External audit Review of effectiveness, non-audit services and auditor reappointment External audit effectiveness The Group’s external auditor is KPMG LLP (KPMG) and oversight of the relationship with them is one of the Committee’s key responsibilities. The Committee reviews the effectiveness of the audit throughout the year taking into account: — The detailed audit strategy for the year and coverage of the highlighted risks; — Group materiality and how that is applied to the individual business units; — Insight around the key accounting judgements, including benchmarking, and the way KPMG applied constructive challenge and professional scepticism in dealing with management; — The outcome of management’s internal evaluation of the auditor as discussed below; and — Other external evaluations of KPMG, with a focus on the Financial Reporting Council’s Annual Quality Review.
There is an open dialogue on emerging risks and issues between the Group Lead Partner and Committee members via a regular schedule of meetings aligned to key reporting milestones. The Committee formally meets with the Group Lead Partner without management present.
KPMG were given the opportunity to respond to the findings in the reports. As a result of the reports, KPMG proposed enhancements to the audit and team.
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The Committee has responsibility for monitoring auditor independence and objectivity and is supported in doing so by the Group’s Auditor Independence Policy (the Policy). The Policy is updated annually and approved by the Committee. It sets out the circumstances in which the external auditor may be permitted to undertake non-audit services and is based on four key principles which specify that the auditor should not: — Audit its own firm’s work; — Act as management or employees for the Group; — Have a mutual or conflicting interest with the Group; or — Be put in a position of being an advocate for the Group.
The 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 capped at no more than 5 per cent of the Group audit fee in the proposed year and capped at $65,000 (£50,000) individually. 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. 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 in accordance with the Policy which complies with the rules and regulations of the UK Financial Reporting Councils’ Ethical Standard (2016), the US Securities and Exchange Commission (SEC) and the standards of the Public Company Accounting Oversight Board (PCAOB).
The Committee considered potential impacts on independence that could have arisen from the increase in non-audit services during the year, with the non-audit fee ratio increasing to 43 per cent (2018: 12 per cent). The increase was driven by non-audit services completed by KPMG in their role as reporting accountant for the demerger of M&G plc. The Committee concluded that as the Group’s auditor it was appropriate for KPMG to act as reporting accountant and this did not impair their independence. The audit partner was not involved in the delivery of services as the reporting accountant for the demerger and neither he nor members of the audit team are incentivised on, or rewarded in respect of, the provision of non-audit services to Prudential plc.
Fees paid to the auditor The fees paid to KPMG for the year ended 31 December 2019 amounted to $30.4 million (2018: $24.4 million) of which $13.0 million (2018: $3.0 million) was payable in respect of non-audit services. Non-audit services accounted for 43 per cent (2018:12 per cent) of total fees payable. A breakdown of the fees payable to KPMG can be found in note B2.4 to the IFRS financial statements. Of the $13.0 million (2018: $3.0 million) non-audit services fees, $11.7 million (2018: $1.0 million) was for one-off services associated with the demerger of M&G plc. Excluding these one-off fees associated with the demerger, non-audit services accounted for 7 per cent (2018: 9 per cent) of total fees payable.
The remaining $1.3 million (2018: $1.5 million out of the remaining $2.0 million) of non-audit services fees was in respect of other assurance services. These services covered assurance over the Group’s assurance reports on internal controls of certain Group companies that are made available for third parties, comfort letter procedures to support debt raising in the year and Solvency II external disclosures up to the demerger. In all these cases, the audit firm was considered the most appropriate to carry out the work, given its knowledge of the Group and the synergies that arise from running these engagements alongside its main audit.
All non-audit services were pre-approved by the Committee and were in line with the Policy discussed above.
Audit tender The Committee acknowledges the provisions contained in the UK Code in respect of audit tendering, along with European rules on mandatory audit rotation and audit tendering. In conformance with these requirements, the Company will be required to change audit firm no later than for the 2023 financial year end. The external audit was last put out to competitive retender in 1999 when the present auditor, KPMG, was appointed. Since 2005, the Committee has annually considered the need to retender the external audit service.
The Audit Committee assessed in February 2019 that in light of the significant change to the Group being undertaken, with the demerger of M&G plc, and the introduction of a new insurance accounting standard (IFRS 17) in the near term, that a new auditor should be engaged in time for the 2023 year end. In conducting this review, the Committee concluded that it would be appropriate to commence a competitive tender for the 2023 audit in the first half of 2020. The planning for this tender process has commenced with the Committee Chair meeting with a number of firms, including firms outside of the ‘Big Four’, to assess interest and ability to tender for the audit, with focus on capability and resource to service the key Asian business units. This was supplemented by a formal request for information to those firms who indicated they would be interested in tendering. A formal invitation to tender will be issued to those firms that confirmed they are able to undertake the audit in March 2020, with the Committee’s recommendation of which firm to appoint to be considered for approval by the Board in July 2020. The tender process is being led by the Audit Committee with the support of Internal Audit and while the selection criteria are yet to be formally set, audit quality will be at the core of the decision.
The auditor tender timeline takes into account the complexity of the Group and the expected timing of the introduction of IFRS 17 and allows the appointee time to ensure they meet the audit independence requirements to which the Group is subject. The timing remains subject to the Committee’s normal annual review of auditor performance and recommendation to shareholders.
Second line oversight Compliance, financial crime prevention, whistleblowing Compliance oversight The Group Compliance Director provided the Committee with regular reports that included updates on: the progress against the 2019 Compliance Plan; key Compliance activities; the effectiveness of the Compliance function; results of Compliance monitoring reviews; material regulatory issues; and the impact of any regulatory change and the establishment of the Hong Kong IA as the Group-wide supervisor.
Financial crime prevention The Committee received the Annual Financial Crime Report that assessed the effectiveness of the Group’s systems and controls to manage financial crime risks. In addition the Committee received regular updates on anti-bribery and corruption, anti-money laundering and sanctions screening.
Whistleblowing The Group continues to operate a Group-wide whistleblowing programme (‘Speak Out’), hosted by an independent third party (Navex). The Speak Out programme received ad hoc reports from a wide variety of channels, including a web portal, hotline, email and letters. Reports are captured, confidentially recorded by Navex, and flagged for investigation by the appropriate team.
The Committee reviews the Group’s Speak Out programme annually, satisfying itself that it continues to comply with regulatory and governance requirements. The Committee also considered the consistency of approach adopted across subsidiary audit committees. The Speak Out programme has been further strengthened during the year by enhanced training for managers and staff; improved mechanisms for reporters to feed back on their experience and case management workflow improvements that focus on tracking (post-investigation) management action and, where relevant, the Committee requested information on the sharing of lessons learnt.
The Chair and Committee spent time privately with the Group Resilience Director to understand outcomes of investigations, ensure that investigations were adequately resourced and appropriately managed, that there had been no retaliation against anyone making a report and that investigations were not improperly influenced.
The independent assurance provided by GwIA formed a key part of the Committee’s deliberations on the Group’s overall control environment. During 2019, the areas reviewed included: change management and transformation (in particular relating to the demerger), financial controls, outsourcing and third-party supply, customer outcomes, cyber risk, compliance and regulatory and second line of defence. In addition, GwIA performed more business monitoring during 2019 to obtain a broader view of the business and enable more regular assessments of emerging risks and changes in the control environment. This has been achieved through a variety of methods including stakeholder discussions and an increasing use of data analytics.
The 2020 Internal Audit Plan was formulated based on a bottom-up risk assessment of audit needs mapped against various metrics combined with top-down challenge. The plan was then mapped against a series of risk and control parameters, including the top risks identified by the Risk Committee, to verify that it is appropriately balanced between financial, business change, regulatory and operational risk drivers and provides appropriate coverage of key risk areas and audit themes within a risk-based cycle of coverage. Key areas of focus for 2020 include: strategic change initiatives, customer outcomes, cyber security, financial risk and financial controls, culture, outsourcing and digitisation.
The Committee also assesses the effectiveness of GwIA through a combination of External Quality Assessment reviews, required every five years, and an annual internal effectiveness review.
A 2019 Internal Effectiveness review, performed by the GwIA Quality Assurance Director, was conducted in accordance with the professional practice standards of the Chartered Institute of Internal Auditors (CIIA) and assessed continued conformance with the CIIA guidance for Effective Internal Audit in the Financial Services (the CIIA Code). The review concluded that GwIA continued to comply with the requirements of internal audit policies, procedures and practices, and standards in all material respects relating to audit planning and execution, and continued to be aligned with its mandated objectives and maintained general conformance with the CIIA Code.
The Committee is responsible for reporting and making recommendations to the Board on the effectiveness of Group-wide internal control and risk management systems.
The Committee considered the outcome of the annual review of the systems of internal control and risk management. This considered M&G plc to the extent it was relevant to the amounts disclosed within the Group 2019 financial statements. The review identified a number of areas for improvement and the necessary actions that have been, or are being, taken. The audit committees at Group and subsidiary level collectively monitor outstanding actions regularly and ensure sufficient resource and focus is in place to resolve them within a reasonable time frame.
Competence and experience In relation to the provisions of the UK Code and HK Listing Rules, the Board is satisfied that David 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.
Regular attendees — Chairman of the Board — Group Chief Executive — Group Chief Risk and Compliance Officer
Number of meetings in 2019: Five. (In addition a joint meeting was held with the Audit Committee in April 2019.)
Dear shareholder As Chair of the Risk Committee, I am pleased to report on the Committee’s activities and focus during 2019.
This will be my last report as Risk Committee Chair. Having served as a Non-executive Director and chaired the Committee since October 2010, I will not offer myself for re-election at the 2020 Annual General Meeting. I would like to take this opportunity to thank my fellow Committee members for their diligence and also everyone on the Prudential team who has supported me and the Committee over the years. As announced on 11 March 2020, Jeremy Anderson will succeed me as Chair of the Committee.
Committee operation The Committee assists the Board in providing leadership, direction and oversight of the Group’s overall risk appetite, limits and strategy. It also oversees and advises the Board on current and future risk exposures of the Group, including those which have the potential to impact on the delivery of the Group’s Business Plan. The Committee reviews the Group Risk Framework and recommends changes to it for approval by the Board to ensure that it remains effective in identifying and managing the risks faced by the Group.
Regulatory matters On 25 March 2019 the Hong Kong Insurance Authority (Hong Kong IA) and the Group signed a Regulatory Letter, which outlines the interim supervision framework applicable to the Group until the Hong Kong IA’s Group-wide Supervision (GWS) Framework becomes effective. The required legislative process is expected to be finalised in the second half of 2020. The Committee considered the capital aspects of the Regulatory Letter as well as considering regular updates on GWS developments over the year.
The Committee also considered the principal risks facing the Group and received updates on these through the course of the year as well as reports from the chief risk officers of our main subsidiaries, who regularly attend Committee meetings. A fuller explanation of principal risks facing the Group and the way in which the Group manages these is set out in the Group Chief Risk and Compliance Officer’s report on pages 51 to 71. During 2019, the Committee considered risk assessments and opinions on key areas covering the risks associated with the Group’s Business Plan, the Group’s revised dividend policy and executive remuneration, further details of which are noted below.
In respect of our principal risks, we continued to focus on the risks to the Group’s financial viability and non-financial sustainability including those arising from the external business and macroeconomic environment in which it operates; risks arising from the nature of the Group’s business and industry; and the risks around global legal and regulatory compliance. We regularly reviewed the strength of our capital and liquidity positions (including the results of stress and scenario analyses) and the impact of the transition to the Hong Kong IA’s Local Capital Summation Method (LCSM) in determining the Group’s regulatory capital requirements.
Information security and privacy Information security and data privacy also received attention from the Committee in 2019. We reviewed progress achieved on the implementation of the Group’s information security and privacy operating model and received updates on the Group’s compliance with the EU’s General Data Protection Regulation (GDPR). In April 2019, a joint session with the Audit Committee on cyber security included an update on progress against the Group’s key 2019 objectives in this area and included training aimed at enhancing the knowledge of Non-executive Directors on both the increasing regulatory expectations and the threats faced by the Group.
