial statements.
4 Represents M&G Prudential asset management external funds under management and internal funds included on the M&G Prudential long‑term insurance business balance sheet.
5 Year‑on‑year percentage increases are stated on a constant exchange rate basis unless otherwise stated.
13 Working age population 15 ‑ 64 years. Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision, DVD Edition.
14 Source: BCG Global Wealth 2016. Navigating the New Client Landscape.
16 Source: Swiss Re Sigma 2015. Insurance penetration calculated as premiums as percentage of GDP. Asia penetration calculated on a weighted population basis.
19 Source: The Investment Association, September 2017. 20 Relates to £12.0 billion of IFRS shareholder annuity liabilities, valued as at 31 December 2017.
At a glance 10 Our business model 12 Our distribution 14 Our performance 16 Our businesses and their performance 18
We aim to generate attractive returns, enabling us to provide financial security to our customers, invest in growth opportunities and meet our customers’ high expectations.
Well recognised brands with a strong track record of a long-term conviction-led investment approach £17.3bn asset management external net inflows £351bn M&G Prudential funds under management1
M&G Prudential In August we announced the formation of M&G Prudential, a leading savings and investments business, ideally positioned to target growing customer demand for financial solutions in the UK and Europe. Our vision is a business built for the customer: simple, efficient, digitally enabled, capital light, fast‑growing and above all focused on delivery. The combined business benefits from two strong complementary brands, a world‑class investment capability, international distribution and a robust capital position.
Products We offer solutions for customers as they face the biggest financial challenges of their lives. We consistently develop our product portfolio, designing it around our customers’ needs and providing them with peace of mind, whether that be in relation to saving for retirement or insuring against risks of illness, death or critical life events.
We create financial benefits for our investors and deliver economic and social benefits for our customers, our employees and the societies in which we operate.
Employees Providing an environment with equal opportunities, career potential and rewards enabling us to attract and retain high‑quality individuals to deliver our strategy.
Communities Supporting communities where we operate, through investment in business and infrastructure, tax revenues and community support activities.
Growth £4,699m IFRS operating profit +6%1 on 2016 £3,616m New business profit +12%1 on 2016 £6,598m EEV operating profit +15%1 on 2016
Most productive VA wholesale distribution force in the US1 627 broker‑dealers’ selling agreements covering +226,545 (73%) of total US advisers2
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Eastspring Investments are present in 10 major Asian markets and distribution offices in US and Europe
CAGR +12% The Group’s business involves entering into long‑term contracts with customers, and hence the Group manages its associated assets and liabilities over a longer‑term time horizon. This enables the Group to manage a degree of short‑term market volatility. Therefore IFRS operating profit based on longer‑term investment returns gives a more relevant measure of the performance of the business. Other items are excluded from IFRS operating profit to allow more relevant period‑on‑period comparisons of the trading operations of the Group, eg the effects of corporate transactions are excluded.
Group IFRS operating profit in 2017 is 6 per cent higher on a constant exchange rate basis (10 per cent on an actual exchange rate basis), compared with 2016, reflecting resilient performance in our life businesses, with Asia up 15 per cent (20 per cent on an actual exchange rate basis), the US up 3 per cent (8 per cent on an actual exchange rate basis) and UK and Europe up 8 per cent. Our asset management businesses have performed well with M&G Prudential asset management up 18 per cent and Eastspring also up 18 per cent (25 per cent on an actual exchange rate basis).
CAGR +15% Life insurance products are, by their nature, long‑term and generate profit over a number of years. Embedded value reporting provides investors with a measure of the future profit streams of the Group. EEV new business profit reflects the value of future profit streams which are not fully captured in the year of sale under IFRS reporting.
CAGR +12% EEV operating profit is provided as an additional measure of profitability. This measure includes EEV new business profit, the change in the value of the Group’s long‑term in‑force business, and profit from our asset management and other businesses. As with IFRS, EEV operating profit reflects the underlying results based on longer‑term investment returns.
Group EEV operating profit in 2017 increased by 15 per cent on a constant exchange rate basis (20 per cent on an actual exchange rate basis), compared with 2016, driven by higher new business profit and higher contributions from the in‑force business.
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Total remittances to the Group increased by 4 per cent in 2017, compared with 2016, with significant contributions from each of our major businesses. This increase was driven by remittances from Asia, up 25 per cent (on an actual exchange rate basis) compared with 2016.
Group Solvency II capital surplus7,8 £bn 13.3Prudential is subject to the risk‑sensitive solvency framework required under European Solvency II Directives (Solvency II) as implemented by the Prudential Regulation Authority in the UK. The Solvency II surplus represents the aggregated capital (own funds) held by the Group, less solvency capital requirements.
The high quality and recurring nature of our operating capital generation, beneficial effects of debt issued and disciplined approach to managing balance sheet risks is reflected in the solvency capital surplus, which increased to £13.3 billion at 31 December 2017.
2017 objectives We are pleased to report that the Group has successfully achieved the financial objectives announced in December 2013. This demonstrates the successful execution of our strategy and is testament to the strength, scale and diversity of our Asia platform.
Group cumulative underlying free surplus, £bn Cumulative Group underlying free surplus generation of at least £10 billion over the four‑year period from 2014 to end‑2017.
Notes 1 The comparative results shown above have been prepared using actual exchange rates (AER) basis except where otherwise stated. Comparative results on a constant exchange rate (CER) basis are also shown in financial tables in the Chief Financial Officers’ report on our 2017 financial performance. CAGR is Compound Annual Growth Rate.
5 The 2016 comparative results have been re‑presented from those previously published following reassessment of the Group’s operating segments as described in note B1.3 of the IFRS financial statements. On re‑presentation, Prudential Capital is excluded from underlying free surplus generated.
6 Cash remitted to the Group forms part of the net cash flows of the holding company. A full holding company cash flow is set out in note II (a) of Additional IFRS financial information. This differs from the IFRS Consolidated Statement of Cash Flows which includes all cash flows relating to both policyholders and shareholders’ funds. The holding company cash flow is therefore a more meaningful indicator of the Group’s central liquidity.
9 The current year and all comparative amounts for the Asia objectives exclude contributions from the Korea life business which was sold in 2017. The 2017 Asia IFRS operating profit objective was adjusted accordingly. 2012 comparative amounts include the one‑off gain on sale of the stake in China Life of Taiwan of £51 million.
Comparative stated at reported currency basis *Expressed at Dec 2013 FX rates 884*
In Asia the insurance and savings industries are still in their infancy with average insurance penetration rates at just 2.4 per cent6, well below those seen in the UK. 65 per cent of personal wealth in Asia is held in cash or deposits relative to 14 per cent in the US. There are significant growth opportunities that arise from simply addressing these existing concerns. However, there are key structural trends that will further increase this strong demand for savings and protection for decades ahead.
The second trend relates to the significant economic growth potential of the region with, GDP in Asia predicted to increase significantly. The implications on wealth creation are profound, with private financial wealth increasing by some US$4 trillion per annum from 2016 to reach US$78 trillion by 2021.
The third trend covers the expanding mortality and morbidity protection gaps; as families’ wealth increases so does the amount of money they need to sustain their lifestyles in the event of a life‑changing event such as the death of a breadwinner or the diagnosis of a critical illness. Research concluded that in Prudential’s life markets the mortality gap is US$45 trillion8 and out of pocket healthcare expenditure is roughly four times the rates seen in the US and UK.
Asia There are compelling structural trends that underpin the long term opportunities for savings and protection across the region, and Prudential is positioned for further growth in these markets.
— Eastspring total funds under management of £138.9 billion up 18 per cent2
Distribution Prudential Corporation Asia has one of the strongest distribution platforms in the region, with a well diversified mix of tied agents and bank partners that enables us to reach a broad range of customers. Our experience is that customers’ fundamental preference for face‑to‑face advice and service from a trusted financial adviser is undiminished, and so tied agency and in‑branch bank sales staff will remain our primary distribution channels.
However, we are making significant investments in upgrading our capabilities to ensure we not only meet but exceed our customers’ expectations, including digital innovations and efficiencies, when they interact with our distributors. For example, in Singapore our agents are now equipped
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Products Prudential has a full suite of products that are tailored to meet individual market requirements and customer needs. Our overarching priority is to ensure firstly that customers have appropriate levels of protection and then support them with their long‑term savings objectives. Consequently a relatively high proportion of our average premiums are directed to protection products; equal to 27 per cent of total APE in 2017, and regular premiums comprised 94 per cent of the total APE. This mix is also beneficial to shareholders, as regular premiums provide a reliable stream of compounding revenues and protection business has higher profit margins as shareholders are providing capital to support risks.
His daughter, who was the beneficiary of his life insurance policy, visited and thanked me for persuading her father not to surrender the policy. She said, “thanks to you, we were able to cover the hospital bills and other expenses after my father passed away”.
A leading pan-Asia franchise The combination of Prudential Corporation Asia’s broad capability set, wide business footprint, and the significant opportunity across the market underpins our business in Asia.
Compounding revenues and profits Prudential Corporation Asia is a business with compounding revenues underpinned by high quality recurring income that is uncorrelated to investment markets. The current scale and profitability has been achieved by increasing our customer base and penetration across the continent. Growth is driven by our ability to meet customer needs through the breadth of markets we operate in, the scale and innovation of our operations, the capabilities of Eastspring Investments, our pan‑Asia asset manager, and our diverse and talented workforce.
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While we are already one of the leaders in the protection space, continued innovation is essential for our ongoing success. In Hong Kong we recently launched a very popular upgrade to our critical illness product, PRUhealth critical illness multi‑care, which provides lifetime multi‑claim, lump‑sum cover for 113 disease conditions, including three claims for cancer up to a total of 300 per cent of the sum assured.
Customers Excellent customer service is a prerequisite for sustained success in the industry and we are continuously driving improvements. For example, in China we have introduced WeChat e‑claims that have reduced the processing time for a seven day hospitalisation claim from around 18 days to two days. The usage rate of e‑claims is 99 per cent. In Hong Kong we have simplified the verification processes for Mainland China customers using iPads and GPS so they no longer need to visit our customer service centre. In Indonesia we have developed PRUcheers, an analytics‑driven business engine that performs a pre‑assessment of claims so that low risk ones can now be turned around in minutes, and the turnaround time for medical claims has been reduced by 15 per cent.
However, in addition to improved processes, customers are increasingly looking for value added services that go beyond the basic product proposition and so provide opportunities for us to increase our connections with them. In Hong Kong we found that myDNA, a service that provides customised diet and exercise advice supported by an app and based on an individual’s genetic profile, is very popular and so this has already been rolled out to Vietnam, Malaysia and Singapore. In Malaysia we have partnered with BP Global for their Doctor2U app. This gives our customers preferential rates on services that include online video medical consultations and the option to have a call‑out 24/7. In Indonesia we have the PRUmedical network covering 45 hospitals in 24 cities. Our customers receive priority admission and discharge to reduce waiting times, and are also guaranteed rooms.
Eastspring Investments Eastspring has a number of advantages and is well placed for the anticipated growth in Asia’s retail mutual fund market. It has one of the largest footprints in Asia, being operational in 10 major markets. It has a well diversified customer base comprising Prudential’s internal life funds, and a number of institutional clients, including sovereign wealth funds and retail customers. Assets managed are also well diversified between fixed income and equities and also include infrastructure funds.
Recent developments include a broadening and strengthening of our in house investment teams with some key hires, winning the ‘Best Asset Management House’ award21, new strategic partnerships (BlackRock, Sustainable Growth Advisers and Korea Advanced Institute of Science and Technology), significant progress with our systems and operating model upgrades and enhancing our institutional coverage by adding consultants in Asia and the US. We have also recently received approval of our business licence as an investment management wholly‑foreign owned enterprise in China.
We are already one of the leaders in the health space, but we will investigate opportunities to participate more broadly in this area with more comprehensive and flexible coverages and a wider range of value added services. We will position Eastspring to play a greater role in managing Asia’s rising wealth and we will also expand our presence in China.
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4 Working age population: 15 to 64 years. 5 World Health Organisation – Global Health Observatory data repository (2013). Out‑of‑pocket as a percentage of Total Health Expenditure. Asia calculated as average out‑of‑pocket.
11 Comparatives have been stated on an constant exchange rate basis. Historic have been restated to exclude sales from Korea Life, classified as held for sale. 2014 excludes intra‑group reinsurance contracts between the UK and Asia with‑profits businesses.
13 Market penetration: Swiss Re (Sigma) – based on insurance premiums as a percentage of GDP in 2016 (estimated).
15 Ranking among foreign JVs. 16 Ranking among private players. 17 Includes Takaful sales at 100 per cent. 18 Singapore includes onshore only, excluding Eldershield and DPS.
Customers In Asia, we focus our efforts on helping new and existing customers build better futures for themselves and their families, by helping to fill the savings and protection gap that exists in many countries in the region.
Building on our strong track record, we are building for future growth by investing in new opportunities and capabilities.
15 million life customers 94% of APE sales in regular premium
However, these Americans face challenges in planning for life after work. For many members of this generation, a financially secure retirement is at risk, due to insufficient accumulation of savings during their working years and the current combination of low yields and market volatility. Employer‑based pensions are disappearing and government plans are underfunded. Social security was never intended to be a primary retirement solution and today its long‑term funding status is in question. Additionally, the life expectancy of an average retiree has significantly increased, lengthening the number of years for which retirement funding is needed.
These products also offer tax deferral, which allows interest and earnings to grow tax‑free until withdrawals are made.
Jackson has a proven track record in this market with its market‑leading flagship product6, Perspective II. Jackson’s success has been built on its quick‑to‑market product innovation, as demonstrated by the development and launch of Elite Access in 2012, our investment‑only variable annuity. Further demonstrating Jackson’s flexibility and manufacturing capabilities, Jackson has launched Perspective Advisory II and Elite Access Advisory to serve advisers and distributors with a preference for advisory products. In November, Jackson launched Private Wealth Shield (PWS), a variable annuity developed specifically for trusts and private banks. To support this new product, Jackson also announced the formation of its Private Wealth & Trust group, a specialised team focused on complex planning, investment management and tax mitigation strategies for high‑net‑worth and ultra‑high net‑worth clients.
— Awarded ‘Contact Center World Class FCR Certification’ and ‘Highest Customer Service for the Financial Industry’ awards by The Service Quality Measurement Group, Inc. – the 11th consecutive year of recognition for customer service performance in both categories
alue (EEV ) basis results 07 A dditional inform ation broker‑dealers, wirehouses, and banks. For variable annuity sales, Jackson is the leader in the independent broker‑dealer, bank and wirehouse channels9 and second in regional firms9.
Adding more to life: Saundra, Jackson ‘My retirement story is about how I want to spend the winter of my life. It’s about having fun, enjoying my family, travelling and having the freedom to do the things I want to do, like spending time with my grandson.
I’m very pleased I chose a Jackson annuity. It gives me the confidence I need for my retirement. And to just live my life the way I want to live my life.’
Retirement wave Baby boomer population by age2 3.5m Age 65 in 2016 4.0m Age 60 in 2016 4.5m Age 55 in 2016 14.3 years 19.4 years
As a result of the DoL regulatory initiative and the uncertainties regarding the application and implementation of the Rules, the annuity industry saw continued pressure on sales in 2017. Sales in the variable annuity industry as of the third quarter of 2017 at US$70.9 billion10 were down 11 per cent compared with the same period last year. Even with competitors recently offering fixed index annuities with benefits that resemble those of variable annuities, sales of fixed index annuities (US$42.9 billion)10 along with fixed annuity products (US$38.9 billion)10 were lower as of the third quarter of 2017 at 9 per cent and 13 per cent respectively, compared with the same period last year. Total annuity industry sales were down approximately 11 per cent10 as of the third quarter of 2017.
The US National Association of Insurance Commissioners (NAIC) is currently conducting an industry consultation with the aim of reducing the non‑economic volatility in the variable annuity statutory balance sheet and enhancing risk management. Following an industry quantitative impact study (QIS), changes have been proposed to the current framework. These changes were presented to the December NAIC national meeting, and were exposed for comment by industry and interested parties until early March 2018. Jackson will continue to engage with the industry and the NAIC during the comment period.
Investment for growth With trillions of dollars of adviser‑ distributed assets across distribution platforms that have not historically been a focus, such as the dually registered investment adviser channel, there is significant opportunity to reach even more American retirees and serve their needs with annuity products going forward. The industry will need to remain flexible and cost‑effective in making changes to products, systems, and processes. We continue to ensure that we understand and make the necessary adjustments to support the needs and demands of American retirees into the future.
Notes 1 Growth rate on a constant exchange rate basis. 2 US Census Bureau Population division 2014 estimate of population.
Consumer Finances. 4 US Department of Health and Human Services, ‘Health,
9 ©2018 Morningstar Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar www.AnnuityIntel.com. Total sales by company and channel 3Q YTD 2017. Jackson ranks #1 out of 25 companies in the Independent NASD channel, #1 out of 19 companies in the Bank channel, #1 out of 14 companies in the Wirehouse channel, and #2 out of 19 companies in the Regional Firms channel.