Committee governance The Committee works closely with the Audit Committee to ensure both Committees are updated and aligned on matters of common interest. Where responsibilities are perceived to overlap between the two Committees, David Law and I agree the most appropriate Committee to consider the matter. Aligned with the consolidation of the Risk, Compliance and Security functions under the leadership of the CRCO during 2019, the Committee assumed responsibility for Compliance oversight from the Audit Committee with effect from 1 January 2020. The Committee considered and approved the Risk and Compliance plan for the first half of 2020 and will receive a plan for the second half of 2020 at mid-year.
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Risk framework The Group Risk Framework and risk policies were subject to both an annual review and a further specific update to ensure compliance with the Hong Kong IA Regulatory Letter. Changes were recommended by the Committee for approval by the Board.
Annually, business units are required to assess and certify their compliance with the Group Risk Framework and associated policies as part of the annual Group Governance Manual certification process. The certification process is facilitated by Group Risk and Compliance and subject to oversight by the Committee.
The Committee conducted its annual review of risk effectiveness in February. It also considered the effectiveness of, and approved updates to, the Group Risk Mandate which formally sets out the purpose and responsibilities of the Group Risk function and its effectiveness in overseeing the key risks to the Group.
The Committee also reviewed the methodology and calibration of the Group internal model.
Risk appetite The Committee is responsible for recommending changes in the Group’s overall risk appetite and tolerance to the Board for approval.
Stress and scenario testing The Committee is responsible for reviewing the outcome and results of stress and scenario testing, which is a key risk identification, measurement and management tool for the Group.
The Group’s Recovery Plan, considered by the Committee in October, included an assessment of the effectiveness of the post-demerger business’s recovery options under market and idiosyncratic scenarios. An updated year-end 2018 RST exercise was performed for the post-demerger Group, which confirmed that it remains resilient to all business model failure scenarios considered. The Committee recommended the Group’s Recovery Plan and RST Report for approval by the Board.
During 2019, a key area of consideration for the Committee was the demerger of M&G plc from the rest of the Group, which contributed to the portfolio of key strategic change activity across the Group. The Committee’s work included overseeing the conflict management process around the demerger. The Committee also discussed the appropriate governance arrangements for the Group’s subsidiary risk committees post-demerger and associated transitional arrangements.
The Committee was provided with updates on demerger and transformation activity throughout the year, and considered the results of risk opinions, guidance and assurance work. It received regular updates on the Group’s portfolio of key strategic change initiatives, including those related to IFRS 17, the Group’s digital transformation, LIBOR transition and implementation of the Aladdin system.
Group principal risks The Committee evaluated the Group’s principal risks, considering recommendations for promoting additional risks and changes in the scope of existing risks. The Committee received regular reporting on principal and emerging risks, external events such as the UK’s exit from the EU and the Hong Kong protests and mitigating actions over the course of the year within the Group CRCO’s regular report to the Committee. Further information about how the Group identifies emerging and principal risks can be found in the Group Chief Risk and Compliance Officer’s report.
These reports also provided the Committee with: regulatory updates; developments in the Group’s internal model; the implications of the developing global capital standards including the engagement with the Hong Kong IA on the development of an industry group capital and risk management framework; and developments in relation to the Group’s designation as a G-SII.
Deep dives As part of its risk oversight responsibilities, the Committee also considers the result of ‘deep dive’ risk reviews performed over the year.
The Committee approved changes to limits used in the monitoring of the market and credit risks of the Jackson business.
Additionally, the Committee considered the results of in-depth reviews performed on the methodology and assumptions of a tool for the estimation of Jackson capital adequacy under stress. In October, the Committee approved Jackson’s adoption of the NAIC Variable Annuity Reform Framework.
Remuneration The Committee has a formal role in the provision of advice to the Remuneration Committee on risk management considerations in respect of executive remuneration. It considered risk management assessments of proposed executive remuneration structures and outcomes during the year, making related recommendations to the Remuneration Committee for their consideration. The assessments considered included those relating to executives of M&G plc at the point of demerger and proposals relating to the Jackson bonus pool.
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The Strategic report provides, on pages 10 to 87, a description of the Group’s capital position, financing and liquidity. The risks facing the Group’s business are discussed in the Group Chief Risk and Compliance Officer’s report of the risks facing our business and how these are managed on pages 51 to 71.
Rules governing the appointment of Directors The appointment and removal of Directors is governed by the provisions in the Articles of Association (the Articles), the UK Code, the HK Code (as appended to the Hong Kong Listing Rules) and the Companies Act 2006.
Director 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. Suitable insurance cover is in place in respect of legal action against directors and senior managers of companies within the Group.
The Group has adopted an Inside Information Policy which includes guidance and procedures for the identification, dissemination and escalation of inside information as well as appropriate controls on the disclosure of such information in line with regulatory requirements. All staff are made aware of the policy and receive communications reminding them of their obligations when they work on any confidential matters in the business or are notified when the Company enters or exits a closed period.
Requirements of Listing Rule 9.8.4 Information to be included in the Annual Report and Accounts under Listing Rule 9.8.4 may be found as follows: Listing Rule Description Page 9.8.4 (4) Details of long-term incentive schemes required by Listing Rule 9.4.3 168 9.8.4 (10) Contracts of Significance involving a Director 134 9.8.4 (12) Details of shareholder waiver of dividends 401 9.8.4 (13) Details of shareholder waiver of future dividends 401
Directors in office during the year Board of Directors 92 to 97
Post-balance sheet events Note D4 of the notes on the Group financial statements 298
Changes in borrowings Strategic report and note C6 of the notes on the Group financial statements
In addition, the risk factors set out on pages 388 to 395 and the additional unaudited financial information set out on pages 362 to 387, are incorporated by reference into the Directors’ report.
The Directors’ report is signed on behalf of the Board of Directors by
This report has been prepared to comply with Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, The Companies (Miscellaneous Reporting) Regulations 2018, The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019, as well as the Companies Act 2006 and other related regulations.
The following sections were subject to audit: Table of 2019 and 2018 Executive Director total remuneration (the ‘single figure’) and related notes, salary information table in section entitled Remuneration in respect of performance in 2019, Pension entitlements, Long-term incentives awarded in 2019, Chairman and Non-executive Director remuneration in 2019, Statement of Directors’ shareholdings, Outstanding share options, Recruitment arrangements and Payments to past Directors and payments for loss of office.
The Committee’s report is presented in the following sections: 1 An ‘at a glance’ summary of the Group’s remuneration arrangements on pages 142 and 143. This includes a summary of the key features of operation of the current Directors’ remuneration policy and outlines our proposed changes to the policy for 2020. The current policy was approved by shareholders at the 2017 AGM; 2 Our Annual report on remuneration on pages 144 to 173 which describes how the Committee applied the Directors’ remuneration policy in 2019 and the decisions it has made in respect of 2020; 3 Our new Directors’ remuneration policy on pages 174 to 191 which describes how we propose paying Directors from 14 May 2020. This will be subject to an ordinary resolution of shareholders at the 2020 AGM; and 4 Supplementary information on pages 192 to 195.
Changes to the executive team The Company made a number of changes to the senior leadership team of the Group in preparation for the demerger. On 16 May 2019, John Foley, Chief Executive of M&GPrudential, Nic Nicandrou, Chief Executive of Prudential Corporation Asia, and Michael Falcon, Chairman and Chief Executive Officer of Jackson Holdings LLC stepped down as Executive Directors of Prudential plc. They did not receive any loss of office payment in respect of their service as Executive Directors. Details of remuneration earned in respect of their service on the Prudential plc Board is provided in this report. When John Foley left the Group on the demerger of M&G plc, his outstanding PLTIP and deferred bonus awards were exchanged for replacement awards over M&G plc shares of an equivalent value and subject to equivalent malus and clawback provisions, and performance conditions which the Remuneration Committee of M&G plc determined were no more or less onerous than those which originally applied. Mr Foley’s 2019 bonus will be assessed and determined by M&G plc Remuneration Committee and will be paid by M&G plc.
In July 2019 Mark FitzPatrick, in addition to his role as Group Chief Financial Officer, became Chief Operating Officer while James Turner, Group Chief Risk Officer, became additionally responsible for the Group Compliance function. Their titles were changed to reflect these new duties.
Adjusted operating profit accounted for 35 per cent of Group financial bonus targets.
Notes 1 In this report ’adjusted operating profit’ refers to adjusted IFRS operating profit based on longer-term investment returns and are as previously reported. 2 For insurance operations, operating free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and excludes non-operating items. For asset management businesses, it equates to post-tax operating profit for the period. Restructuring costs are presented separately from the underlying business unit amount.
6 Executive Directors’ bonus awards have been assessed against targets that assumed M&G plc performance up to the date of demerger. Targets and the level of achievement are set out in the ‘Annual bonus outcomes for 2019’ section of the Annual report on remuneration. 7 Group cash flow includes BU remittances net of dividends and corporate costs.
Group free surplus generation was 10 per cent higher than 2018 on a constant exchange rate basis, excluding the impact of EEV methodology changes outlined in the CFO report (Operating Free Surplus Generation is 16 per cent lower than prior year including the impact of EEV methodology changes). This result was above the Board approved stretch target.
The proportion of 2019 long-term incentive awards which will vest for threshold performance was reduced to 20 per cent (from 25 per cent for previous awards). This level of threshold vesting is formalised in the 2020 policy and will apply to all future awards.
As described above, Mr FitzPatrick’s role expanded in July 2019 when he became Chief Operating Officer in addition to his role as Group Chief Financial Officer. In this capacity, he became responsible for a number of key Group functions including Legal, Government Affairs and Communications. In recognition of Mr FitzPatrick’s expanded role and responsibilities, together with the Board’s view of his strong performance, potential and criticality to the Group, the Committee propose increasing the value of his 2020 long-term incentive award to 300 per cent of base salary (from 250 per cent at present). The Committee chose to recognise the increased scope of Mr FitzPatrick’s role in this way to promote stewardship and long-term focus.
The Committee is mindful of the need for continued restraint in base salary increases. With effect from 1 January 2020, salary increases of 2 per cent were awarded for all Executive Directors. 2020 will be the eighth consecutive year in which the increases generally offered to executives have been below or close to the bottom of the salary increase budget ranges for the broader workforce.
Subject to approval of the new Policy, it is proposed that Executive Directors recruited externally or internally from the date of the 2020 AGM will be offered pension benefits of 13 per cent of salary, aligned with the employer pension contribution available to the UK workforce. We also propose to reduce incumbent Executive Directors’ pension benefits from 25 per cent to 20 per cent of salary by May 2021. The Committee recognises that pension benefits are an increasingly important area of focus and believe that the proposal is an active step towards aligning executives with the wider workforce whilst recognising the existing contractual commitments in place. This is an area where market practice is evolving rapidly and one which the Committee will keep under close review.
In conclusion I trust that you will find this report a clear account of the way in which the Committee has implemented the Directors’ remuneration policy during 2019 and of the Committee’s proposed new Directors’ remuneration policy.
What performance means for Executive Directors’ pay At Prudential, remuneration packages are designed to ensure a strong alignment between pay and performance. As you can see from the charts within the Annual statement from the Chairman of the Remuneration Committee, we are continuing to deliver profitable growth for our shareholders. This has been reflected in both the annual bonuses paid and the release of long-term incentive awards, as set out in the Annual report on remuneration.
In particular, the long-term incentives awarded to Executive Directors in 2017 had stretching performance conditions attached to vesting and were denominated in shares or ADRs. The value of the performance-related elements of remuneration is added to the fixed packages provided to Executive Directors to calculate the 2019 ‘single figure’ of total remuneration. The total 2019 ‘single figure’ for the Group Chief Executive is 11.25 per cent less than the total 2018 ‘single figure’. This chiefly reflects his housing support ending in November 2018 and the impact of the lower value of the 2017 PLTIP vesting compared to the 2016 PLTIP vesting due to lower share price growth over the performance period. The values for the current Executive Directors are outlined in the table below: Executive Director Role
Fixed pay Performance related 2019 single figure 2018 single figure1 salary
Mark FitzPatrick Group Chief Financial Officer and Chief Operating Officer £760,000 £339,000 £1,279,000 £1,082,000 £3,460,000 £2,261,000
Notes 1 The PLTIP award is subject to a three-year performance period and a holding period which ends on the fifth anniversary of the award. 2 James Turner relocated to Hong Kong on 1 August 2019 and has since been paid in HK dollars.
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Salaries reviewed annually with increases generally aligned with those of the workforce. Benefits reflect individual circumstances and are competitive in the local market
Entitled to receive pension contributions and/or a cash supplement up to 25% of salary. Executive Directors based in Hong Kong receive this in addition to contributions into the Hong Kong Mandatory Provident Fund
No change to Hong Kong Mandatory Provident Fund contributions for Executive Directors based in Hong Kong
Short-term variable pay One-year performance assessed on financial or functional objectives and personal objectives, set with reference to business plans approved by the Board. Awards are subject to the achievement of a Solvency II capital underpin
Cash bonus The maximum opportunity is up to 200% of salary 40% of bonus is deferred into shares for three years
The measures for the Group Chief Risk and Compliance Officer are based on functional and personal targets only
Reintroduce financial measures for the Group Chief Risk and Compliance Officer in line with current draft Hong Kong IA guideline and weight the 2020 bonus measures as follows: 40% Group financial measures, 40% functional objectives and 20% personal measures
Long-term variable pay Three-year performance assessed on a combination of: — Financial measures; and/or
Increase the regular award level for Group Chief Financial Officer and Chief Operating Officer to 300% of salary (from 250% of salary)
Adopt a Return on Equity (RoE) measure within the PLTIP for all Executive Directors in addition to the relative TSR and the sustainability scorecard measures. In the scorecard, replace Solvency II capital with a measure aligned with the Hong Kong IA capital framework
Members Anthony Nightingale (Chair of the Committee) Kai Nargolwala Philip Remnant Thomas Watjen Fields Wicker-Miurin Amy Yip (member since 2 September 2019)
Individual Directors’ attendance at meetings throughout 2019 is set out in the ‘Governance’ section.
— Overseeing the implementation of the Group remuneration policy for those roles within scope of the specific arrangements referred to in Article 275 of Solvency II.
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June 2019 Review proposals on Executive Directors’ remuneration arrangements; note an update on regulation affecting remuneration; review progress towards share ownership guidelines by the Chairman, Executive Directors and other Group Executive Committee members; and approve the expense approval process for the Group Chief Executive and Chairman; and approve the Chairman’s fees.
September 2019 Approve the draft 2020 Directors’ remuneration policy and review proposed 2020 remuneration arrangements for Executive Directors ahead of consultation with shareholders; note an update on regulation affecting remuneration; approve minor amendments to the share plan rules and adjustments to outstanding Options; review the indicative incentive outcomes for Group Executive Committee members transferring to M&G plc; and review the workforce remuneration dashboard.
December 2019 Review level of participation in the Company’s all-employee share plans and dilution levels resulting from the Company’s share plans; approve the Group Executive Committee members’ 2020 salaries and incentive opportunities; consider the annual bonus measures and targets to be used in 2020; consider shareholder feedback; review an initial draft of the 2019 Annual report on remuneration and the 2020 Directors’ remuneration policy; approve the Committee’s 2020 Schedule of Business; approve the fees for independent non-executive directors of Material Subsidiaries; review the Group’s remuneration arrangements and approve amendments to the 2020 Group remuneration policy in light of the draft Hong Kong IA Guideline on Group-Wide Corporate Governance; approve the Committee’s terms of reference for recommendation to the Board; and note an update on regulation affecting remuneration.
The Chairman and the Group Chief Executive attend meetings by invitation. The Committee also had the benefit of advice from: — Group Chief Risk and Compliance Officer; — Group Chief Financial Officer and Chief Operating Officer; — Group Human Resources Director; and
Individuals are not present when their own remuneration is discussed and the Committee is always careful to manage potential conflicts of interest when receiving views from Executive Directors or senior management about executive remuneration proposals.
These principles formed the basis for the treatment of outstanding share awards which was set out in the Shareholder Circular published on 25 September 2019 and approved by shareholders at the October 2019 General Meeting. In summary, employees of Prudential plc (including the Executive Directors of the Company) have: — Received the demerger dividend through which the demerger was effected, on their outstanding deferred bonus and long-term incentive awards in the form of additional Prudential plc shares. These will be released on the same timetable and to the same extent as their original share awards. The Committee decided that it was appropriate that, wherever possible, executives should be rewarded in the shares of the business which they continue to lead; — Received the demerger dividend on the shares they hold outright through the all-employee UK SIP plan in the form of M&G plc shares, in the same way as other shareholders; and
Therefore the Committee agreed the Solvency II metric in the sustainability scorecard for in-flight PLTIP awards should be retained for the period to 30 June 2019 and then, for the remainder of each performance period, be replaced with the OFSG measure. Performance for these in-flight PLTIP awards will be assessed using a weighted average between Solvency II and OFSG achievement to reflect the portion of the performance period for which each was in place.
No changes have been made to the TSR peer groups for outstanding awards held by Prudential plc staff. The TSR peer group for the 2019 PLTIP awards was developed in anticipation of the demerger to reflect the post-demerged business, with extensive input from shareholders.
TSR calculation The Committee determined that the calculation of TSR for in-flight PLTIP awards should be adjusted to reflect the demerger of M&G plc. This involved the application of an adjustment factor calculated in line with standard methodologies. No changes have been made to the TSR peer groups for outstanding awards held by Prudential plc staff.
* Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements, relocation/expatriate benefits and shares awarded due to participation in the Share Incentive Plan (SIP).
^ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of Statutory Instrument 2013 No. 1981 - The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. # Total 2019 remuneration has been converted to US dollars using the exchange rate of 1 GBP to USD 1.2765.
Notes 1 Michael Falcon was appointed to the Board on 7 January 2019 as Chairman and Chief Executive Officer, Jackson Holdings LLC. 2 Michael Falcon, Nic Nicandrou and John Foley stepped down from the Board on 16 May 2019. The remuneration above was paid in respect of their service as Executive Directors.
3 Michael Falcon, Nic Nicandrou and James Turner are paid in their local currency and exchange rate fluctuations will therefore impact the reported sterling value. 4 John Foley stepped down from the Board on 16 May 2019. He subsequently left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. As an Executive
The amount of any bonus payment (including any deferred component) to John Foley in respect of 2019 (including that awarded for performance and service during the pre-demerger period) and the vesting of Mr Foley’s replacement 2017-2019 long-term incentive award are due to be disclosed by M&G plc and described in the M&G plc Directors’ remuneration report as set out in the M&G plc 2019 Annual Report. These details were not known by Prudential plc prior to the finalisation of this report.
5 To facilitate Nic Nicandrou’s relocation to Hong Kong, benefits include £95,000 to cover accommodation. 6 James Turner relocated to Hong Kong on 1 August 2019 and since has been paid in HK dollars; benefits include £160,000 to cover accommodation.
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* Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits. † The deferred part of the bonus is subject to malus and clawback in accordance with the malus and clawback policies, but no further conditions. ‡ In line with the regulations, the estimated value of 2018 LTIP releases has been recalculated based on the actual share/ADR price on the date awards were released, being £15.61 for the April release. The restated value of those awards released in June also reflects dividends paid on those awards in June. In line with the requirements under the UK Companies (Miscellaneous Reporting) Regulations 2018,16.8 per cent of the value of the 2018 LTIP releases is attributable to share price growth over the vesting period as awards were granted using a share/ADR price of £12.99/US$37.29 in 2016. The Committee concluded that no discretion will be applied in determining the remuneration resulting from the 2018 LTIP releases as a result of share price appreciation.
Remuneration in respect of performance in 2019 Base salary Executive Directors’ salaries were reviewed in 2018 with changes effective from 1 January 2019. When the Committee took these decisions it considered: — The salary increase budgets for other employees, which vary across our business units, reflecting local market conditions; — The performance and experience of each Executive Director; — The relative size of each Executive Director’s role; and
As reported last year, after careful consideration by the Committee, all Executive Directors received a salary increase of 2 per cent. The 2019 salary increase budgets for other employees across our business units were between 2 per cent and 5.5 per cent.
Mark FitzPatrick Group Chief Financial Officer and Chief Operating Officer — FTSE 40 — International insurance companies
Michael Falcon1,2 Chairman and CEO, Jackson Holdings — Willis Towers Watson US Financial Services Survey
Nic Nicandrou2 Chief Executive, Prudential Corporation Asia — Willis Towers Watson Asian Insurance Survey
In July 2019, the Group Chief Risk Officer became additionally responsible for the Group Compliance function and in August 2019, Mr Turner relocated to Hong Kong to support our dialogue with the Hong Kong IA. The Company supported Mr Turner’s relocation and, in order to recognise the expansion of his role and his development since joining the Board, the Committee determined an uplift in base salary of 9 per cent and an increased maximum bonus incentive opportunity from 160 per cent to 175 per cent of base salary were appropriate. No other changes were made during the year to Executive Directors’ maximum opportunities under either the annual incentive or the long-term incentive plans.
Michael Falcon1 N/A $800,000 Mark FitzPatrick £745,000 £760,000 John Foley1 £781,000 £797,000 Nic Nicandrou1 HK$10,710,000 HK$10,930,000 James Turner2 £625,000 HK$7,330,000 Mike Wells £1,126,000 £1,149,000
Notes 1 Michael Falcon, John Foley and Nic Nicandrou stepped down from the Board on 16 May 2019. The annualised 2019 salaries above were paid in respect of their service as Executive
Directors and pro-rated for the portion of the year for which they were Executive Directors. 2 James Turner was appointed to the Board on 1 March 2018. The 2018 annualised salary above was paid in respect of his service as Group Chief Risk Officer. Mr Turner’s salary as at 1 January 2019 was £638,000. He relocated to Hong Kong on 1 August 2019 and his new annualised 2019 salary was paid in Hong Kong dollars. This was an annual base salary of HK$7,330,000.
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Pension benefit entitlements Pension benefit arrangements in 2019 are set out in the table below. The proposed arrangements for 2020 are described in the ‘Statement of implementation in 2020’ and in the ‘New Directors’ remuneration policy’ sections.
For the period 1 August 2019 to 31 December 2019: pension supplement in lieu of pension of 25 per cent of salary and a HK$18,000 employer payment to the Hong Kong Mandatory Provident Fund.
For the period 1 January 2019 to 31 July 2019: up to four times salary plus a dependants’ pension
John Foley previously participated in a non-contributory defined benefit scheme that was open at the time he joined the Company. The scheme provided an accrual of 1/60th of final pensionable earnings for each year of pensionable service. John received pension payments of £16,061 per annum which increased to £16,462 per annum from 1 April 2019, in line with the Consumer Prices Index. The pension will continue to be subject to statutory increases in line with the Consumer Prices Index. Mr Foley left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019.
Personal objectives comprise 20 per cent of the bonus opportunity for all Executive Directors apart from the Group Chief Risk and Compliance Officer, for whom this accounts for 50 per cent of the total bonus opportunity. These objectives are established at the start of the year and reflect the Company’s Strategic Priorities set by the Board. Functional objectives account for the remaining 50 per cent of the Group Chief Risk and Compliance Officer’s bonus opportunity. These are based on the Group Risk Plan and are developed with input from the Chairman of the Group Risk Committee.
The Committee seeks advice from the Group Risk Committee on risk management considerations to inform decisions about remuneration architecture and performance measures to ensure that risk management, culture and conduct are appropriately reflected in the design and operation of Executive Directors’ remuneration.