Customers Many retirees or soon to be retirees face a reality of under‑saving, having no guaranteed income source and the prospect of living longer than any prior generation. Jackson’s focus is to provide solutions to help address these concerns for the millions of Americans currently transitioning to and through retirement.
Assisting 4 million customers with their financial needs 2 of the top 10 variable annuity contracts by premium6
— Total M&G Prudential assets under management1 of £351 billion, up 13 per cent
— Net investment inflows to mutual funds and institutional investment strategies of £17.3 billion
Our products Our aim is to provide our customers with savings and investment solutions which meet their long‑term financial needs and goals, in the structure which best suits them. Behind these solutions is a powerful investment engine: a highly skilled team of over 120 fund managers who put our customers’ money to work by sourcing investment opportunities globally across a wide spectrum of asset classes, including equities, bonds, credit, real estate and cash across both private and public markets.
At the end of the day, money can give you choices. You never know what opportunities or challenges might be around the corner. And not just for yourself – it’s great to be able to help your family.
For our savings and retirement customers we offer the PruFund range, which invests in our with‑profits fund, the largest in the UK. The with‑profits fund aims to smooth some of the extreme ups and downs of short‑term investment performance to provide a more stable return. It has performed well over the past five years: for example, customers in the PruFund Growth Fund have seen growth of 36 per cent since the start of 2013 against benchmark growth of 30 per cent.
Our open‑ended flexible global bond fund, the M&G Optimal Income Fund, performed strongly in 2017. Having achieved an average annualised return of over 7 per cent since its launch in 2006, Optimal Income has been one of the top performing bond funds across all sectors over the last decade. This return for its customers has been rewarded with net inflows of over £5 billion during 2017, bringing its assets under management to £23 billion.
Distribution In M&G and Prudential, we have two well‑respected and complementary brands: Prudential is closely associated with retirement in the UK, while M&G is recognised as a leading investment brand, both in the UK and across international markets.
One year – Dec 2017 Three years – Dec 2017 Five years – Dec 2017 Since fund manager tenure Dec 2017
Customers Meeting the growing and fast‑evolving saving and investment needs of customers across retail, institutional and direct channels.
Distribution Multi‑channel distribution, based on strong relationships with institutional investors, advisors and intermediaries, and substantial direct‑to‑customer franchises, including Prudential Financial Planning.
Strategic partnership with Tata Consultancy Services leveraging digital capabilities to enhance customers’ experience
While our two brands occupy different market segments, both share a common philosophy of aiming to deliver excellent long‑term customer outcomes, and both offer solutions powered by a world‑class investment capability. Working together as M&G Prudential gives us new opportunities for growth by building on these shared values and strengths.
Investment for growth In a world of low interest rates and increasing life expectancy, more people than ever need long‑term savings and investment solutions. We also know that our customers have far higher expectations of service and value for money, thanks to new technology and digital disruption. Over the last 169 years we have had a proud track record of innovating to deliver good outcomes to our customers, but we need to invest in our business to continue to do so. Over the next five years, we will be investing circa £250 million of shareholders’ funds in our business, including a new digital infrastructure which will improve customer service, accelerate product development and increase customer choice. Strategic partnerships, such as the recently announced Tata Consultancy Services partnership to enhance service for our UK savings and retirement customers, are an important part of these plans to improve customer outcomes. With a simpler, more efficient, digitally enabled business, we will respond quicker and better to our customers’ needs, offer better value and compete at scale in our markets even more effectively.
2 Europe includes AUM in Asia and South Africa. 3 ABI Mixed Investment 20 per cent – 60 per cent Shares
4 Quartile ranking based on ranking of the funds representative share class, net of fees, within their respective Investment Association (IA) or Morningstar sectors. Closed funds excluded. M&G total wholesale AUM was £79.7bn as at 31 December 2017, representing 23 per cent of the total M&G Prudential AUM. One year figures represent £78.1bn AUM, three year figures represent £76.1bn AUM, 5 year figures represent £71.2bn AUM, fund manager tenure figures represent £78.2bn AUM. Performance figures in GBP, bid to bid, net income reinvested. Average fund manager tenure December 2017 = 6.1 years. Source: M&G Prudential, December 2017. IA and Morningstar Inc. combined UK and Pan‑European peer groups as at end December 2017.
Performance was broad‑based across our business units led by our Asia businesses which delivered double digit growth in new business profit (up 12 per cent1), IFRS operating profit based on longer‑term investment returns (‘IFRS operating profit’) (up 15 per cent1) and underlying free surplus generation3 (up 19 per cent1). Asia achieved its 2017 financial objectives, demonstrating successful execution of its strategy, focusing on diversified recurring premium business, at scale. In the US, we saw good growth in fee income, driven by positive net inflows and favourable equity market conditions, which outweighed the expected reduction in the contribution from spread income.
During 2017 we combined M&G and our UK and Europe life business to form M&G Prudential. I am pleased to report that M&G Prudential asset management delivered record external net inflows of £17.3 billion, with overall assets under management4 at a new high of £351 billion at the end of 2017. We are making good progress in delivering our merger and transformation programme, and remain on track to deliver our previously announced savings by the end of 2022.
Chief Financial Officer’s report on the 2017 financial performance – Mark FitzPatrick continued
— Underlying free surplus generation2,3, our preferred measure of cash generation, from our life and asset management businesses, decreased by 1 per cent to £3,640 million (up 2 per cent on an actual exchange rate basis), after financing new business growth. Increased contributions from our Asia and UK businesses were balanced by a lower contribution from our US
business primarily as a result of non‑recurrence of a transaction undertaken in 2016 to enhance local capital efficiency. We continue to focus on high‑return new business with fast payback periods.
— Group shareholders’ Solvency II capital surplus6 was estimated at £13.3 billion at 31 December 2017, equivalent to a cover ratio of 202 per cent7 (1 January 2017: £12.5 billion, 201 per cent). The improvement in the period reflects the continuing strength of the Group’s operating capital generation in excess of growing dividend payments to shareholders.
Total operating profit based on longer‑term investment returns before tax, restructuring costs and interest received from tax settlement 4,802 4,251 13 4,425 9
Total operating profit based on longer-term investment returns before tax 4,699 4,256 10 4,429 6
Basic earnings per share based on operating profit after tax 145.2 131.3 11 136.8 6 Basic earnings per share based on total profit after tax 93.1 75.0 24 77.4 20
www.prudential.co.uk Annual Report 2017 Prudential plc 35 01 G roup overview 02 Strategic report 03 G
US total operating profit at £2,224 million increased by 3 per cent (9 per cent increase on an actual exchange rate basis), reflecting increased profit from our variable annuity business. US equity markets have continued to rise in 2017, which together with separate account net asset inflows of £3.5 billion, has led to separate account balances that were on average 17 per cent higher than the prior period. As a result, fee income increased 15 per cent to £2,343 million. Spread‑ based income decreased 10 per cent, as anticipated, reflecting the impact of lower yields on our fixed annuity portfolio and a reduced contribution from asset duration swaps. We expect these effects to continue to compress spread margins, although continued upwards movements in US yields may help to reduce the speed of the decline.
UK and Europe total operating profit was 10 per cent2 higher at £1,378 million. Life insurance IFRS operating profit increased by 8 per cent to £861 million (2016: £799 million). Within this total, the contribution from our core5 with‑profits and in‑force annuity business was £597 million (2016: £601 million), including an increased transfer to shareholders from the with‑profits funds of £288 million (2016: £269 million) of which 15 per cent was from PruFund business (2016: 10 per cent). The balance of the life insurance result reflects the contribution from other activities which are not expected to recur to the same extent going forward. This includes, as anticipated, lower IFRS operating profit from the sale of annuities of £9 million (2016: £41 million) and a number of other items discussed below. Asset management IFRS operating profit increased 18 per cent to £500 million, driven by higher average assets under management and improved performance fees, together with a lower cost‑income ratio of 58 per cent (2016: 59 per cent).
Life insurance profit drivers The increase in our IFRS operating profit levels reflects the growth in the scale of our operations, driven primarily by positive business flows. We track the progress that we make in growing our life insurance business by reference to the scale of our obligations to our customers, which are referred to in the financial statements as policyholder liabilities. Each year these increase as we write new business and collect regular premiums from existing customers and decrease as we pay claims and policies mature. The overall scale of these policyholder liabilities is relevant in the evaluation of our profit potential in that it reflects, for example, our ability to earn fees on the unit‑linked element and indicates the scale of the insurance element, another key source of profitability for the Group.
Net liability flows11 £2,717m Reclassification of Korea life business held for sale
Analysis of long-term insurance business IFRS operating profit by driver £m (% vs 2016)
UK one‑off items Other income Spread income Insurance margin Fee income Life expenses (net of DAC adjustments and margin on revenues) Growth vs 2016 on a constant exchange rate basis
We continue to maintain our preference for high‑quality sources of income such as insurance margin from life and health and protection business, and fee income. We favour insurance margin because it is relatively insensitive to the equity and interest rate cycle and prefer fee income to spread income because it is more capital‑ efficient. In line with this approach, on a constant exchange rate basis, insurance margin has increased by 9 per cent (up 14 per cent on an actual exchange rate basis) and fee income by 14 per cent (up 20 per cent on an actual exchange rate basis), while spread income decreased by 9 per cent (down 5 per cent on an actual exchange rate basis). Administration expenses increased to £2,297 million (2016: £2,025 million) as the business continues to expand. The expense margin has grown from 85 basis points to 88 basis points reflecting the continued increase in US producers selecting asset‑based commissions which are treated as an administrative expense in this analysis.
M&G Prudential’s external assets under management have benefited from a record level of net inflows, reflecting improvement in investment performance and supportive markets. External asset management net inflows totalled £17.3 billion (2016: net outflows of £8.1 billion), with significant contributions from European investors in the Optimal Income Fund, Global Floating Rate High Yield Fund and multi‑asset range, and from institutional clients, notably within our public debt, illiquid credit strategies and infrastructure equity funds. External assets under management increased 20 per cent to £163.9 billion during the year. Internal assets benefiting from PruFund sales and favourable markets increased 7 per cent, taking total M&G Prudential assets under management to £350.7 billion (2016: £310.8 billion).
Higher interest costs following the debt issued in 2016 and 2017, and restructuring costs of £103 million, as the business invests for the future, including UK and Europe infrastructure, contributed to an increase in net central expenditure of £139 million to £878 million (2016: £732 million on an actual exchange rate basis).
IFRS non‑operating items consist of short‑term fluctuations in investment returns on shareholder‑backed business of negative £1,563 million (2016: negative £1,764 million), the results attaching to disposal of businesses of £223 million (2016: negative £244 million), and the amortisation of acquisition accounting adjustments of negative £63 million (2016: negative £79 million) arising mainly from the REALIC business acquired by Jackson in 2012. The profit attributable to disposal of businesses relates to amounts in respect of the Korea life business sold in 2017 and the disposal of the US broker‑dealer network in August 2017.
IFRS short-term fluctuations in investment returns on shareholderbacked business IFRS operating profit is based on longer‑ term investment return assumptions. The difference between actual investment returns recorded in the income statement and the assumed longer‑term returns is reported within short‑term fluctuations in investment returns. In 2017, the total short‑term fluctuations in investment returns on shareholder‑backed business were negative £1,563 million and comprised negative £1 million for Asia, negative £1,568 million in the US, negative £14 million in the UK and positive £20 million in other operations.
IFRS effective tax rates In 2017, the effective tax rate on IFRS operating profit based on longer‑term investment returns was 21 per cent, which is unchanged from 2016 (21 per cent).
The 2017 effective tax rate on the total IFRS profit was 27 per cent (2016: 16 per cent), reflecting the inclusion of a £445 million one‑off charge on the re‑measurement of US deferred tax balances using a rate of 21 per cent (previously 35 per cent) following the enactment in December 2017 of a comprehensive US tax reform package. Excluding this one‑off charge, the 2017 effective tax rate would have been 14 per cent.
In addition to the impact on the IFRS profit, the re‑measurement of US deferred tax balances also resulted in a separate benefit of £134 million recognised in other comprehensive income, in relation to changes to deferred tax on cumulative unrealised gains (net of DAC) on bonds which are taken directly through other comprehensive income.
The main driver of the Group’s effective tax rate is the relative mix of the profits between jurisdictions with higher tax rates (such as Indonesia and Malaysia), jurisdictions with lower tax rates (such as Hong Kong and Singapore), and jurisdictions with rates in between (such as the UK, and now from 2018, the US).
Once the US tax changes are fully reflected, we would expect a favourable impact on the Group’s effective tax rate. The US operating profit effective tax rate is expected to be circa 18 per cent (previously 28 per cent), and the overall Group operating profit effective tax rate is likely to settle in the range of 16 per cent to 18 per cent.
Total tax contribution The Group continues to make significant tax contributions in the jurisdictions in which it operates, with £2,903 million remitted to tax authorities in 2017. This was similar to the equivalent amount of £2,887 million in 2016.
Asia £2,368m, +12% (+17% AER) US £906m, +9% (+15% AER) UK and Europe £342m, +28%
Life insurance new business profit was up 12 per cent (17 per cent on an actual exchange rate basis) to £3,616 million, and Life insurance new business APE sales increased by 6 per cent (10 per cent on an actual exchange rate basis) to £6,958 million.
Our focus on quality is undiminished with regular premium contracts accounting for 94 per cent of APE sales and supporting a 26 per cent increase in health and protection new business profit. This favourable mix provides a high level of recurring income and an earnings profile that is significantly less correlated to investment markets.
In the US, new business profit increased by 9 per cent to £906 million (up 15 per cent on an actual exchange rate basis) reflecting a modest increase in APE sales, up 1 per cent (6 per cent on an actual exchange rate basis) and the positive impact on future profit from a reduction in corporate income tax rates. Uncertainty regarding the application and implementation of the US Department of Labor Fiduciary Duty Rule has led to continued pressure on industry sales in 2017 which were down 11 per cent over the first nine months of the year. Despite this, Jackson’s variable annuity sales increased by 1 per cent, with the economics on new business in variable annuities remaining extremely attractive, with high internal rates of return and short payback periods. Net inflows into Jackson’s separate account asset balances, which drive fee‑based earnings on variable annuity business, remained positive at £3.5 billion. More favourable market conditions relating to the institutional product market also provided Jackson with the opportunity to write APE sales of £232 million (2016: £193 million).
In our UK life business, our strategy of extending customer access to PruFund’s with‑profits investment option via additional product wrappers continues to drive growth in new business profit, which increased to £342 million, up 28 per cent. APE sales increased 29 per cent to £1,491 million. We have seen notable success with the build out of PruFund, which has contributed significantly towards an APE sales increase in individual pensions (up 110 per cent), income drawdown (up 35 per cent) and ISAs (up 7 per cent). Reflecting this performance, total PruFund assets under management of £35.9 billion as at 31 December 2017 were 46 per cent higher than at the start of the year.
Underlying free surplus generated from in‑force life business and asset management before restructuring costs 4,630 4,485 3 4,649 –
Profit (loss) attaching to disposal of businesses 172 (86) Net cash remitted by business units (1,788) (1,718)
In 2017, underlying free surplus generation from our life insurance and asset management business decreased by 1 per cent to £3,640 million (increased 2 per cent on an actual exchange rate basis), reflecting increased contributions from our Asia and UK businesses, a non‑recurrence of a one‑off prior year gain from our US business, and higher restructuring costs. In Asia, growth in the in‑force life portfolio, combined with post‑tax asset management profit from Eastspring, contributed to free surplus generation of £1,562 million, up 11 per cent. In the US, in‑force free surplus generation decreased by 19 per cent reflecting the non‑recurrence of a £247 million benefit from contingent financing actions taken in 2016, together with lower favourable experience variances. In the UK, in‑force free surplus generation increased by 15 per cent to £1,486 million, attributable to growth in asset management earnings, the adoption of the CMI 2015 assumption basis and portfolio and capital management actions including longevity reinsurance to improve the solvency position of our UK life business of £400 million (2016: £351 million). The result includes an increase in the provision for the costs of the UK review of past non‑advised annuity sales practices and related potential redress, which has a post‑tax impact of £187 million in 2017 (2016: £145 million).
www.prudential.co.uk Annual Report 2017 Prudential plc 41 01 G roup overview 02 Strategic report 03 G
Movement in central cash2,16 £m 1 Jan 2017 Cash remitted to Group
Asia 645 US 475 UK and Europe 643 Other UK 25 2016 second interim dividend and 2017 first interim dividend
Cash remitted to the corporate centre in 2017 amounted to £1,788 million, driven by higher remittances from Asia. For the first time, our Asia business unit is the largest contributor17 to cash in the Group, demonstrating the quality and scale of its growth. Jackson made sizeable remittances of £475 million. The remittance from M&G Prudential of £643 million was 9 per cent higher than the combined remittance in 2016. Prudential Capital contributed a further £25 million.
Post‑tax operating profit based on longer‑term investment returns before restructuring costs and interest received from tax settlement 6,695 5,492 22 5,738 17
Post-tax operating profit based on longer-term investment returns 6,598 5,497 20 5,743 15
Actual exchange rate Constant exchange rate 2017 pence 2016 pence Change % 2016 pence Change %
Jackson’s EEV life operating profit was up 3 per cent to £2,143 million, reflecting a 9 per cent increase in new business profit to £906 million and a stable contribution from in‑force profit of £1,237 million, which included favourable operating assumption changes and experience variances of £543 million (2016: £628 million), related largely to persistency and mortality effects. The increase in our US EEV new business profit reflects the positive impact on future profits from lower tax rates.
Prudential has been designated as a Global Systemically Important Insurer (G‑SII) and is monitoring and engaging with the PRA on the development and potential impact of the policy measures associated with such a designation.
Local statutory capital All of our subsidiaries continue to hold appropriate capital levels on a local regulatory basis. In the UK, at 31 December 2017 The Prudential Assurance Company Limited and its subsidiaries21 had an estimated Solvency II shareholder surplus22 of £6.1 billion (equivalent to a cover ratio of 178 per cent) and a with‑profits surplus23 of £4.8 billion (equivalent to a cover ratio of 201 per cent). In the US, following the enactment in December 2017 of a comprehensive reform package, a £628 million reduction in the level of the statutory net admitted deferred tax asset more than offset operational capital formation, resulting in a risk based capital ratio of 409 per cent (2016: 485 per cent).
Debt portfolio The Group continues to maintain a high‑quality defensively positioned debt portfolio. Shareholders’ exposure to credit is concentrated in the UK annuity portfolio and the US general account, mainly attributable to Jackson’s fixed annuity portfolio. The credit exposure is well diversified and 98 per cent of our UK portfolio and 97 per cent of our US portfolio are investment grade29. During 2017, default losses were minimal and reported impairments across the UK and US portfolios were £2 million (2016: £35 million).
In the UK and Europe, EEV life operating profit increased by 58 per cent to £1,015 million (2016: £643 million). The increase was driven by a 28 per cent increase in new business profit, and higher in‑force profit including a £195 million benefit from revisions to longevity assumptions following adoption of updated actuarial mortality projections under CMI 201519. Profits arising from actions undertaken to improve solvency were more than offset by an increase in the provision related to the potential costs and related potential redress of reviewing internally vesting annuities sold without advice after 1 July 2008.
Asia life £3,705m, +15% (+21% AER) US life £2,143m, +3% (+9% AER) UK and Europe life £1,015m, +58% Asset management and general insurance £578m, +17% (+19% AER)
Profit after tax for the year24 2,389 1,921 8,750 4,516 Exchange movements, net of related tax (409) 1,161 (2,045) 4,211 Cumulative exchange gain of Korea life business recycled to profit and loss account (61) – – – Unrealised gains and losses on Jackson fixed income securities classified as available for sale25 486 31 – –
Group IFRS shareholders’ funds at 31 December 2017 increased by 10 per cent to £16.1 billion (31 December 2016: £14.7 billion on an actual exchange rate basis), driven by the strength of the operating result, offset by dividend payments of £1,159 million. During the period, UK sterling has strengthened relative to the US dollar and various Asian currencies. With approximately 50 per cent of the Group’s IFRS net assets (71 per cent of the Group’s EEV net assets) denominated in non‑sterling currencies, this generated a negative exchange rate movement on the net assets in the period. In addition, the moderate decline in US long‑term interest rates between the start and the end of the reporting period produced unrealised gains on fixed income securities held by Jackson accounted through other comprehensive income.
The Group’s EEV basis shareholders’ funds also increased by 15 per cent to £44.7 billion (31 December 2016: £39.0 billion on an actual exchange rate basis), On a per share basis the Group’s embedded value at 31 December 2017 equated to 1,728 pence, up from 1,510 pence at 31 December 2016.
Corporate transactions Intention to demerge the Group’s UK businesses and sale of £12.0 billion30 UK annuity portfolio In March 2018, the Group announced its intention to demerge its UK and Europe businesses (‘M&G Prudential’) from Prudential plc, resulting in two separately listed companies. On completion of the demerger, shareholders will hold interests in both Prudential plc and M&G Prudential.
M&G Prudential agreed in March 2018 to the sale of £12.0 billion30 of its shareholder annuity portfolio to Rothesay Life. Under the terms of the agreement, M&G Prudential has reinsured £12.0 billion30 of liabilities to Rothesay Life, which is expected to be followed by a Part VII transfer of the portfolio by the end of 2019. The capital benefit of this transaction will be retained within the Group to support the demerger process.
The IFRS liabilities relating to M&G Prudential’s total UK shareholder annuity portfolio as at 31 December 2017 were £32.6 billion. The UK annuity business being sold contributed around £140 million towards UK life insurance core5 IFRS operating profit before tax of £597 million in 2017. Total M&G Prudential IFRS operating profit before tax was £1,378 million in 2017.
Prudential plc’s Hong Kong subsidiaries which are subject to legal transfer from The Prudential Assurance Company Limited to Prudential Corporation Asia Limited comprise its life business, Prudential Hong Kong Limited, and its general insurance business, Prudential General Insurance Hong Kong Limited. Hong Kong will continue to be included in the segmental reporting of Asia’s IFRS and embedded value results. The transfers will be subject to regulatory approval.
* The pro forma estimate assumes that the partial sale of the UK annuity portfolio and the transfer of Prudential plc’s Hong Kong subsidiaries to Asia had both been completed as at 31 December 2017. In relation to the sale of the UK annuity portfolio, this estimate includes a £1.3 billion reduction in the Solvency Capital Requirement (SCR) and a £0.2 billion decrease in Own Funds, resulting in an increase in capital surplus of £1.1 billion, of which £0.6 billion is expected to be recognised in the UK capital position as at 30 June 2018 under the reinsurance agreement. In relation to the Hong Kong transfer, the impact on the SCR allows for the release of the Hong Kong business standalone SCR of £2.0 billion, partially offset by the removal of diversification benefits between UK and Hong Kong of £1.1 billion.
Disposal of Korea life In May 2017, the Group completed the sale of the Group’s life insurance subsidiary in Korea, PCA Life Insurance Co. Ltd to Mirae Asset Life Insurance Co. Ltd. for KRW170 billion (equivalent to £117 million at 17 May 2017 closing rate).
Disposal of broker-dealer network in the US In August 2017, the Group, through its subsidiary National Planning Holdings, Inc. (‘NPH’) sold its US independent broker‑ dealer network to LPL Financial LLC for an initial purchase price of US$325 million (equivalent to £252 million at 15 August 2017).
Dividend The Board has decided to increase the full‑year ordinary dividend by 8 per cent to 47 pence per share, reflecting our 2017 financial performance and our confidence in the future prospects of the Group. In line with this, the Directors have approved a second interim ordinary dividend of 32.5 pence per share (2016: 30.57 pence per share).
www.prudential.co.uk Annual Report 2017 Prudential plc 47 01 G roup overview 02 Strategic report 03 G
Notes 1 Increase stated on a constant exchange rate basis. 2 The 2016 comparative results have been re‑presented from those published previously, following reassessment of the Group’s operating segments as described in note B1.3 of the IFRS financial statements.
3 Underlying free surplus generated comprises underlying free surplus generated from the Group’s long‑term business (net of investment in new business) and that generated from asset management operations. Further information is set out in note 11 of the EEV basis results. Free surplus represents ‘underlying free surplus’ based on operating movements and excludes market movements, foreign exchange, capital movements, shareholders’ other income and expenditure and restructuring and Solvency II implementation costs arising centrally.
6 The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring‑fenced with‑profits funds and staff pension schemes in surplus. The estimated solvency position includes management’s calculation of UK transitional measures reflecting operating and market conditions at each valuation date. An application to recalculate the transitional measures as at 31 December 2017 has been approved by the Prudential Regulation Authority.
7 Before allowing for second interim ordinary dividend. 8 Refer to note B1.1 in IFRS financial statements for the breakdown of other income and expenditure and other non‑operating items.
9 Gross earned premiums for contracts in second and subsequent years, comprising Asia segment IFRS gross earned premium of £15.7 billion less gross earned premiums relating to new regular and single premiums of £5.7 billion, plus renewal premiums from joint ventures of £1.6 billion, and excluding any amounts relating to the sold Korea life business.
12 Includes Unallocated surplus of with‑profits business. 13 Includes Group’s proportionate share in PPM South Africa and the Asia asset management joint ventures.
15 Net inflows exclude Asia Money Market Fund (MMF) inflows of £1,495 million (2016: net inflows £403 million). External funds under management exclude Asia MMF balances of £9,317 million (2016: £7,714 million).
16 Net cash remitted by business units are included in the Holding company cash flow, which is disclosed in detail in note II(a) of the Additional unaudited financial information.
17 Based on the 2017 operating segments. 18 Refer to the EEV basis supplementary information
– Post‑tax operating profit based on longer‑term investment returns and Post‑tax summarised consolidated income statement, for further detail on other income and restructuring costs.
20 The methodology and assumptions used in calculating the Solvency II capital results are set out in note II(f) of the Additional unaudited financial information.
22 The UK shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring‑fenced with‑profits funds and staff pension schemes in surplus. The estimated solvency position includes management’s calculation of UK transitional measures reflecting operating and market conditions at each valuation date. An application to recalculate the transitional measures as at 31 December 2017 has been approved by the Prudential Regulation Authority.
23 The estimated solvency position includes management’s calculation of UK transitional measures reflecting operating and market conditions at each valuation date. An application to recalculate the transitional measures as at 31 December 2017 has been approved by the Prudential Regulation Authority.
24 Excluding profit for the year attributable to non‑ controlling interests.
27 Operating profit after tax and non‑controlling interests as percentage of opening shareholders’ funds, as set out in notes II(c) and II(m) of the Additional unaudited financial information.
29 Based on hierarchy of Standard & Poor’s, Moody’s and Fitch, where available and if unavailable, internal ratings have been used.
48 Prudential plc Annual Report 2017 www.prudential.co.uk 2017 was, in many respects, a year of global geopolitical transition. Popular discontent was one of the driving factors, shifting the political landscape in many countries, in particular in the US and across Western Europe. The nature of technology risks evolved during the year, with high profile and untargeted attacks affecting companies around the world. Despite all this, financial markets appeared largely unperturbed during 2017 with low volatility and steady and broad global economic growth, and the first steps were taken toward monetary policy tightening in key economies.
Our results show that, even in times of unpredictability, we can generate value for our shareholders by taking selective exposure to risks that are rewarded commensurately and that can be quantified appropriately and managed. We retain risks within a clearly defined risk appetite, where we believe doing so contributes to value creation and the Group is able to withstand the impact of an adverse outcome. For our retained risks, we ensure that we have the necessary capabilities, expertise, processes and controls to manage the exposure appropriately.
Our Group Risk Framework and risk appetite have allowed us to control our risk exposure successfully throughout the year. Our governance, processes and controls enable us to deal with the uncertainty ahead in order to continue helping our customers achieve their long‑term financial goals.
This section explains the main risks inherent in our business and how we manage those risks, with the aim of ensuring we maintain an appropriate risk profile.
Risk governance Our risk governance comprises the Board, organisational structures, reporting relationships, delegation of authority, roles and responsibilities, and risk policies that the Group Head Office and our business units establish to make decisions and control their activities on risk‑related matters. This encompasses individuals, Group‑wide functions and committees involved in overseeing and managing risk.
Risk committees and governance structure Our risk governance structure is led by the Group Risk Committee, supported by independent non‑executives on risk committees of major subsidiaries. These committees monitor the development of the Group Risk Framework, which includes risk appetite, limits, and policies, as well as risk culture.
Report on the risks facing our business and how these are managed
Ri sk s fr om o ur b us in es s op er at ions
A major part of the Risk Management Cycle is the annual assessment of the Group’s most material risks. These risks range from those associated with the economic, market, political and regulatory environment; those that we assume when writing our insurance products and by virtue of the investments we hold; and those that are inherent in our business model and its operations. This is used to inform risk reporting to the risk committees and the Board for the year.
The Group Risk Committee reviews the Group Risk Framework and recommends changes to our Board to ensure that it remains effective in identifying and managing the risks faced by the Group. A number of core risk policies and standards support the Framework to ensure that risks to the Group are identified, assessed, managed and reported.
We have some appetite to take market and credit risk where it arises from profit‑generating insurance activities, to the extent that it remains part of a balanced portfolio of sources of income for shareholders and is compatible with a robust solvency position. We also have some appetite for retaining insurance risks in areas where we believe we have expertise and operational controls, and where we judge it to create more value to retain rather than transfer the risk. The extent of insurance risk that we are willing to hold is conditional on a balanced portfolio of income to shareholders and compatibility with a robust solvency position.
Group limits operate within these expressions of risk appetite to constrain material risks, while triggers and indicators provide further constraint and ensure escalation. The Group Chief Risk Officer determines the action to be taken upon all breaches of Group limits which may include escalation to the Group Risk Committee or Board. Any decision on action taken by the Group Chief Risk Officer is reviewed at the subsequent Group Risk Committee meeting.
Capital requirements The limits aim to ensure that: — The Group meets its internal economic capital requirements; — The Group achieves its desired target rating to meet its business objectives; and
An evaluation of risk culture forms part of the Group Risk Framework and in particular seeks to identify evidence that: — Senior management in business units articulate the need for good risk management as a way to realise long‑term value and continuously support this through their actions; — Employees understand and care about their role in managing risk – they are aware of and discuss risk openly as part of the way they perform their role; and
The risks associated with our environmental, social and governance (ESG) activities and the policies we maintain in relation to them, are detailed in the Corporate responsibility review on page 64.
On an annual basis, a top‑down identification of the Group’s key risks is performed, which considers those risks that have the greatest potential to impact the Group’s operating results and financial condition. A bottom‑up process of risk identification is performed by the business units who identify, assess and document risks, with appropriate coordination and challenge from the risk functions.
The Group ORSA report pulls together the analysis performed by a number of risk and capital management processes, which are embedded across the Group, and provides quantitative and qualitative assessments of the Group’s risk profile, risk management and solvency needs on a forward‑looking basis. The scope of the report covers the full known risk universe of the Group.
Risk management and control The control procedures and systems established within the Group are designed to manage the risk of failing to meet business objectives reasonably and are detailed in the Group risk policies. This can only provide reasonable and not absolute assurance against material misstatement or loss. They focus on aligning the levels of risk‑taking with the achievement of business objectives.
The management and control of risks are set out in the Group risk policies, and form part of the holistic risk management approach under the Group’s ORSA.
The methods and risk management tools we employ to mitigate each of our major categories of risks are detailed in the Further risk information section below.
Risk reports provide monthly updates to the Group Executive Risk Committee, Group Risk Committee and Board on exposure against Board‑approved risk appetite statements and limits.
The risk management cycle The risk management cycle comprises processes to identify, measure and assess, manage and control, and monitor and report on our risks.
Geopolitical risk The geopolitical environment has produced varying levels of volatility in recent years as seen by political developments in the UK, the US and the Eurozone. Uncertainty in these regions, combined with conflict in the Middle East and elevated tensions in east Asia and the Korean peninsula underline that geopolitical risks are truly global and their potential impacts are wide‑ranging; for example through increased regulatory and operational risks. The geopolitical and economic environments are increasingly closely linked, and changes in the political arena may have direct or indirect impacts on our Group.
The assets backing the M&G Prudential and Jackson annuity businesses means credit risk is considered a material risk for these business units in particular.
In our Asia business, our main market risks arise from the value of fees from our fee‑earning products. In the US, Jackson’s fixed and variable annuity books are exposed to a variety of market risks due to the assets backing these policies.
Liquidity risk Is the risk of not having sufficient liquid assets to meet our obligations as they fall due, and incorporates the risk arising from funds composed of illiquid assets. It results from a mismatch between the liquidity profile of assets and liabilities. We consider this a risk which is material at the level of the Group.
Both Jackson and M&G Prudential operate in highly regulated markets. Regulatory reforms can have a material impact on our businesses, and regulatory focus continues to be high.
Summary risks The components of our business model, outlined on page 12, give rise to risks of varying nature across the Group which can broadly be categorised as those which arise as a result of our business operations; those risks arising from our investments; those which arise from the nature of our products; and those broad risks which apply to us because of the global environment in which we operate. These risks, where they materialise, may have a financial impact on the Group, and could also impact on the performance of our products or the services we provide our customers and distributors, which gives rise to potential risks to our brand, reputation and have conduct risk implications. These risks are summarised below. We have indicated whether these risks are considered material at the level of the Group or our business units. Our disclosures covering risk factors can be found at the end of this document.
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‘Macro’ risks Risks from our investments Risks from our products Risks from our business operations
Some of the risks that we are exposed to are necessarily broad given the external influences which may impact on the Group. These risks include: Global economic conditions Changes in global economic conditions can impact us directly; for example by leading to poor returns on our investments and increasing the cost of promises (guarantees) we have made to our customers. Our fund investment performance may also be impacted, which is a fundamental part of our business in providing appropriate returns for our customers and shareholders. Changes in economic conditions can also have an indirect impact on us; for example economic pressures could lead to decreased savings, reducing the propensity for people to buy our products. Global economic conditions may also impact on regulatory risk for the Group by changing prevailing political attitudes towards regulation. We consider this to be a risk which is material at the level of the Group.