Michael Falcon2,3 80% – 20% 96% 91% 95% Mark FitzPatrick 80% – 20% 96% 95% 96% Nic Nicandrou2 20% 60% 20% 96% 97% 97% James Turner4 – – 100% N/A 93% 93% Mike Wells 80% – 20% 96% 92% 96%
Notes 1 All bonus awards are subject to 40 per cent deferral for three years and the deferred bonus will be paid in Prudential plc shares or ADRs. 2 Michael Falcon and Nic Nicandrou stepped down from the Board on 16 May 2019. The bonus awards illustrated in the table above are in relation to their Board service only. 3 Michael Falcon is also eligible to receive 10 per cent of the Jackson bonus pool for 2019. 4 James Turner’s maximum bonus opportunity increased from 160 per cent of salary to 175 per cent of salary on 1 August 2019.
5 John Foley stepped down from the Board on 16 May 2019. He subsequently left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. As an Executive
Financial performance The Committee reviewed performance against the performance ranges at its meeting in February 2020. Group adjusted operating profit was approaching the stretch targets. Group free surplus generation exceeded the stretching targets established by the Board. All of our business units achieved target remittance levels, which were 3 per cent higher than 2018 for our continuing operations, enabling us to maintain significant cash stock at the centre, after dividends, corporate costs, demerger effects and investing in profitable opportunities within the business units. The business unit remittances contributed to Group cashflow, which approached the stretch target level. Group EEV new business profit was 6 per cent lower than prior year on a constant exchange rate basis. This reflected the significant reduction in interest rates during the year and the challenging trading environment in Hong Kong in the second half of the year as a direct result of political unrest in the region. Excluding Hong Kong, Asia new business profit was 29 per cent above prior year and given the strong performance of NBP absent the Hong Kong protests, the Committee considered it appropriate to adjust the EEV new business profit target to reflect the reduction in Hong Kong sales driven by the protests, which was considered to be outside of management’s control. Allowing for this adjustment, Group EEV new business profit was between target and stretch target.
At the end of the year, the Committee considered the performance of all executives eligible for a Prudential plc bonus in respect of their 2019 Board service against objectives established at the start of the year. At its meeting in February 2020, it concluded that there had been a high level of performance against these 2019 objectives. All executives met their individual conduct measures and each Executive Director made a significant contribution to the achievement of Group strategy during 2019.
Oversee the maintenance of appropriate financial resilience, within a set framework, across Group pre and post the planned demerger of M&G plc.
Refresh Group Strategy post the demerger. Redevelop and embed the revised approach to Group capital allocation, which integrates risk-based decisions and funding with Group risk appetite and corporate strategy.
Execute on all necessary steps to support the demerger of M&G plc from Prudential at the earliest opportunity.
— Led the strategic plan design and process from which was drawn the revised equity story to be used in the demerger documentation.
Recognising Mr FitzPatrick’s very strong performance against both his individual and shared personal objectives during 2019, the Committee judged that 19 per cent of a maximum of 20 per cent attributable to personal objectives was appropriate.
Act as a trusted adviser and partner to the Group Chief Executive and members of the Board/Group Executive Committee.
— Assessed the risk management considerations to support the Group’s early adoption of the NAIC regulatory framework in Q4 2019.
Drive the operation of the Risk and Compliance team as a Group-wide function promoting the collaboration of the teams across location.
— Steered the operation of the combined Risk and Compliance functions, having taken additional responsibility for Group Compliance in July 2019.
— Directly supported re-alignment of the function with key operational businesses and the lead regulator with personal relocation to Hong Kong in August 2019.
Lead strategic communications between Prudential and key regulators and oversee the internal regulatory communication policy to ensure that responses are appropriate, complete and timely.
— Positive and proactive engagement with both the PRA and Hong Kong IA ensuring our commitment of timely information flow to both Regulators was met and to support the successful handover of regulatory responsibilities on 21 October 2019; — Concluded discussions to confirm Hong Kong IA regulatory requirements in advance of the demerger; — Throughout 2019, led frequent and productive interaction with the Hong Kong IA and industry peers to support the drafting of Group-wide Supervisory standards which are expected to apply from the second half of 2020; and
— Took overall responsibility for the management of the demerger process, in particular gaining the required approvals of senior stakeholders. At the same time, conducted and continued significant relationship building for the PCA and Jackson businesses while focusing business unit leadership on operational delivery.
Develop the capability and effectiveness of the Group, ensuring that the culture fosters delivery, positive internal and external relationships and co-operation across the Group.
Develop plans to determine the Group’s exposure to climate-related risks and opportunities, and Group’s actions as a consequence and implement actions to increase connectivity between the Group and business units, including revisions to operating models.
— Enhanced access to ESG and climate risk data sources across the Group to support carbon footprinting work and initiated work on the stress-testing of the investment book against different climate change scenarios.
Recognising Mr Wells’s very strong performance against both his individual and shared personal objectives during 2019, the Committee judged that 18 per cent of a maximum of 20 per cent attributable to personal objectives was appropriate.
Define and provide oversight of the Group’s adherence to the framework of the Group-wide risk and compliance policies, risk appetite and limits during 2019 and ensuring oversight responsibilities across the Group and business units, in accordance with internal and regulatory requirements.
Deliver regulatory requirements, including those required under Solvency II until the point of demerger and the Hong Kong IA regulatory letter requirements thereafter.
The below summarises performance against the personal objectives for the Executive Directors who retired from the Board during the year and who remain employed by the Group: Michael Falcon
— Committed significant time and leadership resource to the extensive roadshow marketing of the demerger process.
Develop the capability and effectiveness of the Jackson team, ensuring that the culture fosters delivery, positive internal and external relationships and cooperation across the Group and develop and implement (as appropriate) opportunities to optimise Jackson’s capital deployment.
— Enhanced our growing scale in Africa by acquiring a majority stake in a leading life insurer operating in Cameroon, Côte d’Ivoire and Togo.
Recognising Mr Nicandrou’s very strong performance against both his individual and shared personal objectives during the year to 16 May 2019, the Committee judged that 19 per cent of a maximum of 20 per cent attributable to personal objectives was appropriate.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 157 2019 Jackson bonus pool In 2019, the Jackson bonus pool was determined by Jackson National Life Insurance Company’s profitability, remittances to Group and advisory sales. Financial performance in the period reflects the impact of strong equity markets, lower interest rates, and a more diverse product mix. Further detail on this performance is set out on pages 28 to 33. The Committee also considered performance in a number of key activities and the delivery against certain non-financial Group requirements. As a result of this assessment, the Committee determined that Michael Falcon’s share of the bonus pool for his service on the Board was $1,282,000. Forty per cent of this award is deferred into shares for three years.
2019 bonus awards The Committee determined the following 2019 AIP awards on the basis of the performance of the Group and its business units and its consideration of the total bonus value in light of its view of all relevant circumstances, including: — The successful completion of the demerger of M&G plc from the Group; — The overall contribution of the executive; and
Michael Falcon2,3 Chairman and CEO, Jackson Holdings $302,000 100% 95% £1,227,000 Mark FitzPatrick Group Chief Financial Officer and Chief
Nic Nicandrou2 Chief Executive, Prudential Corporation Asia HK$4,113,000 180% 96% £707,000 James Turner4 Group Chief Risk and Compliance Officer £372,000/
7 Diversity is measured as the percentage of the Leadership Team that is female at the end of 2019. The target for this metric has been based on progress towards the goal that the
As discussed in the section on ‘Remuneration decisions taken in relation to the demerger’, the Committee adjusted the performance conditions attached to the 2017 PLTIP awards in order to take account of the demerger, ensuring that the revised performance conditions are no more or less stretching than those originally attached to the awards. The performance assessment provided overleaf is based on these adjusted targets.
Performance assessment In deciding the proportion of the awards to be released, the Committee considered actual financial results against performance targets. The Committee also reviewed underlying Company performance to ensure vesting levels were appropriate, including an assessment of whether results were achieved within the Group’s and business units’ risk framework and appetite. The Directors’ remuneration policy contains further details of the design of Prudential’s long-term incentive plans.
The Committee determined that the cumulative adjusted operating profit target established for the PLTIP should be expressed using exchange rates consistent with the reported disclosures. Individual business units achieved between 86 per cent and 100 per cent vesting under this element. Details of business unit adjusted operating profit targets have not been disclosed as the Committee considers that these are commercially sensitive and disclosure of targets at such a granular level would put the Company at a disadvantage compared to its competitors.
Capital measure – Group ECap operating capital generation The vesting profile for the Group ECap operating capital generation measure is binary, awarding full vesting for achieving plan and no vesting for any level of performance below plan. The adjusted cumulative Group ECap operating capital generation was below the target of $8.5bn (which excludes M&G plc from the point of demerger) and therefore generated a zero per cent vesting outcome on this element of the PLTIP.
Conduct assessment The vesting profile of this element is binary with full vesting being awarded where there are no significant conduct/culture/governance issues that result in significant capital add-ons or material fines. On 30 September 2019, the FCA fined M&G plc £23,875,000 for failures related to the non-advised sale of annuities between July 2008 and September 2017. Since this occurred before the demerger of M&G plc from the Group, the Committee determined that the portion of the 2017 PLTIP awards related to conduct held by Group Executive Directors should lapse.
Diversity assessment On 31 December 2019, 28 per cent of our Leadership Team was female. Since this was above the 27 per cent level required for full vesting, the portion of the awards related to diversity that therefore vested was 100 per cent.
* Awards over shares were awarded to all Executive Directors other than Michael Falcon whose awards were over ADRs. † Awards for Executive Directors are calculated based on the average share price over the three dealing days prior to the grant date, being £15.40 for all Executive Directors other than
Notes 1 Michael Falcon, Nic Nicandrou and John Foley stepped down from the Board on 16 May 2019. 2 John Foley left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. His 2017-2019 PLTIP award has been exchanged for an equivalent award over
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Update on performance against targets for awards made in 2018 and 2019 As set out in the section on ‘Remuneration decisions taken in relation to the demerger’, the Committee has adjusted the performance conditions attached to the 2018 and 2019 awards in order to take account of the demerger, ensuring that the revised performance conditions are no more or less stretching than those originally attached to the awards. The performance update provided below is based on these adjusted targets.
Group adjusted operating profit Prudential’s Group adjusted operating profit performance between 1 January 2018 and 31 December 2019 was above the stretch target established for the 2018 PLTIP awards. Group adjusted operating profit was not used as a performance measure for the 2019 PLTIP awards.
Prudential TSR vs FTSE 100 and peer group average – total return per cent over 10 years to December 2019 £
Note The index of Prudential’s peers represents the average daily total shareholder return performance of the peer group used for the 2019 PLTIP awards (excluding companies not listed at the start of the period).
Other payments – – – – – – – – – – –
Group Chief Executive ‘single figure’ of total remuneration2 5,293 5,339 9,533 8,702 13,418 4,699 7,526 7,370 8,560 7,571 6,719
Notes 1 Tidjane Thiam left the Company on 31 May 2015. Mike Wells became Group Chief Executive on 1 June 2015. The figures shown for Mike Wells’s remuneration in 2015 relate only to his service as Group Chief Executive. 2 Further detail on the ‘single figure’ is provided in the ‘single figure’ table for the relevant year. The figures provided reflect the value of vesting LTIP awards on the date of their release other than for 2019 (for which an estimate is used).
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Group Chief Executive 2.0% (44.5)% 3.0% All UK employees 3.9% (3.4)% 6.7%
Group Chief Executive pay compared with employee pay To increase further transparency of executive remuneration and its alignment with the pay of other employees, we published our CEO pay ratio one year in advance of the disclosure becoming a requirement under the UK Companies (Miscellaneous Reporting) Regulations 2018 in the 2018 Directors’ remuneration report. The employee comparator group used for the purpose of this 2018 analysis was all UK employees comprising employees in M&GPrudential and Group Head Office in 2018. In light of the demerger of the M&G plc business from Prudential plc on 21 October 2019, we have prepared the 2019 CEO pay ratio based on UK-based Group Head Office employees since Prudential plc no longer has any influence over or knowledge of pay decisions, including 2019 bonus awards, for employees within M&G plc. On this basis, the Committee has decided that the 2018 CEO pay ratio will not be restated in this report and that the 2019 CEO pay ratio will form the base year of reporting given the fundamental changes to the UK workforce which have resulted from the demerger.