Digital disruption The emergence of advanced technologies such as artificial intelligence and block chain is providing an impetus for companies to rethink their existing operating models and how they interact with their customers. We consider digital disruption from both an external and internal view. The external view considers the rise of new technologies and how this may impact on our industry and our competitiveness within it, while the internal view considers the risks associated with our own internal developments in meeting digital change challenges and opportunities. While we are embracing such opportunities, we are also closely monitoring any risks which arise.
Insurance risks The nature of the products offered by the Group exposes it to insurance risks, which we consider to form a significant part of our overall Group risk profile.
From our health protection products, increases in the costs of claims (including the level of medical expenses) increasing over and above price inflation (claim inflation) is another risk.
Persistency and morbidity risks are among the most material insurance risks for our Asia business given our focus on health protection products in the region.
Operational risks The complexity of our Group and activities means we face a challenging operating environment. This results from the high volume of transactions we process; product and investment portfolios; our people, processes and IT systems; and the extensive regulations under which we operate.
Regulatory risk We also operate under the ever‑evolving requirements set out by diverse regulatory and legal and tax regimes, as well as utilising a significant number of third parties to distribute products and to support business operations; all of which adds to the complexity of our operations.
Report on the risks facing our business and how these are managed continued
The methods that we use to manage and mitigate our market risks include the following: — Our market risk policy; — Risk appetite statements, limits and triggers that we have in place; — The monitoring and oversight of market risks through the regular reporting of management information; — Our asset and liability management programmes; — Use of derivative programmes, including, for example, interest rate swaps, options and hybrid options for interest rate risk; — Regular deep dive assessments; and
Investment risk (Audited) In the UK business, our main investment risk arises from the assets held in the with‑profits funds. Although this is mainly held by our policyholders, a proportion of the funds’ declared bonuses and policyholder net investment gains is shared with shareholders and so our investment exposure relates to the future performance of that proportion (future transfers).
This investment risk is driven mainly by equities in the funds, although there is some risk associated with other investments such as property and bonds. Some hedging to protect against a reduction in the value of these future transfers against falls in equity prices is performed outside the funds using derivatives. The with‑profits funds’ large Solvency II own funds – estimated at £9.6 billion as at 31 December 2017 (31 December 2016: £8.4 billion) – helps to protect against market fluctuations and helps the funds to maintain appropriate solvency levels. The with‑profits funds’ Solvency II own funds are protected partially against falls in equity markets through an active hedging programme within the fund.
In Jackson, investment risk arises from the assets backing customer policies. In the case of spread‑based business, including fixed annuities, these assets are generally bonds, and shareholder exposure comes from the minimum returns needed to meet the guaranteed rates that we offer to policyholders. For our variable annuity business, these assets include both equities and bonds. In this case, the main risk to the shareholder comes from the guaranteed benefits that can be included as part of these products. Our exposure to this is reduced by using a derivative hedging programme, as well as through the use of reinsurance to pass on the risk to third‑party reinsurers.
Interest rate risk (Audited) While long‑term interest rates in advanced economies have increased broadly since mid‑2016 and indications are for further gradual tightening of monetary policy and the start of balance sheet normalisation by central banks, they remain close to historical lows. Some products that we offer are sensitive to movements in interest rates. We have already taken a number of actions to reduce the risk to the in‑force business, as well as re‑pricing and restructuring new business offerings in response to these historically low interest rates. Nevertheless, we still retain some sensitivity to interest rate movements.
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In Asia, our exposure to interest rate risk arises from the guarantees of some non unit‑linked investment products. This exposure exists because it may not be possible to hold assets which will provide cash payments to us which match exactly those payments we in turn need to make to policyholders – this is known as an asset and liability mismatch and although it is small and managed appropriately, it cannot be eliminated.
Foreign exchange risk (Audited) The geographical diversity of our businesses means that we have some exposure to the risk of exchange rate fluctuations. Our operations in the US and Asia, which represent a large proportion of our operating profit and shareholders’ funds, generally write policies and invest in assets in local currencies. Although this limits the effect of exchange rate movements on local operating results, it can lead to fluctuations in our Group financial statements when results are reported in UK sterling.
Credit risk is the potential for reduction in the value of our investments which results from the perceived level of risk of an investment issuer being unable to meet its obligations (defaulting). Counterparty risk is a type of credit risk and relates to the risk that the counterparty to any contract we enter into being unable to meet their obligations causing us to suffer loss.
We use a number of risk management tools to manage and mitigate this credit risk, including the following: — Our credit risk policy; — Risk appetite statements and limits that we have defined on issuers, and counterparties; — Collateral arrangements we have in place for derivative, secured lending reverse repo and reinsurance transactions; — The Group Credit Risk Committee’s oversight of credit and counterparty credit risk and sector and/or name‑ specific reviews. In 2017 it has conducted sector reviews in the Asia sovereign sector, the UK banking sector, the US retail property sector, and continues to review the developments around central clearing; — Regular deep dive assessments; and
Debt and loan portfolio (Audited) Our UK business is exposed mainly to credit risk on fixed income assets in the shareholder‑backed portfolio. At 31 December 2017, this portfolio contained fixed income assets worth £35.3 billion. Credit risk arising from a further £57.4 billion of fixed income assets is borne largely by the with‑profits fund, to which the shareholder is not exposed directly although under extreme circumstances shareholder support may be required if the fund is unable to meet payments as they fall due.
Credit risk also arises from the debt portfolio in our Asia business, the value of which was £41.0 billion at 31 December 2017. The majority (68 per cent) of the portfolio is in unit‑linked and with‑profits funds and so exposure of the shareholder to this component is minimal. The remaining 32 per cent of the debt portfolio is held to back the shareholder business.
The shareholder‑owned debt and loan portfolio of the Group’s other operations was £2.3 billion as at 31 December 2017.
Group sovereign debt (Audited) We also invest in bonds issued by national governments. This sovereign debt represented 19 per cent or £16.5 billion of the shareholder debt portfolio as at 31 December 2017 (31 December 2016: 19 per cent or £17.1 billion). 5 per cent of this was rated AAA and 90 per cent was considered investment grade (31 December 2016: 92 per cent investment grade).
The exposures held by the shareholder‑ backed business and with‑profits funds in bank debt securities at 31 December 2017 are given in note C3.2(f) of the Group’s IFRS financial statements.
Shareholder exposure by rating 4 BBB 26% 5 BB or below or non‑rated assets 5%
— The access we have to external sources of finance through committed credit facilities.
Risks from our products Insurance risk Insurance risk makes up a significant proportion of our overall risk exposure. The profitability of our businesses depends on a mix of factors including levels of, and trends in, mortality (policyholders dying), morbidity (policyholders becoming ill) and policyholder behaviour (variability in how customers interact with their policies, including utilisation of withdrawals, take‑up of options and guarantees and persistency, ie lapsing of policies), and increases in the costs of claims, including the level of medical expenses increases over and above price inflation (claim inflation).
Longevity risk is an important element of our insurance risks for which we need to hold a large amount of capital under Solvency II regulations. Longevity reinsurance is a key tool for us in managing our risk. The enhanced pensions freedoms introduced in the UK during 2015 reduced the demand for retail annuities greatly and further liberalisation is anticipated. Although we have withdrawn from selling new annuity business, given our significant annuity portfolio the assumptions we make about future rates of improvement in mortality rates remain key to the measurement of our insurance liabilities and to our assessment of any reinsurance transactions.
Risks from our business operations Non-financial risks In the course of doing business, the Group is exposed to non‑financial risks arising from our operations, the business environment and our strategy. Our main risks across these areas are detailed below.
We define operational risk as the risk of loss (or unintended gain or profit) arising from inadequate or failed internal processes, personnel or systems, or from external events. This includes employee error, model error, system failures, fraud or some other event which disrupts business processes. Processes are established for activities across the scope of our business, including operational activity, regulatory compliance, and those supporting environmental, social and governance (ESG) activities among others, any of which can expose us to operational risks.
We process a large volume of complex transactions across a number of diverse products, and are subject to a high number of varying legal, regulatory and tax regimes. We also have a number of important third‑party relationships that provide the distribution and processing of our products, both as market counterparties and as outsourcing partners. M&G Prudential outsources several operations, including a significant part of its back office, customer‑facing functions and a number of IT functions. These third‑party arrangements help us to provide a high level and cost‑effective service to our customers, but they also make us reliant on the operational performance of our outsourcing partners.
The Group maintains active engagement with our shareholders, governments, policymakers and regulators in our key markets, as well as with international institutions. This introduces expectations for the Group to act and respond to environmental, social and governance (ESG) matters in a certain manner. The perception that our key stakeholders have of us and our businesses is crucial in forming and maintaining a robust brand and reputation. As such, the Group’s operational risk framework explicitly incorporates ESG as a component of our social and environmental responsibility, brand management and external communications within our framework. This is further strengthened by factoring considerations for reputational impacts when the materiality of operational risks are assessed.
The climate risk landscape continues to evolve and is moving up the agenda of many regulators, governments, non‑ governmental organisations and investors. Examples of this include the US Department of Labor’s decision to change its guidance to pension fund fiduciaries to allow them to factor ESG issues into investment decisions; Hong Kong Stock Exchange listing rules requiring listed companies to provide a high‑level discussion of ESG approaches and activities in external disclosures, and the Financial Stability Board’s (FSB) Task Force for Climate‑related Financial Disclosures.
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The increased regulatory focus on environmental issues not only reflects existing commitments, for example in the UK under the 2008 Climate Change Act, but also a heightened societal awareness of climate change as a pressing global concern. Regulatory and stakeholder interest in environmental matters is expected to increase as climate change moves higher up governmental agendas. This increase in focus creates a number of potential near term risks.
— Reputational risks, where the Group’s actions could affect external perceptions of our brand and corporate citizenship.
Implementation of the Group’s strategy and the need to comply with emerging regulation has resulted in a significant portfolio of transformation and change initiatives, which may further increase in the future. In particular the intention to demerge the UK and Europe business from the rest of the Group will result in a substantial change programme which will need to be managed at the same time that other material transformation programmes are being delivered. The scale and the complexity of the transformation programmes could impact business operations and customers, and has the potential for reputational damage if these programmes fail to deliver their objectives. Implementing further strategic initiatives may amplify these risks.
Other significant change initiatives are occurring across the Group. The volume, scale and complexity of these programmes increases the likelihood and potential impact of risks associated with: — Dependencies between multiple projects; — The organisational ability to absorb change being exceeded; — Unrealised business objectives/ benefits; and
The risks detailed above form key elements of the Group’s operational risk profile. In order to effectively identify, assess, manage, control and report on all operational risks across the business, a Group‑wide operational risk framework is in place. The key components of the framework are: — Application of a risk and control assessment (RCA) process, where operational risk exposures are identified and assessed as part of a periodical cycle. The RCA process takes into account a range of internal and external factors, including an assessment of the control environment, to determine the business’s most significant risk exposures on a prospective basis; — An internal incident capture process, which identifies, quantifies and monitors remediation conducted through application of action plans for risk events that have occurred across the business; — A scenario analysis process for the quantification of extreme, yet plausible manifestations of key operational risks across the business on a forward looking basis. This is carried out at least annually and supports external and internal capital requirements as well as informing risk activity across the business; and
The Group operational risk policy, standards and operational risk appetite framework sit alongside other risk policies and standards that individually engage with key operational risks, including outsourcing and third‑party supply, business continuity, technology and data, and operations processes.
— Reviews of key operational risks and challenges within Group and business unit business plans.
Recent shifts in the focus of some governments toward more protectionist or restrictive economic and trade policies could impact on the degree and nature of regulatory changes and Prudential’s competitive position in some geographic markets. This could take effect, for example, through increased friction in cross‑border trade, capital controls or measures favouring local enterprises such as changes to the maximum level of non‑domestic ownership by foreign companies. We continue to monitor these developments at a national and global level and these considerations form part of our ongoing engagement with government policy teams and regulators.
The UK’s decision to leave the EU has introduced uncertainty to the extent of future applicability of the Solvency II regime in the UK. In October 2017, the Treasury Committee published its report on the Solvency II Directive and the UK Insurance Industry, which highlighted the need for a strategy, post‑UK exit, to foster innovation, competition and competitiveness for the benefit of UK consumers. In late 2016 the European Commission began a review of some aspects of the Solvency II legislation, with a particular focus on the Solvency Capital Requirement calculated using the standard formula, which is expected to run until 2021.
The IAIS’s G‑SII regime forms additional compliance considerations for us. Groups designated as G‑SIIs are subject to additional regulatory requirements, including enhanced group‑wide supervision, effective resolution planning, development of a Systemic Risk Management Plan, a Recovery Plan and a Liquidity Risk Management Plan. The FSB did not publish a new list of G‑SIIs in 2017, however the policy measures set out in the FSB’s 2016 communication on G‑SIIs continue to apply to the Group. Prudential is monitoring the development and potential impact of the policy measures and is continuing to engage with the PRA on the implications of such measures and Prudential’s designation as a G‑SII. The IAIS has launched a public interim consultation on an activities‑based approach to systemic risk. Following the feedback from this, a second consultation with proposals for policy measures is due to be launched in 2018. Any changes to the designation methodology are expected to be implemented in 2019.
In the US, some parts of the Department of Labor (DoL) rule introducing fiduciary obligations for distributors of investment products, which may reshape dramatically the distribution of retirement products, became effective on 9 June 2017. This included those provisions on impartial conduct standards, although other provisions of the rule have now been delayed until 1 July 2019. Jackson has introduced fee‑based variable annuity products in response to the introduction of the rule, and we anticipate that the business’s strong relationships with distributors, history of product innovation and efficient operations should further mitigate any impacts.
The US National Association of Insurance Commissioners (NAIC) is continuing its industry consultation with the aim of reducing the non‑economic volatility in the variable annuity statutory balance sheet and risk management. Following two industry quantitative impact studies, proposed changes to the current framework have been released by the NAIC for comment from industry and other interested parties. Jackson continues to be engaged in the consultation and testing process. The proposed changes are expected to be effective from 2019 at the earliest. In December 2017, the Tax Cuts and Jobs Act was signed into law in the US. Some uncertainty exists on the implications of the tax reforms on the NAIC’s proposals.
The core objectives of our Cyber Risk Management Strategy are: to develop a comprehensive situational awareness of our business in cyberspace; to proactively engage cyber attackers to minimise harm to our business; and to enable the business to grow confidently and safely in cyberspace.
Our Cyber Defence Plan consists of a number of work‑streams, including developing our ability to deal with incidents; alignment with our digital transformation strategy; and increasing cyber oversight and assurance to the Board. We have made progress in all of these across 2017. Protecting our customers remains core to our business, and the successful delivery of the Cyber Defence Plan will reinforce our capabilities to continue doing so in cyberspace as we transition to a digital business.
The Board receives periodic updates on cyber risk management throughout the year, which includes assessments against the core objectives under our Group‑wide Cyber Risk Management Strategy and progress updates on the associated Group‑wide Coordinated Cyber Defence Plan.
Viability statement prepared in accordance with the provision C.2.2 of the UK code The Group’s longer-term prospects The Group’s strategy is based around meeting the long‑term savings and protection needs of its customers and hence creating value for both customers and shareholders over a time frame that can be many years. As described on pages 12 to 13, the Group’s business model supports this strategy by constantly evolving our products to meet changing customers’ needs, building out and diversifying distribution capabilities and relationships to reach new customers and investing in technology to better empower and serve the salesforce and customers. Examples of the actions undertaken during 2017 are set out on pages 18 to 32. This focus, together with our risk management framework, supports the sustainability of our business over the longer term.
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Assessment of risks over the period The Group’s business plan implements the Group’s strategic objectives through the business model and activities discussed on pages 10 to 13. As noted above, underpinning the projections in the business plan are a number of economic and other assumptions. Assessment of the risks to achieving the projected performance therefore remains an integral part of the planning process. The Group’s approach to risk management and a summary of the key risks facing the Group are set out on pages 48 to 63.
For the purposes of assessing the Group’s viability, the Directors considered those risks where the impact of possible adverse external developments could be of such speed and severity to present a shock to the Group’s financial position. The risks further considered, from those detailed on page 53, are: market risk, credit risk, liquidity risk and regulatory risk.
To evaluate the Group’s resilience to significant deteriorations in market and credit conditions and other shock events, these risks are grouped together into severe but plausible scenarios which are then applied to the assumptions underlying the business plan. For example, the impacts of scenarios assuming a disorderly transition to a more normalised interest rate environment and an international recession were considered in the preparation of the most recent business plan, together with the impact on Group liquidity of a scenario assuming the closure of short‑term debt markets for three months. In addition, the Group conducts an annual reverse stress test which gives the Directors an understanding of the maximum resilience of the Group to extremely severe adverse scenarios.