Under the regulations there is a choice of three methodologies to determine the 25th, median and 75th full-time equivalent remuneration of our UK employees. This is the most recently collected data in accordance with the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 and includes all UK employees. The Company has chosen to use the 2019 hourly rate gender pay gap information as this method uses data that is aligned with other disclosures made under our gender pay gap reporting (‘Option B’ in the table above). The employees used in the calculations were identified using the most recent gender pay gap data for 2019, on 23 January 2020, following the end of the financial year. Base salary and total remuneration for these identified employees has then been calculated based on their actual remuneration for 2019. The Committee determined that the identified employees are reasonably representative since the structure of their remuneration arrangements is in line with that of the majority of employees within the UK-based Group Head Office workforce. The same methodology used for calculating the ‘single figure’ of the Group Chief Executive has been used for calculating the pay and benefits of these three UK employees.
The salary and total remuneration received during 2019 by the indicative employees used in the above analysis are set out below: 25th percentile Median 75th percentile
As part of the Board’s wider initiatives, which included the appointment of designated Non-executive Directors who led on workforce engagement during the year as detailed in the ‘Governance’ section earlier in this Annual report, the Committee took additional measures in 2019 to explain how the remuneration of Executive Directors aligns with the wider company pay policy. The Company established a microsite on its intranet that outlines executive pay arrangements during the previous financial year and key areas of change for 2019. It explains to employees that total remuneration for Executive Directors is made up of a number of elements and is governed by both the Directors’ remuneration policy and the Group’s remuneration policy (which is also published on the Company’s website) with the relevant links to these documents.
Relative importance of spend on pay The table below sets out the amounts payable in respect of 2018 and 2019 on all employee pay and dividends: Percentage change
All employee pay including M&G plc ($m)1,2 2,454 2,143 (12.7)% All employee pay excluding M&G plc ($m)1,3 1,672 1,466 (12.3)% Dividends including demerger dividend ($m)4 1,638 8,582 423.9% Dividends excluding demerger dividend ($m)4 1,638 1,203 (26.6)%
Notes 1 All employee pay as taken from note B2.1 to the financial statements. 2 This includes the costs of employment for M&G plc employees up to the demerger in October 2019. 3 This excludes the costs of employment of M&G plc employees for 2018 and 2019 in order to present a like for like comparison between the two years. 4 Dividends taken from note B6 to the financial statements.
Non-executive Directors’ fees The Non-executive Directors’ fees were reviewed by the Board during 2019 and the basic fee was increased from £97,000 to £99,000, the Remuneration Committee Chair fee increased from £60,000 to £65,000 while the Nomination & Governance Committee member fee increased from £12,500 to £15,000. No other fees were increased. The Board also introduced a £30,000 fee for each designated Non-executive Director carrying out a workforce engagement role.
The resulting fees paid to the Chairman and Non-executive Directors are: £000s 2019 fees 2018 fees benefits*
Directors * Benefits include the cost of providing the use of a car and driver, medical insurance and security arrangements (including any tax thereon). † Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of the Companies Act. The Chairman and Non-executive Directors are not entitled to participate in annual bonus plans or long-term incentive plans. ‡ Total remuneration has been converted to US dollars using the exchange rate of 1 GBP to 1.2765 USD for the 2019 single figure calculations and 1 GBP to 1.3352 USD for the 2018 single figure calculations.
Statement of Directors’ shareholdings The interests of Directors in ordinary shares of the Company are set out below. ‘Beneficial interest’ includes shares owned outright, shares acquired under the Share Incentive Plan (SIP) and deferred annual incentive awards, detailed in the ‘Supplementary information’ section. It is only these shares that count towards the share ownership guidelines.
Number of shares subject to performance conditions† Total interest in shares
Directors were introduced with effect from January 2013 and increased again in 2017. Executive Directors normally have 5 years from this date (or date of joining or role change, if later) to reach the enhanced guideline. The guideline for Non-executive Directors was introduced on 1 July 2011. Non-executive Directors normally have 3 years from their date of joining to reach the guideline. During 2019, the periods available to reach the guidelines for Executive Directors and Non-executive Directors were revised to recognise that shares they beneficially held in M&G post demerger no longer counted towards the guideline. Directors are expected to rebuild the value of their shareholding in line with the share ownership guidelines within a reasonable timeframe.
6 Lord Turner stepped down from the Board on 16 May 2019. Total interest in shares is shown at this date. 7 For the 1 January 2019 figure, Thomas Watjen’s beneficial interest in shares is made up of 5,170 ADRs (representing 10,340 ordinary shares). For the 31 December 2019 figure, the beneficial interest in shares is made up of 5,170 ADRs (representing 10,340 ordinary shares).
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The bar chart below illustrates the Executive Directors’ shareholding as a percentage of base salary versus the share ownership guideline.
Mark FitzPatrick 21 Sep 17 1455 1449 01 Dec 22 31 May 23 2,061 – – – – – 2,061 James Turner 21 Sep 17 1455 1449 01 Jan 21 30 Jun 21 1,237 – – – – – 1,237
Letters of appointment of the Chairman and Non-executive Directors Details of Non-executive Directors’ individual appointments are outlined below. The Directors’ remuneration policy contains further details on their letters of appointment.
Chairman/Non-executive Director Appointment by the Board Notice period Time on the Board at 2020 AGM
Michael Falcon Michael Falcon was appointed as Chairman and Chief Executive Officer, Jackson National Holdings LLC and joined the Board on 7 January 2019. Details of his remuneration arrangements on appointment, including the terms of his buy-out awards, were disclosed in the 2018 Directors’ Remuneration Report.
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On 21 May 2019, the Company confirmed that John Foley, Chief Executive of M&GPrudential, Nic Nicandrou, Chief Executive of Prudential Corporation Asia, and Michael Falcon, Chairman and Chief Executive Officer, Jackson Holdings LLC, stepped down as members of the Prudential plc Board at the end of the Annual General Meeting on 16 May 2019 as part of our progress towards the demerger of M&G plc. They remained in their executive roles and continued to be members of the Group Executive Committee with Mr Foley leaving the Group on 21 October 2019 on the demerger of M&G plc.
The remuneration of these executives was managed in line with the currently approved Directors’ remuneration policy and they have not received any loss of office payment in respect of their service as Directors.
John Foley Following his retirement from the Board on 16 May 2019, John Foley’s employment with the Group ended on 21 October 2019 on the demerger of M&G plc and he continued as the Chief Executive Officer, M&G plc. The Committee determined that Mr Foley would not receive a bonus from Prudential plc for any part of the 2019 performance year. On the demerger date, Mr Foley’s unvested awards under the Prudential deferred AIP and the PLTIP were cancelled by Prudential plc. These awards were converted by M&G plc into awards over M&G plc shares in line with the M&G plc Directors’ remuneration policy. Further information on Mr Foley’s 2019 remuneration arrangements may be found in the M&G plc 2019 Directors’ remuneration report.
Nic Nicandrou An annual incentive award has been paid to Nic Nicandrou for the whole of 2019 as he remained a member of the Group Executive Committee after leaving the Board. This award was determined on performance achieved when the 2019 results were known. Sixty per cent of it was paid in cash in the usual way, and 40 per cent was deferred into Prudential plc shares (to be released in the Spring of 2023). This award continues to be subject to malus and clawback provisions.
Details of the remuneration received during 2019 in respect of his role as an Executive Director are set out in the 2019 ‘single figure’ table.
Mr Nicandrou’s unvested awards under the Prudential deferred AIP will be released on the original timetable and remain subject to malus and clawback provisions. Outstanding long-term incentive awards will vest in line with the original vesting dates, subject to the satisfaction of the original performance conditions. The number of Prudential plc shares under award have been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’. These awards will also continue to be subject to the original malus and clawback provisions, and awards will remain subject to a two-year holding period following the end of the three-year performance period.
Barry Stowe Barry Stowe retired as Chairman and Chief Executive, NABU on 31 December 2018. He remained as an adviser to the Group until his employment ended on 31 December 2019. Mr Stowe received US$1,466,000 in respect of salary, benefits, and pension between 1 January and 31 December 2019. As disclosed in the 2018 Directors’ remuneration report, the Committee exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that Mr Stowe should be allowed to keep his unvested 2017 and 2018 PLTIP awards which will vest in line with the original vesting dates, subject to the satisfaction of the performance conditions under the plan rules, remain subject to malus and clawback provisions, and will be pro-rated for service to the date Mr Stowe retired from the Board to 31 December 2018. Mr Stowe was not eligible for a 2019 bonus and was not granted a 2019 PLTIP award.
As set out in the section ‘Remuneration in respect of performance in 2019’ the performance conditions attached to Mr Stowe’s 2017 PLTIP awards were partially met and 68.75 per cent will be released in 2020. The number of Prudential plc ADRs under award have been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’. The details of Mr Stowe’s award are set out below: Award Number of
Notes 1 The number of shares vesting include accrued dividend shares. 2 The share price used to calculate the value was the average share price for the three months up to 31 December 2019, being £13.85.
Statement of voting at general meeting At the 2017 Annual General Meeting, shareholders were asked to vote on the current Directors’ remuneration policy and at the 2019 Annual General Meeting, shareholders were asked to vote on the 2018 Directors’ remuneration report. Each of these resolutions received a significant vote in favour by shareholders and the Committee is grateful for this support and endorsement by our shareholders. The votes received were: Resolution Votes for % of votes cast Votes against % of votes cast Total votes cast Votes withheld
To approve the Directors’ remuneration report (2019 AGM) 1,948,451,528 95.71 87,313,483 4.29 2,035,765,011 6,608,034
Statement of implementation in 2020 Base salary Executive Directors’ remuneration packages were reviewed in 2019 with changes effective from 1 January 2020. When the Committee took these decisions, it considered the salary increases awarded to other employees in 2019 and the expected increases in 2020. The external market reference points used to provide context to the Committee were similar to those used for 2019 salaries.
All Executive Directors received a salary increase of 2 per cent. The 2020 salary increase budgets for other employees across the Group’s business units were between 2.5 per cent and 5.1 per cent.
Pension entitlements from 2020 As set out in the Annual statement from the Chairman of the Remuneration Committee, externally or internally-recruited Executive Directors appointed on or after the date of the 2020 AGM will be offered pension benefits of 13 per cent of salary, aligned with the employer pension contribution available to the UK workforce and broadly reflecting the pension benefits for the workforce in locations across Asia and the US. The Committee intends to reduce incumbent Executive Directors’ pension benefits from 25 per cent to 20 per cent of salary on the following basis: — From 14 May 2020 (the effective date of the new policy), incumbent Executive Directors’ pension benefits will be reduced to 22.5 per cent of base salary; and
— From 14 May 2021, incumbent Executive Directors’ pension benefits will be reduced to 20 per cent of base salary.
In addition, statutory contributions will continue to be made into mandatory pension arrangements in the country in which the Executive Directors are based, in line with the local requirements.
Annual bonus No changes have been made to the bonus opportunities for Executive Directors for 2020.
In recent years, bonuses for the Group Chief Risk and Compliance Officer have been based entirely on a combination of personal and functional measures, an approach aligned with Solvency II remuneration requirements under the PRA. In 2020 the Committee has introduced a financial element in the bonus for the Group Chief Risk and Compliance Officer. The 2020 bonus for this role will be based on 40 per cent Group financial measures, 40 per cent functional objectives and 20 per cent personal measures. This is in line with the current draft of the Hong Kong IA’s guideline on the remuneration of key persons in control functions. It reflects the Committee’s view that it is important that this role and other control function staff continue to demonstrate long-term commercial sensitivity and are rewarded in a way which allows the Company to recruit the very best talent to these roles.