Environmental, social and governance (ESG) – a changing landscape The ESG landscape is evolving rapidly. We recognise these changes and position ourselves to adapt to them proactively, to ensure that we remain a sustainable business and demonstrate that sustainability as transparently as possible. We will report in detail on our material, non‑financial ESG issues in our 2017 ESG Report.
— £412,375 donated by employees through payroll giving across the Group
Managing a sustainable business means managing a wide range of ESG issues. Every one of these areas is integral to our performance and sustainability and we approach them accordingly. We recognise that the ESG landscape is changing and position ourselves to adapt to this proactively.
Managing our material ESG issues In 2016, we undertook a Group‑wide review to identify the ESG issues that are most material for Prudential. We determined the relevance and significance of each ESG issue, based on the risks and opportunities to Prudential and our stakeholders, and prioritised these issues according to the greatest impact to the sustainability of our business. Our material ESG issues fall into the following areas: business integrity, customers, environment, responsible investment, suppliers, technology, people and communities. These remain the most material issues for Prudential.
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Business integrity At Prudential, responsible and ethical behaviour is a business imperative and is integrated throughout our operations and locations. We believe that the way in which we conduct ourselves on a daily basis is key to building trust, maintaining our reputation and positive relationships with our stakeholders and ultimately in achieving long‑term business success. We have embedded a robust framework throughout our operations to ensure that we are able to effectively manage existing and emerging risks in this area, including maintaining our financial strength, fighting financial crime, undertaking responsible tax practices and upholding the highest standards for professional conduct.
(the restriction of investment opportunities). However, we maintain the ability to exclude entities from our internal insurance mandates, where their practices, policies or procedures conflict with our Group values, or where we see a need to explicitly recognise international consensus. To date, owing to the decentralised nature of our Group, our asset management and ownership businesses have managed ESG risks in our investment portfolios, distinctly. In recognition of the importance of ESG in delivering long‑term sustainable returns across our investment portfolio, we created our Group Responsible Investment Framework during 2017. The framework sets minimum requirements and provides guidance that enables our Business Units to explain, in a manner that is consistent with our Group Values and Code of Conduct, how they incorporate ESG considerations into their investment processes and stewardship commitments as asset owners. Further information on our Group Responsible Investment Framework will be found in our 2017 ESG Report.
Adding more to life: Prudential Scholarship programme, Zambia Prudential’s scholarship programme in Zambia is run in partnership with the international charity, Camfed, and was endorsed by the Ministry of Education. The programme focuses on educating young girls and people with disabilities in rural Zambia.
Sara is the sixth born in a family of eight children. Having completed primary school and achieved impressive results in her primary leaving examination, she was awarded a place at secondary school, but her parents did not have the money to pay the fees and it looked as if she would have to turn down her place. Fortunately, Sara was awarded a scholarship. Prudential’s support is enabling Sara to take her final school leaving examination, giving her the potential to go on and pursue her dream of becoming a medical professional. She says: ‘I encourage Camfed donors to continue supporting other vulnerable children in the same way they have done for me. When I complete my Grade 12, I wish to work in the health sector as a medical personnel by studying for Medicine at the University of Zambia, if possible becoming a surgeon.’
Suppliers As a global financial services organisation, we source goods and services from thousands of outsourced and third‑party suppliers across the world. We recognise the need to source these goods and services in a way that maximises value and minimises our supply risk, and we do this in an ethically and socially responsible manner. Given the number of our outsourced and third‑party supply relationships, we also have a responsibility to make it as simple as possible for our suppliers to do business with us. We manage this through our responsible procurement practices. We believe in respecting human rights and acting responsibly and with integrity. We have always believed this commitment extends beyond our organisation and into our supply chain. For information around modern slavery and how we are identifying and managing our risks in relation to slavery, human trafficking, child and forced labour, please read our forthcoming 2017 Modern Slavery Statement.
Further information on the diversity of our Board, our policy in respect of this, how this is implemented and the associated results in 2017 can be found in our Governance statement on page 101.
— Sanctions Policy, outlining our commitment to complying with sanctions laws and regulation and how we comply with this through screening, prohibited business activity, restricting business activities and investigation.
— Security Policy, outlining how we ensure a level of security commensurate with our regulatory and legal obligations, while meeting the demands of our competitive, commercial organisation. This includes our principles to enhance commercial opportunity, while minimising corporate risks utilising financial crime and fraud investigations and ‘Speak out’ whistleblowing processes.
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Environment — Environment Policy, covering how we manage the impact of our businesses on the environment, including our environmental commitments and how we measure, monitor, review and report on our environmental performance.
Suppliers — Outsourcing and Third Party Supply Policy, outlining our commitment to ensuring we have a robust, well managed outsourcing and third‑party supplier network. It covers how we manage and oversee these arrangements, through: due diligence/selection criteria, contractual requirements, the ongoing monitoring of such relationships and reporting and escalation. Additionally, our policy considers the requirements of the UK Modern Slavery Act, and the principles of the UN’s Universal Declaration of Human Rights.
People — Diversity and Inclusion Policy, setting out how we foster an inclusive workforce and ensure all our employees are treated fairly and feel valued, and together have the diversity in skill sets and backgrounds that enriches the organisation. Our policy considers a range of diversity aspects of our employees, including gender, age, ethnicity, disability, sexual orientation and background. Further information on the diversity of our Board, our policy in respect of this, how this is implemented and the associated results in 2017 can be found in our Governance statement on page 101.
Asia In Asia, the demand for savings and protection products continues to grow as people seek greater financial security and peace of mind. Lack of insurance protection is one of the primary reasons why a middle‑income family falls below the poverty line following a significant life event, and through some of our products that situation can be averted. We continue to broaden our offering to help meet the distinct needs of our customers.
The value of insurance in helping customers move away from poverty is being increasingly recognised. The China Insurance Regulatory Commission, for example, has set a penetration target for insurance of 5 per cent by 2020, from a current rate of only 2 per cent. We are working with the Chinese authorities to help them reach that target and deliver all the benefits to both customers and communities that our industry’s products bring.
Our 15 million life insurance customers in Asia give us access to fast, comprehensive feedback on what they want, how their needs are evolving and how we can best adapt our products and capabilities to improve our service and operational efficiency.
Customers are increasingly looking for product features that reflect changes in their own lives. One of these is a more personalised approach, and one example of how we are addressing this demand is ‘myDNA’, a DNA‑based, personalised precision health programme, which we are making accessible to more customers across the region. Following its successful launch in Hong Kong in 2016, ‘myDNA’ can now be accessed by customers in Singapore, Malaysia and Vietnam, with its launch in these markets last year.
Through both ‘myDNA’ and ‘myDNA Pro’, we are enabling our customers to make better lifestyle decisions and ultimately lead healthier lives, bringing benefits to families and communities.
Customers are also increasingly expecting an on‑demand digital experience in all areas of their lives, and we are meeting that need in a number of ways. In Singapore, Vietnam and Hong Kong, we have launched artificial intelligence‑driven chatbots. Prudential Vietnam’s ‘PruBot’, available on its corporate website and Facebook page, provides customers with 24/7 support by answering queries related to its products and services, as well as helping them schedule appointments with financial consultants. ‘AskPRU’ allows Prudential Singapore’s financial consultants to instantly retrieve information specific to their customers’ life insurance plans.
US Jackson provides retirement income strategies aimed at the approximately 75 million baby boomers in the US. Our pursuit of excellence in product innovation and our distinctive distribution capabilities have helped us forge a solid reputation for meeting the needs of customers, through a diverse range of variable, fixed and fixed‑index annuity products. As part of a carefully designed plan, our variable annuities help retirees avoid running out of money and provide a reliable cushion against volatile markets. We support our industry‑leading product development and distribution teams with award‑winning customer service.
PAII has more than 130 investment options, providing access to world‑class money managers and the flexibility to build a portfolio that meets consumers’ investing needs. Furthermore, this product has no surrender charges and a low‑cost sub‑account structure. A robust suite of optional living and death benefits is also available for an additional charge, designed to provide the opportunity to grow retirement assets and obtain guaranteed income for life.
The new entity combines M&G’s active investment expertise with Prudential UK & Europe’s capabilities in volatility‑adjusted savings and liability‑driven investment to provide more choice for customers across both brands through retail, institutional and direct channels. The unified business is also better positioned to develop and fund joint product propositions and to build new digital service and distribution to meet fast‑changing customer needs.
The proven investment capability and risk‑managed solution offered by our PruFund range of investment fund options also continues to meet customer needs, especially for those investors who are moving towards the latter stages of saving before needing to secure an income for their retirement. In offering unparalleled diversification, financial strength and smoothed investment returns across ISA, bond, pension income and drawdown products, the assets under management in PruFund reached £36 billion in 2017.
The service we provide to customers and financial advisers goes hand‑in‑hand with the retirement solutions we offer. An important part of this service is the ongoing support for intermediary advisers provided by our regional sales units, business development team and technical helpline, which handled 17,000 adviser enquiries in 2017.
A number of technology improvements were delivered in 2017, each designed to help reduce the time advisers spend on administration. These included the introduction of paperless offshore bond claims and an electronic signature facility for the Prudential Retirement Account.
In investment management, M&G Prudential is a long‑term investor that takes seriously its responsibilities as a steward of clients’ assets. Our fund managers believe that if a company is run well it is more likely to be successful in the long run. Regular meetings with company directors allow us to identify whether a company’s strategy is aligned with our interests as long‑term shareholders and the interest of our customers. Active voting is an integral part of our investment approach, both adding value and protecting our interests as shareholders and those of our customers. We provide transparency on our voting record by publishing it quarterly on our website at www.mandg.com/about‑us/responsible‑ investment/equities/voting‑history/
In 2017, we launched myM&G, a new online investing service. Over 90 per cent of our direct customers will benefit from lower fund charges if they move their old paper‑based account to the online service, which is free to join and carries no platform or service fee. A customer with £100,000 invested across M&G equity funds which offer R class shares, for example, should save at least £5,000 in fees over 10 years by switching their account to myM&G.
At M&G, we actively involve our customers in the development of services such as myM&G, as well as new products and investor communications. This is achieved through engagement with end investors, including our Client Council, our own panel of around 400 direct customers. During 2017, our principal research focus has been to engage with private investors, including those in our Client Council, to understand the role that socially responsible investing plays in driving their investment decisions and how they would like to receive more information about responsible investment.
In Africa, we are continually looking for new ways to meet our customers’ needs, and in 2017 we rolled out a new ‘never lapse’ feature in Ghana. This addresses one of the main concerns our customers in Ghana have about insurance – that unforeseen circumstances might lead them to miss premium payments on their insurance policies and result in them losing their benefits. This new feature ensures that, beyond the first policy year, the policy will never lapse or become inactive. The feature is due to be rolled out in Kenya, Uganda and Zambia in 2018.
In 2017, Eastspring Investments announced a significant step forward in our infrastructure investment capabilities. IFC, part of the World Bank, chose Eastspring as its first Asian partner in a programme that mobilises funds from institutional investors into projects in emerging markets. This US$500 million partnership will help us scale up our skills in the region. Worldwide, 1.2 billion people still have no access to electricity and 660 million lack a clean source of drinking water. This programme will help at least some of those people get these basic amenities, while at the same time helping our customers meet their own vital savings needs.
We establish long‑term relationships with our charity partners to ensure that the projects we support are sustainable, and we work closely with them to ensure that our programmes continuously improve. In addition, we believe it is important to make a contribution to delivering the United Nation’s Sustainable Development Goals and we are supportive of those priorities.
Education and life skills Cha-Ching – the first global financial education programme Developed by Prudential, Cha‑Ching is the world’s only global financial education platform aimed at primary school‑aged children. Now in its seventh year, the programme has expanded from its origins in Asia to each of the four continents where the Group does business. In all of the markets where it has been launched it has been very well received, with positive feedback from parents, teachers, children and political stakeholders.
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In the UK, working with Young Enterprise, we have developed an online educational resource for primary school students in England and Wales that has enabled the Cha‑Ching programme to be brought into the classroom. The Quality Marked teaching resource is linked to the Personal Finance Education Group’s Financial Education Framework and has guidance for teachers on how most effectively to integrate activities into their teaching as well as activities for home‑learning. Since launch in late 2016, the resource has been downloaded over 20,000 times in more than 650 schools across the UK.
First Read – developing children’s skills Prudence Foundation has funded and supported the First Read programme since 2013, partnering with Save the Children to focus on investing in early childhood care and development in Cambodia and the Philippines. First Read is a programme that helps parents to develop their children’s numeracy and literacy skills by providing books in the local language or dialect, and encouraging them to read, sing and count together. It also helps parents understand the importance of healthy and nutritious food for children’s development.
Adding more to life: Jackson National Life Insurance with Junior Achievement, US Jackson volunteers worked with Junior Achievement Middle Tennessee (JA) to teach work‑readiness, entrepreneurship and financial literacy skills through hands‑on programmes in schools, and led a programme at the Nashville Rescue Mission, a shelter for families experiencing homelessness. Through this partnership, JA was able to reach students outside the traditional classroom and provide experiences to help young people break the cycles of financial and personal hardship.
Jackson volunteers joined nearly 700 students at a STEM (science, technology, engineering and mathematics) Summit, which combined hands‑on activities in the fields of science, technology, engineering and mathematics with a career panel from employees in many fields of the local economy. Colleagues also provided support at the JA Finance Park, an experiential budgeting simulation facility to help students build a foundation for smart financial decisions.
Female colleagues encourage careers in finance Since 2014, Jackson has supported Rock the Street, Wall Street (RTSWS), a charity that increases financial literacy and interest in finance careers for high‑school girls. What began in 2014 with a field trip to the Jackson Sales Desk has grown over time, with Jackson now sponsoring two RTSWS classes at Ravenwood and Centennial High Schools. Sponsorship of a class is much more than the financial contribution, also entailing five female sales professionals teaching a six‑week curriculum, hosting students for a field trip, pairing students with female finance professional mentors and creating job shadow experiences with their mentors.
The programme has been well received and partnerships continue to be formed across Asia, helping to spread the messages, including free‑to‑air channels, radio stations and cinema. Through these partnerships, Safe Steps currently reaches more than 200 million people a day in Asia.
Safe Schools programme Prudence Foundation supports the Safe Schools programme, partnering with Plan International and Save the Children in Cambodia, Indonesia, the Philippines, Thailand and Vietnam. The programme focuses on capacity‑building for students, teachers and local community members on disaster preparedness, placing schools at the heart of building a culture of disaster preparedness within communities. The programme trains students and their teachers in key disaster management skills and supports the organisation of disaster simulations and evacuation drills for students and their communities. Since 2013, more than 82,000 students and 33,000 teachers have participated.
Emergency fund relief Prudential has also been a Group‑level supporter of Save the Children since 2010 and is one of the Children’s Emergency Fund’s major supporters. This allows us to act swiftly when disasters occur in any of our markets and provides an instant, effective fundraising mechanism for employees when needed. In 2017 the emergency fund was used 81 times and reached over a million people in 40 countries caught up in emergencies.
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Enhancing later life Building on previous Age UK programmes, Prudential is funding the Later Life Links programme with the charity, providing long‑term companionship, advice and practical help to older people. Launched in six UK communities in February 2017, the programme has supported over 9,000 older people in its first year. Last year also saw the launch of a new partnership with Royal Voluntary Service (RVS). First Time for Everything events run in 11 RVS centres, providing around 1,200 elderly people in 2017 with a chance to try something for the first time for free, such as tai chi, yoga and drawing, aiming to tackle loneliness and social isolation with the support of RVS volunteers.
Apprenticeships in the UK Youth unemployment is a huge social challenge and M&G Prudential is helping to shape future job prospects for young people.
M&G has run its Apprentice programme for the last six years and, as part of Investment20/20, offers the scheme to encourage school leavers to establish a career in the financial services industry. The programme is designed to help people without degrees start their careers, straight after sixth form or college, providing an opportunity to receive on‑the‑job training and earn a competitive salary. A total of 65 apprentices have been hired by the business since 2012 across all Business Units, including fund management teams. One of the benefits of this programme is that the positions are permanent and training and development is undertaken from the outset.
Adding more to life: PruGoals programme, UK Prudential’s PruGoals programme provides inspiration and support for disadvantaged young people, helping them build confidence and employability and encouraging personal motivation. The programme provides aspirational challenges and workshops leading up to the Prudential RideLondon‑Surrey 46 mile cycle ride, and participants are provided with bikes, training and equipment, as well as coaching and mentoring.
Support for disadvantaged communities M&G supports disadvantaged communities near its offices and during 2017 more than 190 charities received support either by donation or as a result of employee volunteering. Grants typically focused on education, medical research, social and welfare programmes and children and youth projects. In 2017, M&G continued its support of the City Giving initiative led by the Lord Mayor of London’s Appeal, and an onsite event showcased the services provided by charities that had received support from M&G. The Lord Mayor of the City of London attended M&G’s event as part of his initiative to promote the varied charitable activities undertaken by City businesses.