AIP payments for all Executive Directors have been previously subject to meeting Solvency II minimum capital thresholds which were aligned to the Group and business unit risk framework and appetites (as adjusted for any Group Risk Committee and/or business unit risk committees approved counter-cyclical buffers). This will be replaced with LCSM minimum capital thresholds aligned to the Group and business unit framework and appetites. No other changes have been made to the bonus performance measures and weightings for the other Executive Directors.
2020 share-based long-term incentive awards Award levels No change to the PLTIP award levels of the Group Chief Executive of 400 per cent of base salary or the Group Chief Risk and Compliance Officer of 250 per cent of base salary are proposed. In recognition of Mark FitzPatrick’s expanded role and responsibilities in 2019, together with the Board’s view of his strong performance, potential and criticality to the Group, the Committee intends to increase the value of his long-term incentive award within the current policy limit for 2020 to 300 per cent of base salary (from 250 per cent at present). This approach is also considered to support the promotion of stewardship and long-term focus.
Performance conditions The post-demerger Prudential Group is focused on capturing the structural growth opportunity across the Asian and African markets under Prudential Corporation Asia, its Asian business unit. In the US, its business unit, Jackson, will seek to benefit from the growing retirement market and to provide enhanced cash generation to the post-demerger Prudential Group.
The Executive Directors’ long-term incentive awards will continue to be made under the PLTIP. The Company will look to build long-term shareholder value by continuing to focus on achieving sustainable, profitable growth and retaining a resilient balance sheet, with a disciplined approach to active capital allocation. As set out in the 2018 Directors’ remuneration report and following our conversations with investors last year, the vesting of the major part of 2019 awards under the PLTIP is dependent on the achievement of a relative TSR target. As also indicated in last year’s report, this was appropriate in the context of the demerger and the Committee intended to develop performance measures for 2020 and subsequent years in light of the evolving priorities of the business.
The proportion of 2020 long-term incentive awards which will vest for threshold performance will remain at 20 per cent. This level of threshold vesting is formalised in the proposed 2020 Directors’ remuneration policy.
Since these measures are in line with the remuneration requirements for control staff under the draft Hong Kong IA Corporate Governance Guideline, the weightings of the Group Chief Risk and Compliance Officer’s PLTIP performance targets will be the same as that of the other Executive Directors.
Operating return on average shareholders’ funds Operating return on average shareholders’ funds is calculated as adjusted IFRS operating profit based on longer-term investment returns (‘adjusted operating profit’) after tax and net of non-controlling interests divided by average shareholders’ funds, is assessed at Group level. 20 per cent of the award will vest for achieving the threshold level of performance of 16.7 per cent, increasing to full vesting for reaching the stretch level of at least 22.9 per cent.
Sustainability scorecard Under the 2020 sustainability scorecard, performance will be assessed for each of the four measures, at the end of the three-year performance period. Performance will be assessed on a sliding scale. Each of the measures has equal weighting and the 2020 measures are set out below: Capital measure: Cumulative three-year ECap Group operating capital generation relative to plan, less cost of capital (based on the capital position at the start of the performance period).
Capital measure: Cumulative three-year LCSM operating capital generation relative to plan
Vesting basis: 20 per cent vesting for achieving Plan, increasing to full vesting for performance above stretch level. The plan figure for this metric will be published in the Annual Report for the final year of the performance period.
Vesting basis: 20 per cent vests for meeting the threshold of at least 27 per cent of our Leadership Team being female at the end of 2022, increasing to full vesting for reaching the stretch level of at least 33 per cent being female at that date.
Chairman and Non-executive Directors Fees for the Chairman and Non-executive Directors were reviewed in 2019 with changes effective from 1 July 2019, as set out under the ‘Chairman and Non-executive Director remuneration in 2019’ section. The next review will be effective 1 July 2020. Fees for the Chairman will be paid in US dollars from May 2020.
As discussed in the Annual statement from the Chairman of the Remuneration Committee, the current policy has operated as intended. Full details of the existing policy can be found on pages 135 to 150 of the 2016 Annual Report or on our website at www.prudentialplc.com/investors/governance-and-policies/directors-remuneration-policy
During 2019, the Committee reviewed the policy, taking into account the demerger, the views of our shareholders, the new UK Corporate Governance Code, evolving market practice and the broader regulatory and competitive environment. It also considered workforce remuneration and related policies in the business units across the Group, including how the Company’s incentive arrangements are aligned with culture. Input was sought from the management team, while ensuring that conflicts of interest were suitably mitigated.
— Foster alignment between the remuneration of executives and the wider workforce.
— External factors such as economic conditions and market data, taking into account the geographies and markets in which the Company operates.
Annual salary increases for Executive Directors will normally be in line with the increases for other employees unless there is a change in role or responsibility.
In addition, Executive Directors may receive statutory contributions to mandatory pension arrangements in the country in which they are based in line with local requirements.
In addition, statutory contributions will be made to mandatory pension arrangements in the country in which the Executive Directors are based, in line with the local requirements.
The Committee has the authority to apply clawback and/or a malus adjustment to all, or a portion of, the cash and deferred award elements of the bonus. More details about clawback and malus are set out below. See the ‘Policy on corporate transactions’ section for details of the Committee’s powers in the case of corporate transactions.
In assessing financial performance, the Committee determines the AIP award for each Executive Director with reference to the performance achieved against approved performance ranges.
In assessing performance, the Committee will take into account the personal performance of the Executive Director and the Group’s risk framework and appetite, as well as other relevant factors. To assist them in their assessment the Committee considers advice from the Group Risk Committee on adherence to the Group’s risk framework and appetite and to all relevant conduct standards.
Opportunity The maximum AIP opportunity is up to 200 per cent of salary for Executive Directors. Annual awards are disclosed in the relevant Annual report on remuneration.
The Committee has the discretion, for each Executive Director, to determine the specific performance conditions attached to each AIP cycle and to set annual targets for these measures with reference to the business plans approved by the Board. The financial measures used for the AIP will typically include profit and cash flow targets and payments depend on the achievement of minimum capital thresholds and operation within the Board approved risk framework and appetite. For the measures to be used in 2020, please refer to the Annual report on remuneration.
The weightings of the performance measures for 2020 for all Executive Directors, other than the Group Chief Risk and Compliance Officer, are 80 per cent Group financial measures and 20 per cent personal measures. For the Group Chief Risk and Compliance Officer, the weightings of performance measures for 2020 are 40 per cent Group financial measures, 40 per cent functional objectives and 20 per cent personal measures.
Amendments The Committee may make amendments to the rules of the deferred bonus plan which it considers appropriate (such as amendments which benefit the administration of the plan) but it will not make any amendments which are incompatible with the approved Directors’ remuneration policy.
In determining awards under the AIP, the Committee retains the discretion to adjust the formulaic outcome against any or all measures if it considers that the outcome does not reflect the underlying financial or nonfinancial performance of the participant or any member of the Group over the performance period and/or there exists any other reason why an adjustment is appropriate, taking into account such factors as the Committee considers relevant.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 177
Prudential Long Term Incentive Plan (PLTIP) The Prudential Long Term Incentive Plan is designed to incentivise the delivery of: — Longer-term business plans; — Sustainable long-term returns for shareholders; and
Prudential’s policy is that Executive Directors may receive long-term incentive awards with full vesting only achieved if the Company meets stretching performance targets.
Holding period Awards made under this Policy are normally subject to a holding period which ends on the fifth anniversary of the award (except for buyout awards made under the PLTIP or, for example, in the case of the death of an executive).
The Company may sell such number of shares as is required to satisfy any tax liability that arises on vesting. The balance of shares will be subject to the holding period.
In 2020, the Committee intends to make awards at the following levels under the PLTIP (as a percentage of base salary): Group Chief Executive 400 per cent
Group Chief Financial Officer and Chief Operating Officer 300 per cent
The Committee may decide to attach different performance conditions and/or change the conditions’ weighting for future PLTIP awards. The performance conditions attached to each award will be disclosed in the relevant Annual report on remuneration.
Relative TSR is measured over three years. 20 per cent of this portion of each award will vest for achieving the threshold level of median, increasing to full vesting for meeting the stretch level of upper quartile. TSR is measured against a peer group of international insurers similar to Prudential in size, geographic footprint and products. The peer group for each award is disclosed in the relevant Annual report on remuneration.
Three year cumulative Return on Equity, defined as Operating return on average shareholder funds, calculated as adjusted IFRS operating profit based on longer-term investment returns (‘adjusted operating profit’) after tax and net of non-controlling interests divided by average shareholder funds, is assessed at Group level. Threshold and maximum achievement levels will be set at the beginning of the performance periods in line with the three-year business plan. 20 per cent of this portion of the award will vest for achieving threshold performance increasing to full vesting for meeting stretch targets.
The Committee also considers advice from the Group Risk Committee on whether results were achieved within the Group’s and business units’ risk framework and appetite and to all relevant conduct standards.
Examples of such events could include a change in strategy, a material acquisition and/or divestment of a Group business or a change in the share capital of the Company, a change in the requirements of the Company’s regulators or a change in prevailing market conditions. The Committee would seek to consult with major shareholders before revising performance conditions on outstanding awards under the PLTIP.
It is the intention of the Committee that PLTIP awards should normally reflect the outcomes of performance measures set. However, the Committee may, in its discretion, adjust (including by reducing to nil) the formulaic outcome under the PLTIP if it considers that: (i) the extent to which any performance condition has been met does not reflect the underlying financial or non-financial performance of the participant or any member of the Group over the performance period; or
(ii) there exists any other reason why an adjustment is appropriate, taking into account such factors as the Committee considers relevant, including the context of circumstances that were unexpected or unforeseen at the date of grant.
Under the Articles of Association, all Executive Directors are required to hold at least 2,500 shares and have one year, from their date of appointment to the Board, to acquire these.
Should an Executive Director not meet the share ownership guidelines, the Remuneration Committee retains the discretion to determine how this should be addressed, taking account all of the prevailing circumstances. In the absence of mitigating circumstances, if an Executive Director fails to comply with the share ownership guideline in the required timeframe and has not (in the opinion of the Remuneration Committee) taken reasonable steps to achieve compliance, despite encouragement to do so, then the Remuneration Committee may take steps including preventing the individual from selling shares/ADRs or mandating the use of any cash bonuses to buy Prudential plc shares/ADRs.
When an Executive Director leaves the Board, they will be required to hold the lower of their actual shareholding on the date of their retirement from the Board and their in-employment share ownership guideline for a period of two years.
The Committee has the discretion to disapply or reduce this requirement in extenuating circumstances, for example if the Executive Director takes up a role with a Regulator or for compassionate reasons (such as genuine financial hardship or on death).
Where a business decision taken during the performance period by the business which the participant leads has resulted in a material breach of any law, regulation, code of practice or other instrument that applies to companies or individuals within the business.
Where an individual’s personal conduct during the relevant performance period has resulted in the Company, or any member of the Group, suffering significant reputational or financial damage; the potential to cause significant reputational or financial damage; and/or the material breach of the Group’s business code of conduct or law.
Clawback Allows cash and share awards, including shares subject to the holding period, to be recovered before or after release in certain circumstances.
The Committee may approve payments or awards in excess of, in a different form to, or calculated or delivered other than as described above, where the Committee considers such changes necessary or appropriate in light of regulatory requirements. If these changes are considered by the Committee to be material, the Company will seek to consult with its major shareholders.
Determining the performance measures The Committee selected the performance measures that currently apply to variable pay plans on the following basis: AIP The performance measures are selected to incentivise the delivery of the Group’s business plan, specifically to ensure that financial objectives are delivered while maintaining adequate levels of capital. Executives are also rewarded for the achievement of functional and/or personal objectives. These objectives include the executive’s contribution to Group strategy as a member of the Board, achievement of the Group’s strategic priorities and, for the Group Chief Risk and Compliance Officer, specific goals related to the Risk and Compliance function.
— Relative TSR was selected as a performance measure because it focuses on the value delivered to shareholders – aligning the long-term interests of shareholders with those of executives.
The Committee may decide to attach different performance conditions and/or change the conditions’ weighting for future PLTIP awards.