M&G continues to sponsor the RHS Chelsea Flower Show and is refocusing the sponsorship to increase charitable activity through support of RHS campaigns such as Greening Grey Britain, which aims to transform urban grey spaces into community green spaces.
Employee engagement Successful volunteering programme – Chairman’s Challenge Many of our employees play an active role in their communities through volunteering, charitable donations and fundraising. In the UK, the US and Asia we offer our employees the opportunity to support charities through payroll giving.
The programme continues to appeal to colleagues, with the number of volunteers signing up increasing year‑on‑year. From its launch in 2006, when 2,603 employees signed up, volunteer numbers have increased by 227 per cent. Last year 8,500 colleagues around the world took part, volunteering over 35,000 hours to support 30 projects.
Each volunteering project focuses on one or more of our CR priorities and allows us to support both large, well established charities and innovative, smaller‑scale activities with volunteers as well as financial support. Prudential donates £150 to our charity partners for every employee who registers for the programme. Charity partners use this money to seed‑fund charitable projects for Prudential volunteers. Each year, employees across the Group are involved in the voting process to decide on the most innovative projects, which receive extra funding towards their charitable objectives.
Volunteering across the Group As well as volunteering efforts on behalf of the Chairman’s Challenge, employees around the Group volunteered on a huge range of other charitable projects, from providing relief following disasters to mentoring schoolchildren, supporting the elderly and skills‑sharing. We recognise that employee volunteering brings benefit not only to the charities but also to the development of our people, and we actively encourage colleagues to participate in our programmes.
In 2017, the Group spent £25 million supporting community activities. The direct cash donations to charitable organisations amounted to £19.2 million, of which approximately £4.9 million came from our UK and EU operations. The remaining £14.3 million was contributed to charitable organisations by Jackson National Life Insurance Company and Prudential Corporation Asia.
The cash contribution to charitable organisations from our UK and EU operations is broken down as follows: education £2,971,000; social, welfare and environment £1,861,000 and cultural £62,000.
The balance includes in‑kind donations as set out on the Group website at www.prudential.co.uk/responsibility/ performance/community‑investment and prepared in accordance with LBG guidelines. This included 9,460 employees who dedicated 96,493 hours of volunteer service in their communities. Furthermore, £412,375 was donated across the Group by our employees through our payroll giving scheme.
Referendums Act 2000. The Group did not make any such donations or incur any such expenditure in 2017.
Valuing our people We strive to foster an environment in which employees can derive meaning and empowerment from their work and feel that they are making an active contribution to the organisation. In addition to the core principle of providing interesting work and challenging opportunities to engage our people we drive employee engagement through an array of initiatives across our businesses. These include colleague appreciation programmes, wellbeing programmes, employee engagement surveys, networking opportunities with peers and senior leaders across functions, employee focus groups, and volunteering activities. The success of our engagement efforts has again been recognised externally by winning prestigious awards. For example, in 2017 M&G Investments was ranked number one Asset Manager in both the HITC Best Places to Work and the RateMyPlacement Top 100 employers surveys. Our businesses, including Group Head Office, have processes, and where appropriate a policy, in place for engaging with employees. In addition, our businesses in the UK have a longstanding relationship with the union Unite. We encourage volunteering through which our employees can support our communities and acquire new skills. See page 76 for further detail.
Diversity and inclusion Prudential believes that diversity of experience and background is vital to success, both today and in the future. The Board has made D&I one of the strategic objectives for Prudential. Tim Rolfe, Group HR Director, is the executive responsible for sponsoring D&I activities across the Group, with Nic Nicandrou, Chief Executive of Prudential Corporation Asia, acting as the Board member accountable for D&I work. Our policies and plans support an inclusive culture sensitive to the needs of all employees. We protect all our employees against discrimination and provide opportunities for our people regardless of their age, caring responsibilities, disability status, ethnicity, gender, religion, sexual orientation or professional and educational background. We make appropriate disability adjustments as required and provide training and career development opportunities for all. We give full and fair consideration and encouragement to all applicants with suitable aptitude and abilities.
For example, 268 senior managers and executives from our businesses in Asia, the US and the UK participated in unconscious bias workshops in 2017. We sponsored Dive In, the D&I festival in insurance and the financial sector, which took place in 17 countries in the Americas, Asia, Africa, the Middle East and Europe, and we published the first Group‑wide D&I newsletter for all employees.
We are committed to developing a robust and diverse talent pipeline and increasing representation of women in senior positions in the Group and on the Board. We were among the first cohort of companies to sign the HM Treasury Women in Finance Charter in 2016. In 2017, we monitored progress against our target of 30 per cent of women in senior management by the end of 2021. We will continue to focus effort toward achieving our aim to have 27 per cent women in senior management by the end of 2019.
Please see Basis of Reporting at www.prudential.co.uk/~/media/Files/ P/Prudential‑v2/content‑pdf/basis‑of‑ reporting‑2017 for the definition of senior managers.
We are committed to supporting women who aim to return to work after an extended career break. As an example of this commitment, in 2017 Eastspring Malaysia launched the ‘Career Comeback for Women’ programme. In the US, Jackson sponsored a 10‑stop national speaking tour focusing on women’s empowerment. As part of our diversity agenda more broadly, at M&G Prudential, 57 employees qualified as mental health first aiders this year and M&G Real Estate was awarded the National Equality Standard. In Africa the Prudential Actuarial Support System supports the top 10 graduates in Ghana and the top three in Kenya, helping them with exam fees. Group Head Office (GHO) also rolled out the ‘PruThrive’ programme for colleagues, covering physical health, mental wellness and inclusivity.
In addition to the established Prudential Women’s Network and M&G Pride (for LGBT employees and allies), several new affinity group networks launched, focusing on mental health, disability and cultural awareness. Across all businesses and at GHO, more than 20 initiatives supported schools and students, often from underprivileged backgrounds.
Adding more to life: Prudential Charity Trustee programme, UK Colleagues have been taking part in the Prudential Charity Trustee programme to develop valuable skills to become trustees on charity boards. A series of training workshops outlined what was involved in becoming a trustee and the skills and time required. Working with our charity partner, Getting on Board, colleagues were then given help to find the right role.
Melissa Kantor, from Prudential plc’s Group Talent team, is now a trustee for SEED Madagascar, which is working to alleviate poverty and maintain the island nation’s unique environment. ‘Since joining
SEED’s board in May, I have learned much about functions outside my main areas of expertise and I hope to continue to be challenged outside my comfort zone’, said Melissa. ‘I am thrilled to be able to assist SEED by leveraging my corporate experience, largely around
Senior managers Excludes the Chairman, all directors and GEC members 92 = 69 23
Notes 1 Excludes Prudential Corporation Asia joint ventures 2 In many of our businesses, we provide our employees with the option to not disclose their gender. For these employees, gender is recorded as ‘undisclosed’. 3 No specification or information is captured on gender for an immaterial number of our employees. These employees are recorded as ‘unspecified’.
We believe in supporting human rights and acting responsibly and with integrity. 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 out the Group values and expected standards of behaviour for all employees, and in our Group Outsourcing and Third Party Supply Policy. Our Business Units implement policies and practices at a local level that aim to ensure compliance with statutory and regulatory requirements in the local labour market and the prevention of slavery, human trafficking, child and forced labour. As a global business, focused on our customers, it is important that our employment models reflect the markets in which we operate. In certain markets, this means hiring local agents to sell our products, or partnering with joint ventures to offer the breadth of products and services that meet our customers’ needs. We are clear – slavery, human trafficking, child labour or any other abuse of human rights has no place in our organisation or supply chain. This supply chain includes our joint ventures and the agents we use to distribute our products. For further information around how we manage slavery, human trafficking, child and forced labour risks, refer to our forthcoming Modern Slavery Statement.
Talent development People development is essential to deliver our strategy. The quality of leadership across the Group is fundamental to the future growth and success of the business and we therefore review our talent annually, and offer a range of programmes that enable our people to continue to grow and develop. The majority of our programmes are managed by our Business Units, while Group Human Resources focuses on tailored programmes for senior leaders across the organisation, succession planning for senior roles and development of our leadership talent pipeline. We invest in succession planning for our leaders and critical specialists, and segment our talent to identify short, medium and long‑term successors. We support them with the appropriate development and career planning to ensure that we maintain a relevant balance of internal progression and external hires. Individually tailored development offerings are provided for our most senior executives so they are well prepared to deliver the long‑term ambitions of the Group. In 2017, 120 senior high‑potential individuals participated in our established and well respected Group‑wide leadership development programmes ‘Impact’ and ‘Agility’ and the ‘Next Generation’ emerging talent programme. These programmes were developed in partnership with world‑ leading academic institutions and co‑delivered with business school thought leaders.
Our businesses, including GHO, have processes, and where appropriate a policy, in place for engaging with employees. Reporting to Group HR is required on jurisdiction specific or sector specific trends and developments in certain areas. For any significant issues that are likely to impact either positively or negatively on our reputation as an employer – at both business and Group level – immediate reporting to Group HR is required. In addition, our businesses in the UK have a longstanding relationship with the union Unite.
We recognise and reward high performance and are committed to a fair and transparent system of reward. We have recently reported our 2017 UK gender pay gap figures/data along with information about how we are working to increase the number of women in leadership, investment management and senior operational roles.
term success of the business, and actively encourages share ownership and engagement. Of all eligible employees, 59 per cent participate in the Group’s UK Sharesave and 25 per cent in the share incentive plans.
In 2017 the Financial Stability Board (FSB) published the recommendations of its Task Force on Climate‑Related Financial Disclosures (TCFD). We welcomed the release of these recommendations, which provide additional guidance in this area. Currently, our oversight in this area is provided at Group Executive Committee level by the Group’s ESG sponsor, Jonathan Oliver, Group Director of Communications, who has responsibility for our corporate responsibility strategy and activities more broadly. The Board approves the Group’s annual ESG Report, which is also reviewed by the Group Audit Committee and Group Disclosure Committee. We are in the process of refreshing our enterprise‑wide assessment of climate‑related risks, while also establishing the internal capabilities needed to make enhanced climate‑related financial disclosures in future reporting periods, considering the geographical and asset class breadth of our investment activities.
Scope 1 emissions are our direct emissions from the combustion of fuel, fugitive emissions and company owned vehicles. Scope 2 emissions cover our indirect emissions from the purchase of electricity, heating and cooling. We have reported our Scope 2 emissions using both the location and market‑based methods in line with the GHG Protocol Scope 2 Guidance. Our Scope 3 footprint includes UK booked business travel, global water consumption and waste generated from our investment properties with operational control, UK and US occupied properties. We continue to work with our Business Units to review the extent of our Scope 3 reporting and increase coverage where practicable.
Adding more to life: Jackson, a star performer In 2017, Jackson were awarded a U.S. Environmental
Protection Agency (EPA) Energy Star for a second building on our Lansing campus, demonstrating superior energy efficiency. Commercial buildings that earn EPA’s Energy Star certification use an average of 35 per cent less energy than typical buildings. Our new building, 8 Corporate Way, received an Energy Star score of 93 placing it in the top 10 per cent of all similar facilities nationwide.
To earn the Energy Star certification, Jackson created a five‑year energy plan that included the installation of new mechanical and electrical building controls to enhance monitoring and control of all systems, improving comfort and efficiency along with the advanced lighting controls to with occupancy sensors and daylight harvesting to maximise the use of natural light.
Jackson received honourable mention for best commercial project in Michigan State at the 2017 Governor’s Energy
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Scope 2 – Market‑based (supplier and residual mix) Occupied 60,225 64,0822 ‑6%
kg CO2e per employee – Scope 1 and 2 only Group 3.4 3.8 -12%
kg CO2e per m2 – Scope 1, 2 and 3 Group 36 38 -5%
Independent Assurance: Deloitte LLP has provided limited assurance over selected environmental metrics in accordance with the International Auditing and Assurance Standards Board’s (ISAE3000 (Revised)) international standard.
Emission factor: Scope 1 and 3 reporting uses the UK DEFRA 2017 GHG Conversion Factors.
Local governance We believe that CR is best managed on the ground by our people running the businesses. In M&G Prudential and Jackson there are governance committees in place – with senior management representation – that agree strategy and spend. In Asia, the Prudence Foundation has been established as a unified charitable platform to align and maximise the impact of community efforts across the region. The Prudence Foundation is governed by a statutory Board of Directors, under which a Board of Trustees operates as a decision‑ making forum, directing the management of the programmes in collaboration with our local markets, and ensuring that we maximise the value of our spend to local communities.
The boards of each of our Material Subsidiaries consider updates on corporate responsibility activities and spend in their communities on an annual basis.
Code of Business Conduct Consideration of environmental, social and community matters is integrated in our Code of Business Conduct. Our code is reviewed by the Board on an annual basis. Refer to page 76 for more information.
Risk assessment For more information on the risks facing our business see our Report on the risks facing our business and how these are managed on page 48. Further information on how we manage our material ESG issues and associated risks are provided in the ‘Managing our material ESG issues’ section of the Corporate responsibility review on page 64.
Further information on our supply chain management and performance will be provided in our forthcoming 2017 ESG Report.
Dear Shareholder This report provides an explanation of the Group’s governance arrangements and our activities in this area during 2017.
Good governance encourages decisions to be made in the best interests of the business, taking account of the views of stakeholders. We aim to achieve this through a responsive governance framework that supports and challenges our executives’ decision making.
2017 has seen a refresh of the Board in both Non‑executive and Executive roles. The changes to the Board have highlighted the strength of our succession planning activities which have allowed us to successfully navigate a number of changes without disruption. This planning has enabled us to recruit very high calibre candidates to the Board, with diverse skills and expertise. Succession planning has therefore been a particular area of focus during the year and we continue to keep this under active review. The activities of the Nomination & Governance Committee in this respect are set out on pages 101 to 104 and all changes to the Board are set out on page 83 of this report. I would like to express my thanks once again for the contributions made by Ann Godbehere, Penny James and Tony Wilkey during their tenures and to welcome Mark FitzPatrick, James Turner and Tom Watjen to the Board.
The Board has set itself an objective for the Group to develop a framework for a measurable, definable culture. As part of this, a risk culture survey was developed by the Risk Committee covering all businesses. The Board will continue to build on this in 2018, bringing together the many strands of initiatives around the Group.
Strategic projects In 2017, the Board considered a number of strategic projects. Most notably, we announced in August 2017 our intention to merge our UK asset manager, M&G, and our UK life insurance business to form M&G Prudential. The combined business manages over £330 billion in assets for more than six million customers. Further details of the merger are set out in the Strategic report on pages 10 to 80. From a governance perspective, the Board and Audit Committee spent significant time considering the benefits of the transaction for shareholders and customers and the impact on our wider stakeholders.
Looking after our stakeholders The Board continues to be aware of the impact of its decisions on all of our stakeholders. Feedback we receive from engaging with stakeholders helps us to devise and manage policies and processes.
In 2017, the Group published its first environmental, social and governance (ESG) report which gave a detailed account of our approach to ESG matters. That report explains that while serving our customers is at the centre of our business, we approach other stakeholders with the same sense of responsibility and commitment, from our suppliers and employees to the wider communities in which we operate. We expect to publish our next ESG report in May 2018.
Looking forward On the governance front, of key interest will be the changes proposed to the UK Corporate Governance Code, which are set to include a range of new requirements for both behaviour and reporting. Once in place, the Board and its Committees will consider how any changes will affect the way we work.
On a regulatory level, the impact of International Financial Reporting Standard 17 (IFRS 17) on the Group will be further assessed following work already undertaken by the Board and Audit Committee.
Other previous appointments include the chairmanship of Aon UK Limited and JPM European Smaller Companies Investment Trust Plc. From September 2005 until March 2011, Paul was a non‑executive director of Wm Morrison Supermarkets Plc, including as senior independent director, audit committee chairman and remuneration committee chairman. He was also a non‑executive director and audit committee chairman of KazMunaiGas Exploration & Production until the end of September 2012.
During 2017, Paul stepped down as chairman and a member of the board of Henderson Diversified Income Limited with effect from 26 April and was appointed to the board of RateSetter (Retail Money Market Limited) with effect from 1 June and as chairman from 17 July.
Paul initially joined the Board in October 2010 as the Senior Independent Director and member of the Audit and Remuneration Committees, roles he held until his appointment as Chairman in July 2012. On becoming Chairman, Paul was also appointed Chair of the Nomination & Governance Committee, having been a member of the Committee since January 2011.
Board changes Non-executive Directors Ann Godbehere retired from the Board at the conclusion of the Annual General Meeting held on 18 May 2017.
David Law succeeded Ms Godbehere as Chair of the Audit Committee and became a member of the Risk Committee and the Nomination & Governance Committee with effect from 19 May 2017. Lord Turner was appointed a member of the Audit Committee with effect from 19 May 2017.
Tom Watjen was appointed to the Board and as a member of the Remuneration Committee with effect from 11 July 2017.
Post year end, Alice Schroeder was appointed a member of the Risk Committee with effect from 1 March 2018.
John joined Prudential as Deputy Group Treasurer in 2000 and became Managing Director of Prudential Capital and Group Treasurer in 2001. During his career at Prudential, John has held the offices of Chief
John first joined the Board in 2011 as Group Chief Risk Officer and was reappointed in January 2016, having stepped down during his time as Group Investment Director.
Other appointments — European Insurance CFO Forum (chairman) — CITIC‑Prudential Life Insurance Company
Relevant skills and experience Mark previously worked at Deloitte for 26 years, building his industry focus on insurance and investment management globally. During this time, Mark was Managing Partner for Clients and Markets, a member of the executive committee and a member of the board of Deloitte UK. He was a vice chairman of Deloitte for four years, leading the CFO Programme and developing the CFO Transition labs. Mark previously led the Insurance & Investment Management audit practice and the insurance industry practice.
Mark joined the Board as an Executive Director and Chief Financial Officer in July 2017.
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James joined Prudential in November 2010 as the Director of Group‑wide Internal Audit and was appointed Director of Group Finance in September 2015, with responsibility for delivery of the Group’s internal and external financial reporting, business planning, performance monitoring and capital and liquidity planning. He also led the development of the Group’s Solvency II internal model.
James joined the Board as an Executive Director and Group Chief Risk Officer in March 2018.
Anne joined the Board in 2016 as an Executive Director and Chief Executive of M&G. She became Deputy Chief Executive of M&G Prudential in 2017 whilst remaining Chief Executive of M&G.
Relevant skills and experience Before joining Prudential, Barry was president, accident & health worldwide for AIG Life Companies. He joined AIG in 1995 after having held senior positions at Pan‑American Life and Willis in the United States.
Barry fulfilled this role until June 2015 when he became Chairman and Chief Executive of the North American Business Unit.
Sir Howard joined the Board in October 2010 as a Non‑executive Director and Chair of the Risk Committee. He joined the Audit Committee in November 2010 and the Nomination & Governance Committee in July 2012.
Other appointments — China Banking Regulatory Commission international advisory board — China Securities Regulatory Commission international advisory board (chairman) — Institut d’Études Politiques (Sciences Po) — Millennium LLC regulatory advisory board — Royal Bank of Scotland (chairman)
Relevant skills and experience Philip was a senior advisor at Credit Suisse and a vice chairman of Credit Suisse First Boston (CSFB) Europe and head of the UK Investment Banking Department. He was twice seconded to the role of director general of the Takeover Panel. Philip also served on the board of Northern Rock plc and as chairman of the Shareholder Executive.
Other appointments — Bank of America Merrill Lynch International — Showfer Media LLC (formerly WebTuner
Jardine Matheson group companies) — Schindler Holding Limited — Shui On Land Limited — The Hong Kong‑APEC trade policy study group (chairman) — UK‑ASEAN Business Council — Vitasoy International Holdings Limited
Relevant skills and experience Tom started his career at Aetna Life and Casualty before joining Conning & Company, an investment and asset management provider, where he became partner in the capital markets and venture capital division.
He joined Morgan Stanley in 1987 as a managing director in its insurance practice and in 1994, was appointed executive vice president and chief financial officer of Provident Companies Inc.
A key architect of Provident’s merger with Unum in 1999, Tom was appointed president and chief executive officer of the renamed Unum Group in 2003, a role he held for 12 years before becoming non‑executive chairman until his retirement in May 2017.
Relevant skills and experience Lord Turner began his career with McKinsey & Co, advising companies across a range of industries.
Lord Turner joined the Board in September 2015 as a Non‑executive Director and member of the Risk Committee. He became a member of the Audit Committee in May 2017.
The Board confirms that, for the year under review, the Company has complied with all the principles and provisions of those Codes other than the provision of the Hong Kong Corporate Governance Code set out below.
The Company does not comply with provision B.1.2(d) of the Hong Kong Corporate Governance Code which requires companies, on a comply or explain basis, to have a remuneration committee which makes recommendations to a main board on the remuneration of non‑ executive directors. This provision is not compatible with supporting provision D.2.3 of the UK Corporate Governance Code which recommends that the board determines the remuneration of non‑ executive directors. Prudential has chosen to adopt a practice in line with the recommendations of the UK Corporate Governance Code.
The Executive Directors are the senior management population for the purposes of the Hong Kong Listing Rules.
How the Board leads the Group The Group is headed by a Board which the Chairman is responsible for leading. The Board is currently made up of 16 Directors, of which a majority, excluding the Chairman, are independent Non‑ executive Directors. Biographical details of each of the Directors can be found on pages 83 to 87 and further details of the roles of the Chairman, Group Chief Executive, Senior Independent Director, Committee Chairs and the Non‑executive Directors can be found on pages 89 and 90.
— Monitoring management’s performance against strategic goals and ensuring sufficient resources are in place to achieve these goals.
— Responsibility for the system of internal control and risk management.
In making decisions, the Board has regard to the balance of interests between all relevant stakeholders, including shareholders, employees, customers, regulators and the community.
The content of the Manual is reviewed regularly with significant changes reported to the relevant Board Committee, reflecting the developing nature of both the Group and the markets in which it operates.
An externally facilitated evaluation of each Material Subsidiary board and their audit and risk committees was carried out by Lintstock Limited, a corporate advisory firm, which concluded that each of those boards and committees operated effectively during the year.
Regulatory environment The Group’s business means it is subject to regulatory requirements and oversight. The Group’s primary regulator is the Prudential Regulatory Authority (PRA). We are also regulated by the Financial Conduct Authority in the UK and by other regulators worldwide.
Interactions with our regulators shape our governance framework and the Chairman and Group Chief Executive play a leading role in representing the Group to regulators and ensuring our dialogue with them is constructive.
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— Meeting with Non‑executive Directors throughout the year. In 2017, the Chairman met with Non‑executive Directors without Executive Directors being present on three occasions
— Maintaining an effective dialogue with the Non‑executive Directors to encourage engagement and maximise their contributions
Governance — Leading the Board’s determination of appropriate corporate governance and business values, including ethos, values and culture at Board level and throughout the Group
— Acting as key contact for independent chairs of Material Subsidiaries
— Meeting with the independent chairs of the Group’s Material Subsidiaries on a regular basis and reporting to the Board on the outcome of those meetings
Relationship with the Group Chief Executive — Discussing broad strategic plans with the Group Chief Executive prior to submission to the Board
— Engaging in a programme of meetings with key shareholders throughout the year and reporting to the Board on the issues raised at those meetings
Independent scrutiny of corporate social responsibility actions As part of the Group’s focus on corporate responsibility, the Chairman has instructed the boards of our Material Subsidiaries to consider updates on corporate responsibility activities and spend in their communities on an annual basis.
— Supported by the Group Executive Committee (GEC) which he chairs and which receives reports on performance and implementation of strategy for each business unit and discusses major projects and other activities related to the attainment of strategy
— Chairs the Chief Executive’s Committee (CEC) meetings which are held weekly to review matters requiring approval under the Group’s framework of delegated authorities
— Keeps in regular contact with the Chairman and briefs him on key issues
Each of the Committee Chairs is responsible for the effective operation of their respective Committees: — Responsible for the leadership and governance of their Committee
— Works with the Group General Counsel and Company Secretary to ensure the continued good governance of each Committee during the year
All of the Non‑executive Directors are deemed to be independent and together have a wide range of experience used to attain the strategic aims of the Group through: — Constructive and effective challenge
— Scrutinising the performance of management in meeting agreed goals and objectives
— Taking part in one‑to‑one meetings with the Group Strategy team and participation in the annual Strategy Away Day
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— Maintains an effective framework for senior succession planning including at Board level
— Oversees the governance of Material Subsidiaries and the Group’s overall governance framework
— Responsible for the integrity of the Group’s financial reporting, including scrutinising accounting policies
— Monitors the effectiveness of internal control and risk management systems, including compliance arrangements
Notes 1 The Board held two meetings in March 2017. 2 Strategic projects during the year included the merger of our business units M&G and Prudential UK & Europe, and the sale of our broker‑dealer network in the USA. 3 Prior to their merger in August 2017, M&G and Prudential UK & Europe reported to the Board separately.
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Subsidiary governance – the 2016 review identified that ensuring good subsidiary governance was maintained was a continuing priority from 2015.
— Group Secretariat continued its established quarterly ‘round table’ sessions with subsidiary counterparts to share governance best practices.
Senior employee focus – the 2016 review noted the focus on rebuilding strength in senior management teams around the Group, following a number of successful internal promotions.
Remuneration – the 2016 review noted the growing complexity of remuneration across all UK‑listed companies and, over the course of 2017, the Board noted the increased governance focus in this area.
— A training session on remuneration was established for those Non‑executive Directors who do not serve on the Remuneration Committee, to discuss the Directors’ Remuneration Policy and broader market practice information. This took place in May 2017 and further sessions will be delivered on an as‑required basis; and
The findings were presented to the Board in December 2017 and a collective Board discussion to exchange ideas and agree priorities arising from the report took place.
The report identified a number of strengths of the Board, including strong leadership from the Chairman and Group Chief Executive; a collegiate and constructive environment; effective use of time; high quality information flow; robust risk and control oversight; appropriate tone through the Remuneration Committee; attention to leadership development and effective shareholder communication.
Through the evaluation and subsequent discussion at the Board meeting in February 2018, the Board identified areas of particular focus and related actions: Theme Summary of actions
Continue to focus on gender and other diversity in all new Board appointments. Introduce a skills map to monitor experience and expertise more formally
Director evaluation The performance during 2017 of the Non‑executive Directors and the Group Chief Executive was evaluated by the Chairman in individual meetings. Philip Remnant, the Senior Independent Director, led the Non‑executive Directors in a performance evaluation of the Chairman.
Executive Directors are subject to regular review and the Group Chief Executive individually appraised the performance of each of the Executive Directors as part of the annual Group‑wide performance evaluation of all staff.
Building Directors’ knowledge Induction – new Directors On appointment, each new Director is provided with a comprehensive induction, tailored to reflect the experience of the individual and his or her position as a Non‑executive or Executive Director.
Our two new Directors, Mr Watjen and Mr FitzPatrick each received a full induction to the business.
— Comprehensive briefings on the regulatory environment in which the Group operates
— Additional tailored support in his first role as Chief Financial Officer of a global financial services operation
Induction – role changes Since Mr Nicandrou was appointed Chief Executive of Prudential Corporation Asia he has continued to deepen his knowledge of the Asia business with a tour of operations across each of the 14 markets in which Prudential Corporation Asia operates. As part of his visits, Mr Nicandrou spent time with senior management, staff and agents of both Prudential Corporation Asia’s Life and Eastspring operations. He held a regional conference to provide insights on the strategic direction of the business and to discuss opportunities to broaden distribution, simplify products and services, and the role of digital technology in upgrading the way the business engages and services its customers. He has also engaged extensively with regulators, government officials, existing and prospective partners and hosted a regional investor conference.
Further information on the activities of the Board and its Committees can be found in the tables explaining how the Board and its Committees spent their time on pages 92, 102, 107, 117 and 133.
All Directors have the opportunity to discuss their individual development needs as part of the annual Board effectiveness review and Directors are asked to provide a record of training received externally on an annual basis. All Directors have the right to obtain professional advice at Prudential’s expense.
Indonesian executive team focusing on agency, Sharia strategy, products, operations, compliance and risk management, brand and corporate social responsibility.
recognition event at the Kasablanca Hall with more than 4,000 agents and visited an agency training centre and two agency offices in Menara 88 (PruVictory and PruFavor) which gave an opportunity to see the Group’s distribution in action.
Craigforth, Scotland All Board and GEC members visited the Group’s operations in
In addition, focus sessions were held to provide an in‑depth understanding of Prudential Savings & Retirement Solutions and M&G. These included sessions on the annuities business, the customer vision and strategy, distribution, investment management, transformation and culture.
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This is reflected in our Group Diversity and Inclusion Policy which aims to provide equal opportunities to all who apply for and who perform work for our organisation – including our Directors – irrespective of sex, race, age, ethnic origin, educational, social and cultural background, marital status, pregnancy and maternity, civil partnership status, any gender reassignment, religion or belief, sexual orientation, disability, or part‑time/ fixed‑term work, and to ensure appropriate diversity of experience, skill sets and professional backgrounds.
The Group Chief Executive, Chief Financial Officer and Investor Relations team also attend major financial services conferences to present to and meet with the Company’s shareholders.
In 2017, as part of the investor relations programme, over 320 meetings were held with approximately 700 individual institutional investors in London, continental Europe, the USA and Asia.
Shareholder feedback and key issues from these meetings is communicated to the Board. Details of when feedback was discussed by the Board in 2017 can be found on page 92.
— The appointment and removal of Directors is governed by the provisions in the Articles of Association (the Articles), the UK Corporate Governance Code (the UK Code), the Hong Kong Corporate Governance Code (HK Code) as appended to the Hong Kong Listing Rules (the HK Listing Rules) and the Companies Act 2006.
— Non‑executive Directors are appointed for an initial term of three years, commencing with their election by shareholders.
— The Directors’ remuneration report sets out the terms of the Non‑executive Directors’ letters of appointment on page 130 and the terms of Executive Directors’ service contracts on page 150.
— All Non‑executive Directors are required to discuss any additional commitments which might impact the time which he or she is able to devote to their role with the Chairman prior to accepting.
Independence — The independence of the Non‑executive Directors is determined by reference to the UK Code and HK Listing Rules as follows: – for the purposes of the UK Code, throughout the year, all Non‑executive Directors were considered by the Board to be independent in character and judgement and to have met the criteria for independence as set out in the UK Code; and
– all the Non‑executive Directors were considered independent for the purposes of the HK Listing Rules, and each Non‑executive Director provides an annual confirmation of his or her independence as required under the HK Listing Rules.
— Prudential is one of the UK’s largest institutional investors. The Board does not believe that this compromises the independence of those Non‑executive Directors who are on the boards of companies in which the Group has a shareholding. The Board also believes that such shareholdings should not preclude the Company from having the most appropriate and highest calibre Non‑executive Directors.
— In relation to the provisions of the UK Corporate Governance Code and HK Listing Rules, the Board is satisfied that Mr Law has recent and relevant financial experience and that the Committee as a whole has competence relevant to the sectors in which the business operates. Full biographies of the Committee members including experience and professional qualifications, are set out on pages 86 and 87.
— The Board has determined that Mr Law qualifies as the Audit Committee financial expert under the requirements of Form 20‑F.
Indemnities — Subject to the provisions of the Companies Act 2006, the Company’s Articles permit the Directors and officers of the Company to be indemnified in respect of liabilities incurred as a result of their office.
— Qualifying third‑party indemnity provisions are also available for the benefit of the Directors of the Company and certain other such persons, including certain directors of other companies within the Group.
— 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.
Internal control The Group Governance Manual (the Manual) sets out delegated authorities and establishes the requirements for subsidiaries to seek approvals from or report to Group Head Office. Group‑wide standards are established through policies and other governance arrangements, which are also included in the Manual. Internal controls and processes, based on the provisions established in the Manual, are in place across the Group. These include controls for the preparation of financial reporting. The operation of these controls and processes facilitates the preparation of reliable financial reporting and the preparation of local and consolidated financial statements in accordance with the applicable accounting standards and requirements of the Sarbanes‑Oxley Act. These controls include certifications by the Chief Executive and Chief Financial Officer of each business unit regarding the accuracy of information provided for use in preparation of the Group’s consolidated financial reporting and the assurance work carried out in respect of US reporting requirements.
The Board has delegated authority to the Audit Committee to review the framework and effectiveness of the Group’s systems of internal control. The Audit Committee is supported in this responsibility by the assurance work carried out by Group‑wide Internal Audit and the work of the business unit audit committees, which oversee the effectiveness of controls in each respective business unit. Details of how the Audit Committee oversees the framework of controls and their effectiveness on an ongoing basis, is set out more fully in the report on pages 105 to 114.
The Risk Committee is constituted by the Board for the purpose of assisting the Board in providing leadership, direction and oversight of the Group’s overall risk appetite, risk tolerance and strategy, and for monitoring the effectiveness of the risk management framework and adherence to the various risk policies. The Risk Committee also has authority to review and approve changes made to the Group risk framework and risk policies, approve changes to risk limits within the overall Board approved risk appetite, approve the Group’s top risks, and oversee, and advise the Board, on the current and potential future risk exposures of the Group. Regular activities are detailed in the report on pages 115 to 119.
— Manages the business to ensure full compliance with the Group risk management framework as set out in the Manual, which includes the Group Risk Framework and risk policies as well as approval requirements, among other requirements.
Formal review of controls A formal evaluation of the systems of internal control and risk management is carried out at least annually. The report is considered by the Audit Committee and Risk Committee prior to the Board reaching a conclusion on the effectiveness of the systems in place. This evaluation takes place prior to the publication of the Annual Report.
As part of the evaluation, the Chief Executive and Chief Financial Officer of each business unit, including Group Head Office, certify compliance with the Group’s governance policies and the risk management and internal control requirements. The Group Risk function facilitates a review of the matters identified by this certification process. This includes the assessment of any risk and control issues reported during the year, risk and control matters identified and reported by the other Group oversight functions and the findings from the reviews undertaken by Group‑wide Internal Audit, which carries out risk‑based audit plans across the Group. Issues arising from any external regulatory engagement are also taken into account.