Setting the performance ranges for financial targets Where variable pay has performance conditions based on business plan measures (for example the financial metrics of the AIP and the Return on Equity element of the PLTIP) the performance ranges are set by the Committee prior to, or at the beginning of, the performance period. Performance is based on the annual and longer-term plans approved by the Board. These reflect the long-term ambitions of the Group and business units, in the context of anticipated market conditions.
Wherever possible, the targets attached to long-term incentive awards will be disclosed prospectively at the time of the award. Where long-term incentive targets are commercially sensitive, they will be published in the Annual Report for the final year of the performance period.
Legacy payments The Committee reserves the right to make any remuneration payments and/or payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the policy set out above where the terms of the payment were agreed (i) before 15 May 2014 (the date the Company’s first shareholder-approved Directors’ remuneration policy came into effect); (ii) before this policy came into effect, provided that the terms of the payment were consistent with the shareholder-approved Directors’ remuneration policy in force at the time they were agreed; or (iii) at a time when the relevant individual was not a Director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming or having been a Director of the Company. For these purposes ‘payments’ includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ’agreed’ at the time the award is granted.
References to ‘shares’ In this policy, references to shares include American Depositary Receipts (ADRs). Directors may receive awards denominated in ADRs rather than shares.
The Committee is satisfied that the maximum potential remuneration of the Executive Directors is appropriate. Prudential’s policy is to offer Executive Directors remuneration which reflects the performance and experience of the executive, internal relativities and Group financial and non-financial performance. In order for the maximum total remuneration to be payable: — Financial performance must exceed the Group’s stretching business plan; — Relative TSR must be at or above the upper quartile relative to the peer group; — The sustainability scorecard, aligned to the Group’s strategic priorities, must be fully satisfied; — Functional and personal performance objectives must be fully met; and
— Performance must be achieved within the Group’s risk framework and appetite.
No PLTIP vesting. Vesting of 60% of award under PLTIP (midway between threshold and maximum)
Vesting of 100% of award under PLTIP plus share price growth of 50 per cent over three years.
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The benefits for a new Executive Director will be consistent with those outlined in the fixed pay policy table.
If an externally-appointed Executive Director forfeits one or more bonuses (including outstanding deferred bonuses) on leaving a previous employer, these payments or awards may be replaced in either cash, Prudential shares or options over Prudential shares with an award of an equivalent value. Replacement awards will normally be released on the same schedule as the foregone bonuses.
If an externally-appointed Executive Director forfeits one or more long-term incentive awards on leaving a previous employer, these may be replaced with Prudential awards with an equivalent value. Replacement awards will generally be made under the terms of a long-term incentive plan approved by shareholders, and vest on the same schedule as the foregone awards. Where foregone awards were subject to performance conditions, performance conditions will normally be applied to awards replacing foregone long-term incentive awards; these will usually be the same as those applied to the long-term incentive awards made to Prudential executives in the year in which the forfeited award was made.
The Company is required to give to, and to receive from, each of the current Executive Directors 12 months’ notice of termination. An Executive Director whose contract is terminated would be entitled to 12 months’ salary and benefits in respect of their notice period. The payment of the salary and benefits would either be phased over the notice period or, alternatively, a payment in lieu of notice may be made.
Should an executive die, their estate would not be entitled to receive payments and benefits in respect of their notice period – provisions are made under the Company’s life assurance scheme to provide for this circumstance.
Should an Executive Director step down from the Board but remain employed by the Group, they would not receive any payment in lieu of notice in respect of their service as a Director.
The treatment of outstanding deferred bonuses will be decided by the Committee taking into account the circumstances of the departure including the performance of the Executive Director.
Any Executive Director dismissed for cause would forfeit all outstanding deferred bonus awards.
The treatment of unvested long-term incentives will be decided by the Committee taking into account the circumstances of the departure including the performance of the Executive Directors.
Where an Executive Director is determined to be a good leaver, unvested long-term incentive awards will normally subsist. These awards will ordinarily be pro-rated based on time employed, will vest on the original timescale and will remain subject to the original performance conditions assessed over the entire performance period.
Where an individual is not determined to be a good leaver, unvested long-term incentive awards will lapse on cessation of employment.
Prior to release, awards remain subject to the malus and clawback terms and holding periods originally applied to them.
If the Committee has judged that the departing Executive Director should retain their unvested long-term incentive awards with the expectation that: (i) the Executive Director is retiring from their professional executive career; and/or
(ii) the Executive Director will not be seeking to secure alternative employment with another organisation of comparable size as the Company or that is within the financial services sector the Committee retains the power to lapse all unvested long-term incentive awards should the Committee deem that the Executive Director has secured similar paid executive employment elsewhere.
On death, disablement and in other exceptional circumstances, the Committee has discretion to release unvested long-term incentive awards earlier than the end of the vesting period. The malus and clawback provisions will continue to apply.
Should an Executive Director step down from the Board but remain employed by the Group, an executive would retain any outstanding long-term incentive awards which they held on their change of role. These awards would remain subject to the original rules, performance conditions and vesting schedule.
Executive Directors will normally retain their vested long-term incentive awards that remain subject to the holding period. Normally these awards will be released in accordance with the original timescale and will remain subject to the holding period.
On death, disablement and in other exceptional circumstances, the Committee has discretion to release vested long-term incentive awards earlier than the end of the holding period. The malus clawback provisions will continue to apply.
Other payments Consistent with other employees, Executive Directors may receive payments to compensate them for the loss of employment rights on termination. Payments may include: — A nominal amount for agreeing to non-solicitation and confidentiality clauses; — Directors and Officers insurance cover for a specified period following the executives’ termination date; — Payment for outplacement services; — Reimbursement of legal fees; and
Further details are included in the section on ‘Share ownership guidelines for Executive Directors’.
— Lapse and, in exchange, the participant will be granted an award under any other share or cash incentive plan which the Committee considers to be broadly equivalent to the award.
Statement of consideration of conditions elsewhere in the Company Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their local market and given their individual skills, experience and performance. Each business unit’s salary increase budget is set with reference to local market conditions. The Committee considers salary increase budgets across the workforce when determining the salaries of Executive Directors.
Statement of consideration of shareholder views The Committee and the Company undertake regular consultation with key institutional investors on the Directors’ remuneration policy and implementation. This engagement is led by the Committee Chairman and is an integral part of the Company’s investor relations programme. The Committee is grateful to shareholders for the feedback that is provided and takes this into account when determining executive remuneration.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 187
Should a new committee be formed, or the remit of an existing committee be materially expanded, the new or additional fees paid for the chairmanship or membership of the committee will be commensurate with the new or additional responsibilities and time commitment involved.
Non-executive Directors do not currently receive benefits or a pension allowance or participate in the Group’s employee pension schemes.
Non-executive Directors will normally be expected to attain this level of share ownership within three years of their date of appointment.
In determining the level of the fee for the Chairman the Committee considers: — The time commitment and other requirements of the role; — The performance and experience of the Chairman; — Internal relativities; — Company financial performance; and
Alignment to culture Executive Directors recruited externally or internally from the date of the 2020 AGM will be offered pension benefits of 13 per cent of salary, aligned with the employer pension contribution available to the UK workforce. For existing Directors, pension benefits will be reduced from 25 per cent to 20 per cent of salary by May 2021.
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Clarity The Committee has consulted with the Company’s largest shareholders and their advisers on the changes to the policy and executive pay decisions before they are implemented.
Proportionality There are no incentive awards for below threshold performance. Financial targets are set against the Board approved Plan.
Under the PLTIP, 20 per cent of each portion of the award will vest for achieving threshold performance.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 193
Other share awards The table below sets out Executive Directors’ deferred bonus share awards: Year of grant
James Turner Deferred 2015 group deferred bonus plan award 2016 5,440 5,440 – 31 Dec 18 01 Apr 19 1279 1557
Deferred 2018 annual incentive award 2019 20,605 664 3,291 24,560 31 Dec 21 1605.5
Deferred 2016 annual incentive award 2017 54,060 1,744 8,636 64,440 31 Dec 19 1672
Deferred 2017 annual incentive award 2018 48,664 1,570 7,774 58,008 31 Dec 20 1750
Notes 1 A dividend equivalent was accumulated on these awards. 2 The table above reflects the adjustments made to outstanding awards at the time of the demerger.
Details of Executive Directors’ rights under the SAYE scheme are set out in the ‘Outstanding share options’ table.
Share Incentive Plan awards held in Trust at 1 Jan 2019 (Number of shares)
Share Incentive Plan awards held in Trust at 31 Dec 2019
Dilution Releases from the Prudential Long Term Incentive Plan and the Prudential Agency Long Term Incentive Plan are satisfied using new issue shares rather than by purchasing shares in the open market. Shares relating to options granted under all-employee share plans are also satisfied by new issue shares. The combined dilution from all outstanding shares and options at 31 December 2019 was 1 per cent of the total share capital at the time. Deferred bonus awards will continue to be satisfied by the purchase of shares in the open market.
Of the five individuals with the highest emoluments in 2019, one was an Executive Director for the full year whose emoluments are disclosed in this report. The aggregate of the emoluments of the other four individuals for 2019 were are set out in the table below. In light of a change to the Board’s definition of senior management during 2019, senior management comprised the Executive Directors, plus from 1 August 2019, members of the Group Executive Committee. The table sets outs the aggregate of the emoluments paid to the senior management team: Components of remuneration
Payments made on appointment 49,505 4,950 49,505 4,950 Payments made on separation 62,681 6,267 – –
Primary statements Consolidated income statement 199 Consolidated statement of comprehensive income 200 Consolidated statement of changes in equity 201 Consolidated statement of financial position 203 Consolidated statement of cash flows 204
Notes to the primary statements A Basis of preparation and accounting policies A1 Basis of preparation and exchange rates 205 A2 Discontinued operations 206 A3 New accounting pronouncements in 2019 206 A4 Accounting policies 208
B1.4 Segmental income statement 225 B1.5 Other investment return 227 B1.6 Additional analysis of performance by segment components
B4 Tax charge from continuing operations 233 B4.1 Total tax charge by nature of expense 234 B4.2 Reconciliation of shareholder effective tax rate 235
C3 Assets and liabilities C3.1 Group assets and liabilities – measurement 244 C3.2 Debt securities 250 C3.3 Loans portfolio 255 C3.4 Financial instruments – additional information 256
C7.1 Group overview 282 C7.2 Asia insurance operations 283 C7.3 US insurance operations 285 C7.4 Asset management and other operations 289
D Other information D1 Gain (loss) on disposal of business and corporate transactions
Continuing operations: Gross premiums earned 45,064 45,614 Outward reinsurance premiums (1,583) (1,183)
Benefits and claims C4.1(iii) (85,475) (26,518) Reinsurers’ share of benefits and claims C4.1(iii) 2,985 1,598 Movement in unallocated surplus of with-profits funds C4.1(iii) (1,415) 1,494
Acquisition costs and other expenditure B2 (7,283) (8,527) Finance costs: interest on core structural borrowings of shareholder-financed businesses (516) (547) (Loss) on disposal of businesses and corporate transactions D1.1 (142) (107)
Share of profit from joint ventures and associates net of related tax D7 397 319
Profit before tax attributable to shareholders’ returns B1.1 1,922 3,450 Total tax charge attributable to shareholders’ and policyholders’ returns B4.1 (334) (676) Remove tax charge attributable to policyholders’ returns 365 107 Tax credit (charge) attributable to shareholders’ returns B4.1 31 (569)
Attributable to: Equity holders of the Company From continuing operations 1,944 2,877 From discontinued operations (1,161) 1,142 Non-controlling interests from continuing operations 9 4
Based on profit attributable to equity holders of the Company: B5
Basic Based on profit from continuing operations 75.1¢ 111.7¢ Based on (loss) profit from discontinued operations (44.8)¢ 44.3¢
Diluted Based on profit from continuing operations 75.1¢ 111.7¢ Based on (loss) profit from discontinued operations (44.8)¢ 44.3¢
Note This measure is the formal profit before tax measure under IFRS. It is not the result attributable to shareholders principally because total corporate tax of the Group includes those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the IFRS profit before tax measure is not representative of pre-tax profit attributable to shareholders as it is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of with-profits funds after adjusting for tax borne by policyholders.