Effectiveness of controls In accordance with provision C.2.3 of the UK Corporate Governance Code and provision C.2.1 of the HK Corporate Governance Code, the Board reviewed the effectiveness and performance of the system of risk management and internal control during 2017. This review covered 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 Group’s accounting, internal audit and financial reporting functions. The review identified a number of areas for improvement and the necessary actions have been or are being taken.
Executives 1st line of defence 2nd line of defence 3rd line of defence
Key Board‑level committees Executive personnel Exec/Management committees GHO functions Direct reporting line Regular communication and escalation
Dear Shareholder The Board changes in 2017 have again demonstrated the effectiveness of our preparations for Board level succession. Full details of all Board changes during the year can be found on page 83.
Having the right individuals in place in leadership roles is fundamental to the successful delivery of our strategy. The Board requires a diverse skill set which can be deployed across our Committees and businesses for the benefit of the Group and its stakeholders.
The role of the Committee has grown since 2016 when we took on responsibility for overseeing the governance arrangements in the Group. This includes the governance of our Material Subsidiaries, in order to ensure that those boards operate effectively and that their independent non‑executive directors can constructively challenge and monitor performance in those businesses. We have spent time as a Committee considering the composition and effectiveness of those boards, the processes around their risk and audit committees, and the tenure and succession of their non‑executives.
Review external positions, conflicts of interests and independence, time commitment, tenure and terms of appointment
Succession planning Throughout the year, the Committee kept succession plans for all Executive and Non‑executive Board roles under review. Succession plans are supported by the year end Board evaluation and individual performance evaluations.
The Committee works with the Group Chief Executive and Group Human Resources Director to ensure that when a vacancy or a gap in the Board’s skills is identified, a role specification is prepared, taking into account feedback from the Committee and the Group’s Diversity and Inclusion Policy. Once the specification is agreed, specialist talent agencies are typically engaged to create a shortlist of candidates for review by the Committee and other stakeholders. Interviews with individuals then take place and feedback is provided to the Committee members. In this manner, a preferred candidate is selected and the Committee then recommends the individual to the Board for appointment (subject to regulatory approval where required).
Contemporaneously with this process, thorough due diligence checks are undertaken on the candidate and we liaise with the FCA and PRA as to the suitability of the individual from a regulatory perspective, as needed.
In 2017, the Committee debated and approved a skills map for use in Non‑executive succession planning discussions. The skills map identifies key skills and experiences, including sector, geographic and operational skills, which are desirable for the Board as a whole, taking account of the Group’s strategic direction.
As part of its focus on searching for an additional Non‑executive Director, in November 2017 The Miles Partnership was instructed to begin a market mapping exercise with particular focus on potential female candidates to ensure that the Board’s gender diversity was addressed in a positive manner.
The Committee carried out its annual review of the succession plans in place for the Group Chief Executive, other Executive Directors and Group Executive Committee roles.
The Committee has oversight of senior executive level succession planning and the talent pipeline.
The Committee discussed these plans closely with the Group Chief Executive to identify business requirements and plan for future succession needs and gave feedback on the planning process. The Company continues to commit to developing a robust and diverse talent pipeline, increasing representation of women in senior positions.
— Mr Nicandrou took on the role of Chief Executive of Prudential Corporation Asia, following Mr Wilkey’s departure.
In February 2018, the Committee also recommended the appointment of Ms Schroeder as a member of the Risk Committee, which was effective from 1 March 2018.
Election of Directors As part of its ongoing work on Board succession planning, the Committee considered the terms of appointment for the Chairman, Committee Chairs and Non‑executive Directors taking into account time commitment and the general balance of skills, diversity, experience and knowledge on the Board, assessing length of service in their roles.
Independence and conflicts of interest Independence criteria The Committee considered the independence of the Non‑executive Directors against relevant requirements as outlined on page 98.
Conflicts of interest The Board has delegated authority to the Committee to consider, and authorise where necessary, any actual or potential conflicts of interest.
In May 2017 we welcomed Lord Turner as an additional Committee member. Lord Turner’s biography is included on page 87.
The Committee continued to focus on the integrity of the Group’s financial reporting and ensuring appropriate financial accounting policies are adopted and implemented. We reviewed management’s annual process for setting assumptions which underpin the Group’s IFRS insurance liabilities and European Embedded Value (EEV) results and requested additional information and clarification where needed. Building on work undertaken in prior years, in 2017 we further accelerated our year end process and carried out a substantive review of key judgements, such as UK mortality and expenses, policyholder behaviour assumptions in Jackson and, for EEV reporting in particular, persistency in Asia, before the year end. As in previous years, the Committee reviewed the Group’s Annual Report and Accounts and advised the Board that they were considered to be fair, balanced and understandable. The Committee also reviewed the Group’s Solvency II reporting disclosures forming part of our 2016 full year and 2017 half and full year reports. Following a transfer of duties from the Risk Committee during the year, the Committee is now responsible for reviewing the Solvency and Financial Condition Report (SFCR) and the Regulatory Supervisory Report (RSR), which is a private regulatory filing.
The Committee regularly reviews the performance of GwIA and monitors the adequacy of the resourcing available to the function. In addition, in 2017 an independent External Quality Assessment (EQA) of GwIA was undertaken by Deloitte in line with the Chartered Institute of Internal Auditors Standards (the Standards). The EQA concluded that GwIA met the Standards and code of ethics, and assisted both the Committee and the executive management in identifying and mitigating risk.
Committee members — David Law (Chair) (from May 2017) — Ann Godbehere (until May 2017) — Howard Davies — Philip Remnant — Alice Schroeder — Lord Turner (from May 2017)
— Director of Group Compliance — Director of Group‑wide Internal Audit
Number of meetings in 2017: Nine. In addition, a joint meeting was held with the Risk Committee
The Committee looks to identify matters likely to impact the Group going forward. In addition to its usual activities, in 2018 the Committee expects to consider further the impact of IFRS 17, as well as monitoring regulatory changes and the impact of major projects such as the creation of M&G Prudential on the Group’s internal controls functions.
As part of my transition, as well as the regular meetings with the Material Subsidiary audit committee chairs to facilitate escalation of important matters and reporting of material issues to the Committee, I attended one of each of the Material Subsidiary audit committee meetings to gain a better understanding of how they operate. I found this helpful and will look to repeat this in the coming years.
Part of my role as Chair is to consider the governance arrangements for the Committee. The Committee considers its terms of reference at least annually and proposed changes to its terms of reference in December 2017. The only significant change related to the review of Solvency II disclosures which now rests with the Committee.
As Chair of the Committee, I have responsibility for ensuring the Committee operates effectively. To ensure we do so and provide constructive challenge to management, I encourage open debate and contributions from all Committee members. Committee members are encouraged to meet with management or the internal and external audit team where this assists them in their preparations. I report to the full Board after each meeting on the main matters discussed.
An annual review of our effectiveness was carried out as part of the Board evaluation, described in more detail on page 94. The Committee was found to be functioning effectively.
Periodic financial reporting including: — Key accounting judgements and disclosures — Solvency II results and governance processes — Associated audit reports
Review of announcement of the merger of M&G and Prudential UK & Europe
Financial crime prevention including anti‑money laundering, prevention of tax evasion and anti‑bribery and corruption programmes
Note 1 Two meetings were held in each of March and August 2017.
In May 2017 the Group published externally, for the first time, a Group tax strategy document and a Group environmental, social and governance report. Both documents were reviewed by the Committee, which was updated on the approach and progress as the documents were developed.
— Mortality, expense and credit risk assumptions for the UK annuity business. Mortality assumptions were a particular focus for the Committee following a detailed review of granular historic experience data by the UK business and the release of new industry mortality improvement tables. Further information is contained in the consolidated financial statements on pages 267 to 269.
The Committee also received information on the nature of goodwill and intangible asset values and considered what factors might give rise to an impairment of the Group’s intangibles and whether those factors had arisen in the period. The Committee was satisfied that there was no impairment of the Group’s intangibles at 31 December 2017.
The Committee reviewed and challenged updates to the Group’s independent price valuation policy for investments and endorsed the proposed enhancements to Group Finance oversight of this policy. It also received information on the carrying value of investments in the Group’s balance sheet including data on the approach used in that valuation (for example, the level of asset valued on a mark to market basis).
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As part of its assessment of the description of performance within the Annual Report, the Committee considered judgemental aspects of the Group’s reporting across the Group’s IFRS and EEV metrics.
The potential impact of proposed US tax reforms was considered in advance of their implementation in December 2017 and the impact of the final rule changes were discussed in detail post year end.
The Committee reviewed and approved the Group’s tax strategy which was subsequently published in May 2017 and was also updated on the 2016 country by country tax disclosures required to be filed with HM Revenue & Customs by the end of 2017.
The Committee reviewed the parent company profit and loss account and balance sheet, which included recognition of a pension surplus asset.
In addition to these reporting matters, the Committee also received and considered regular updates from management on the status and implications for the Group of financial reporting developments, including new accounting standards due to be implemented over the period 2018‑2021. In particular it received an overview of the requirements of IFRS 17 on insurance contracts, following publication of the final standard in the first half of 2017.
The separate internal evaluation of the auditor was conducted using a questionnaire which was circulated to the Committee, the Chief Financial Officer and the Group’s senior financial leadership for completion.
KPMG also provided commentary on the findings of the FRC’s Annual Audit Quality Review of KPMG and the firm‑wide actions being taken to address observations made.
On completion of the activities outlined above, the Committee concluded that the audit had been effective and the challenge appropriately robust across all parts of the Group.
The Committee has responsibility for monitoring auditor independence and objectivity and is supported in doing so by the Group’s Auditor Independence Policy (the Policy). The Policy is updated annually and approved by the Committee. It sets out the circumstances in which the external auditor may be permitted to undertake non‑audit services and is based on four key principles which specify that the auditor should not: — Audit its own firm’s work; — Make management decisions for the Group; — Have a mutuality of financial interest with the Group; or — Be put in the role of advocate for the Group.
The Policy has two permissible service types: those that require specific approval by the Committee on an engagement basis and those that are pre‑approved by the Committee with an annual monetary limit. In accordance with the Policy, the Committee approved these permissible services, classified as either audit or non‑audit services, and monitored the usage of the annual limits on a quarterly basis. All non‑audit services undertaken by KPMG were agreed prior to the commencement of work and were confirmed as permissible for the external auditor to undertake under the rules and regulations of the US Securities and Exchange Commission (SEC) and the standards of the Public Company Accounting Oversight Board (PCAOB). In 2016, the Committee considered and approved revisions to the Policy with effect from 1 January 2017, to reflect final rules and guidance issued by the Financial Reporting Council, in connection with the implementation of broader European Union (EU) reforms to the audit market. This ensured that the schedule of prohibited non‑audit services was in line with EU reforms referenced above. In 2017 the Committee reconsidered the Policy and concluded that it remained appropriate.
Fees paid to the auditor The fees paid to KPMG for the year ended 31 December 2017 amounted to £17.3 million (2016: £16.2 million) of which £2.6 million (2016: £2.8 million) was payable in respect of non‑audit services. Non‑audit services accounted for 15 per cent of total fees payable (2016: 17 per cent). A breakdown of the fees paid to KPMG can be found in Note B2.4 to the financial statements on page 194.
Of the £2.6 million of non‑audit services, the principal types of non‑audit engagements approved for 2017 were other assurance services of £1.5 million (of which £0.8 million related to Solvency II reporting and disclosures) and other non‑audit services of £0.7 million. In accordance with the Policy, all non‑audit services were pre‑approved by the Committee. It was considered appropriate for KPMG to undertake work relating to the Group’s Solvency II reporting and disclosure requirements because the terms of the engagement were in compliance with the Policy and KPMG’s knowledge of the Group’s processes facilitated the efficient execution of the work.
The Company has complied throughout the 2017 financial year with the provisions of the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 issued by the Competition and Markets Authority.
A plan to identify successor firms to ensure that there is sufficient time for an orderly transition and to safeguard independence was considered and agreed by the Committee.
In line with the FRC Ethical Standard, the rules and regulations of the SEC and the standards of the PCAOB, a new lead audit partner, Philip Smart, has been appointed in respect of the 2017 financial year. Mr Smart is expected to be in place until the completion of the 2021 reporting cycle. Prior to taking up this role, Mr Smart shadowed the outgoing lead audit partner. During the 2016 year end audit, he met with members of the Committee and management team, including management teams of our business units, and attended Committee meetings and met with members of the Committee.
Third line oversight Internal audit Regular reporting The quality of the internal control systems is assessed by the Group’s Internal Audit function using independent audit procedures. Each of the Group’s business units has an Internal Audit team, the heads of which report to the Director of GwIA. The Committee received regular updates from GwIA on audits conducted and management’s progress in addressing audit findings within agreed timelines. Any delays in implementing remediation action are escalated to the Committee and given particular scrutiny. The independent assurance provided by GwIA formed a key part of the Committee’s deliberations on the Group’s overall control environment. The Director of GwIA reports functionally to the Chairman of the Committee and for management purposes to the Group Chief Executive, and also has direct access to the Chairman of the Board. In addition to formal Committee meetings, the Committee meets with the Director of GwIA in private to discuss matters relating to, for example, the effectiveness of the internal audit function, significant audit findings and the risk and control culture of the organisation.
Annual plan and focus for 2018 The Committee approved the half year update of the 2017 plan. It also considered and approved the Internal Audit Plan, resource and budget for 2018.
Membership of the committees for all Material Subsidiaries comprises solely of independent non‑executive directors of those subsidiaries. Minutes of business unit audit committees were provided to the Committee and their meetings were attended by the external auditor, as well as senior management from the business unit (including the Business Unit Chief Executive, heads of Finance, Risk, Compliance and GwIA) and from Group Head Office. In addition, the Committee Chair meets in person or telephonically with the chairs of each of the Material Subsidiary audit committees, usually on a quarterly basis. The Chair has also attended one of each of the Material Subsidiary audit committee meetings since his appointment to enhance his understanding of how they operate.
The Committee approved the Group’s standard terms of reference for the Material Subsidiary and other business unit audit committees, which were updated to reflect changes in the Committee’s own responsibilities to align them with best practice. These were adopted by the business unit audit committees, with minor variations to address local regulations or the particular requirements of the business where necessary.
Financial crime prevention The Committee received the Money Laundering Reporting Officer’s report which assessed the operation and effectiveness of the Group’s systems and controls in relation to managing financial crime risks.
Whistleblowing In 2016 Prudential launched a Group‑wide whistleblowing programme (‘Speak Out’). The programme captures and comprehensively records matters raised through the Group’s confidential reporting process.
The role of the whistleblowing champion, for the purpose of the Senior Insurance Managers Regime, is carried out by the chair of the audit committee of Prudential Assurance Company (PAC), who is an independent non‑executive director of PAC and is supported by the PAC audit committee. The terms of reference for each Material Subsidiary audit committee provides for them to ensure Speak Out arrangements are in place for those business units. The Committee was also updated on arrangements for promoting awareness of the Speak Out policy, including computer based training tailored for each business unit, and the distribution of communications across the Group.
At Group level, the Chair of the Audit Committee is responsible for oversight of whistleblowing activities across the whole of the Group.
Governance Group Governance Framework The Group Governance Manual sets out the policies and procedures by which the Group operates within its framework of internal governance, taking into account relevant statutory and regulatory matters. Used as a platform for mandating specific ways of working across the Group, each business unit attests annually to compliance with: — Mandatory requirements set out in Group‑wide policies, including matters which must be reported to the Group functions; and
Dear Shareholder As Chairman of the Risk Committee, I am pleased to report on the Committee’s activities and focus during 2017.
The Committee received regular reports from the Group Chief Risk Officer (CRO), who is advised by the Group Executive Risk Committee (GERC). I provided feedback on the performance of the CRO to the Group Chief Executive Officer as part of the annual evaluation of the Board and its members. The Committee also received regular reports from the Group‑wide Internal Audit and Compliance functions and updates from other areas of the business as needed.
During 2017, we reviewed the Group’s risk policies and the aggregate limits accompanying the Group risk appetite statements. In addition, the Group’s risk appetite limits were reviewed and updated where necessary to reflect changes in the Group’s risk profile and the evolving regulatory and macroeconomic environments. We also reviewed the principal risks facing the Group and received regular updates on these through the course of the year. We receive regular reports from the Chief Risk Officers of our major subsidiaries. A fuller explanation of key risks facing the Group and the way in which the Group manages these is set out in the Report on the risks facing our business on pages 48 to 63.
During the year we continued to oversee the work required as a result of the Group’s continuing designation as a Global Systemically Important Insurer (G‑SII), which included the approval of the 2017 Systemic Risk Management Plan, Liquidity Risk Management Plan and Recovery Plan.
Number of meetings in 2017: Six. In addition, a joint meeting was held with the Audit Committee