Valuation movements on available-for-sale debt securities: Net unrealised gains (losses) on holdings 4,208 (2,144) Deduct net gains included in the income statement on disposal and impairment (185) (15)
Total items that will not be reclassified to profit or loss (89) 21
Total comprehensive income for the year 6,390 1,961 * The 2018 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars (as described in note A1) and the reclassification of the Group’s UK and Europe operations as discontinued operations in 2019 (as described in note A2).
Shareholders’ share of actuarial gains and losses on defined benefit pension schemes net of related tax – – (89) – – (89) – (89)
Total other comprehensive income (loss) from continuing operations – – (89) 135 2,679 2,725 2 2,727
Demerger dividend in specie of M&G plc B6.1 – – (7,379) – – (7,379) – (7,379)
Reserve movements in respect of share-based payments – – 64 – – 64 – 64 Change in non-controlling interests – – – – – – 158 158 Movements in respect of option to acquire non-controlling interests – – (143) – – (143) – (143)
Net increase (decrease) in equity 6 123 (8,242) 2,943 2,679 (2,491) 169 (2,322) Balance at beginning of year 166 2,502 21,817 (2,050) (467) 21,968 23 21,991
Reserves Profit from continuing operations – – 2,877 – – 2,877 4 2,881 Other comprehensive income (loss) from continuing operations: Exchange movements on foreign operations and net investment hedges net of related tax – – – (33) – (33) 1 (32)
Shareholders’ share of actuarial gains and losses on defined benefit pension schemes net of related tax – – 21 – – 21 – 21
Total comprehensive income (loss) from continuing operations – – 2,898 (33) (1,446) 1,419 5 1,424
Total comprehensive income (loss) for the year – – 4,116 (714) (1,446) 1,956 5 1,961
Reserve movements in respect of share-based payments – – 92 – – 92 – 92 Change in non-controlling interests – – – – – – 9 9 Movements in respect of option to acquire non-controlling interests – – (146) – – (146) – (146)
Share capital and share premium New share capital subscribed C10 1 22 – – – 23 – 23 Impact of change in presentation currency in relation to share capital and share premium C10 (10) (155) – – – (165) – (165)
Net increase (decrease) in equity (9) (133) 2,508 (714) (1,446) 206 14 220 Balance at beginning of year 175 2,635 19,309 (1,336) 979 21,762 9 21,771
Balance at end of year 166 2,502 21,817 (2,050) (467) 21,968 23 21,991 * The 2018 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars (as described in note A1) and the reclassification of the Group’s UK and Europe operations as discontinued operations in 2019 (as described in note A2).
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Assets held for sale – 13,472 51 Cash and cash equivalents 6,965 15,442 14,461
The parent company statement of financial position is presented on page 310.
(iii) The Group has adopted a change in its presentation currency from pounds sterling to US dollars at 31 December 2019 as described in note A1. Accordingly, the 31 December 2018 and 1 January 2018 comparative statements of financial position and the 2018 related notes have been re-presented retrospectively from the previously published results. As a result of this change, the statement of financial position as at 1 January 2018 has been re-presented in accordance with IAS 1.
(iv) The 31 December 2018 and 1 January 2018 comparative statements of financial position included discontinued UK and Europe operations.
Cash flows from investing activities Purchases of property, plant and equipment C13 (64) (134) Acquisition of business and intangibles note (i) (635) (442) Disposal of businesses 375 –
Cash flows from financing activities Structural borrowings of shareholder-financed operations: note (ii) C6.1
Issue of subordinated debt, net of costs 367 2,079 Redemption of subordinated debt (504) (553) Fees paid to modify terms and conditions of debt issued by the Group (182) (44) Interest paid (526) (502)
Equity capital: Issues of ordinary share capital 22 23 External dividends (1,634) (1,662)
Comprising: Cash and cash equivalents from continuing operations 6,965 9,394 Cash and cash equivalents from discontinued operations D2 – 6,048 * The 2018 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars (as described in note A1) and the reclassification of the Group’s UK and Europe operations as discontinued operations in 2019 (as described in note A2).
Notes (i) Cash flows arising from the acquisition of business and intangibles includes amounts paid for distribution rights. (ii) Structural borrowings of shareholder-financed businesses exclude borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed businesses and other borrowings of shareholder-financed businesses. Cash flows in respect of these borrowings are included within cash flows from operating activities. The changes in the carrying value of the structural borrowings of shareholder-financed businesses for the Group are analysed in note C6.1.
(iii) The cash flows shown above are presented excluding any transactions between continuing and discontinued operations.
Foreign exchange translation In�order�to�present�the�consolidated�financial�statements�in�US�dollars,�the�results�and�financial�position�of�entities�not�using�US�dollars�as� functional�currency�(ie�the�currency�of�the�primary�economic�environment�in�which�the�entity�operates)�must�be�translated�into�the�US� dollars.�The�general�principle�for�converting�foreign�currency�transactions�is�to�translate�at�the�functional�currency�spot�rate�prevailing�at� the�date�of�the�transactions.�This�includes�external�dividends�determined�and�paid�to�shareholders�in�pounds�sterling.�Prudential�will� determine�and�declare�its�dividend�in�US�dollars�commencing�with�dividends�paid�in�2020,�including�the�2019�second�interim�dividend.� All�assets�and�liabilities�of�entities�not�operating�in�US�dollars�are�converted�at�closing�exchange�rates�while�all�income�and�expenses�are� converted�at�average�exchange�rates�where�this�is�a�reasonable�approximation�of�the�rates�prevailing�on�transaction�dates.�The�impact�of� these�currency�translations�is�recorded�as�a�separate�component�in�the�statement�of�comprehensive�income.�At�31�December�2019�the� functional�currency�of�the�Group’s�parent�company�changed�to�US�dollars.�The�Group�and�parent�company�have�chosen,�for� presentational�purposes,�to�retranslate�their�share�capital�and�share�premium�as�at�31�December�2019�using�the�closing�exchange�rate�as� at�that�date,�and�comparative�amounts�at�the�relative�closing�exchange�rates.�The�foreign�exchange�adjustments�arising�on�the�share� capital�and�share�premium�balances�of�$2,797�million�(31�December�2018:�$2,668�million)�adjust�the�translation�reserve�movement�in�the� statement�of�other�comprehensive�income.�As�this�amount�arises�on�the�translation�of�the�parent�company’s�share�capital�and�share� premium,�the�corresponding�impact�to�the�currency�translation�reserve�of�$980�million�will�never�be�recycled�on�disposal�of�any�foreign� operations.
IFRS 16 operating lease liability on an undiscounted basis 1,165 Difference�in�lease�rental�payments�due�to�probable�renewals�or�early�termination�decisions�reflected�above (48) Other (6)
Total operating lease commitments at 31 December 2018* 1,111 *�As�disclosed�in�note�D5�of�the�Group’s�IFRS�financial�statements�for�the�year�ended�31�December�2018�and�after�excluding�$76�million�for�the�amount�relating�to�certain�lease� commitments�from�the�central�operations�to�the�discontinued�UK�with-profits�fund.��
A4.1 Critical accounting policies, estimates and judgements The�preparation�of�these�financial�statements�requires�Prudential�to�make�estimates�and�judgements�about�the�amounts�of�assets,� liabilities,�revenues�and�expenses,�which�are�both�recognised�and�unrecognised�(eg�contingent�liabilities)�in�the�primary�financial� statements.�Prudential�evaluates�its�estimates,�including�those�related�to�long-term�business�provisioning�and�the�fair�value�of�assets�as� required.�The�notes�below�set�out�those�critical�accounting�policies,�the�application�of�which�requires�the�Group�to�make�critical�estimates� and�judgements.�Also�set�out�are�further�critical�accounting�policies�affecting�the�presentation�of�the�Group’s�results�and�other�items�that� require�the�application�of�critical�estimates�and�judgements.
Unallocated�surplus�of�with-profits�funds�represents�the�excess�of�assets�over� policyholder�liabilities�determined�in�accordance�with�the�Group’s�accounting�policies�and� based�on�local�GAAP�for�the�Group’s�with-profits�funds�in�Hong�Kong,�Malaysia�and,�up�to� its�demerger,�the�UK�and�Europe�operations�that�have�yet�to�be�appropriated�between� policyholders�and�shareholders.�The�unallocated�surplus�is�recorded�wholly�as�a�liability� with�no�allocation�to�equity.�The�annual�excess�or�shortfall�of�income�over�expenditure�of� the�with-profits�funds,�after�declaration�and�attribution�of�the�cost�of�bonuses�to� policyholders�and�shareholders,�is�transferred�to�or�from�the�unallocated�surplus�each� period�through�a�charge�or�credit�to�the�income�statement.�The�balance�retained�in�the� unallocated�surplus�represents�cumulative�income�arising�on�the�with-profits�business�that� has�not�been�allocated�to�policyholders�or�shareholders.�The�balance�of�the�unallocated� surplus�is�determined�after�full�provision�for�deferred�tax�on�unrealised�appreciation�or� depreciation�on�investments.
Jackson’s�liabilities�for�insurance�contracts,�which�include�those�for�separate�accounts� (reflecting�separate�account�assets),�policyholder�account�values�and�guarantees� measured�as�described�in�note�C4.2�and�the�associated�deferred�acquisition�cost�asset,� are�measured�under�US�GAAP�and�liability�adequacy�testing�is�performed�in�this�context.� Under�US�GAAP,�most�of�Jackson’s�products�are�accounted�for�under�Accounting� Standards�Codification�Topic�944,�Financial�Services�–�Insurance�of�the�Financial� Accounting�Standards�Board�(ASC�944)�whereby�deferred�acquisition�costs�are�amortised� in�line�with�expected�gross�profits.�Recoverability�of�the�deferred�acquisition�costs�in�the� balance�sheet�is�tested�against�the�projected�value�of�future�profit�using�current�estimates� and�therefore�no�additional�liability�adequacy�test�is�required�under�IFRS�4.�The�deferred� acquisition�cost�asset�recoverability�test�is�performed�in�line�with�US�GAAP�requirements,� which�in�practice�is�at�a�grouped�level�of�those�contracts�managed�together.
Measurement and presentation of derivatives and debt securities of US insurance operations (Jackson)
Assets held at amortised cost When�assets�held�at�amortised�cost�are�subject�to�impairment�testing,�estimated�future� cash�flows�are�compared�to�the�carrying�value�of�the�asset.�In�estimating�future�cash�flows,� the�Group�looks�at�the�expected�cash�flows�of�the�assets�and�applies�historical�loss� experience�of�assets�with�similar�credit�risks�that�has�been�adjusted�for�conditions�in�the� historical�loss�experience�which�no�longer�exist,�or�for�conditions�that�are�expected�to� arise.�The�estimated�future�cash�flows�are�discounted�using�the�financial�asset’s�original�or� variable�effective�interest�rate�and�exclude�credit�losses�that�have�not�yet�been�incurred.�
A4.2 New accounting pronouncements not yet effective The�following�standards,�interpretations�and�amendments�have�been�issued�but�are�not�yet�effective�in�2019,�including�those�which� have�not�yet�been�adopted�in�the�EU.�Following�UK’s�withdrawal�from�the�European�Union,�the�Group�will�continue�to�prepare�these� statements�in�accordance�with�IASB�issued�standards�as�endorsed�by�the�EU�until�the�end�of�the�transition�period�on�31�December�2020.� This�includes�accounting�standards�already�endorsed�by�the�EU�but�not�yet�effective�as�well�as�any�new�or�amended�standards�adopted� by�the�EU�before�the�31�December�2020.�For�financial�years�beginning�after�31�December�2020,�the�Group�will�be�required�to�prepare� financial�statements�in�accordance�with�UK-adopted�international�accounting�standards.�The�Government�is�in�the�process�of� establishing�the�UK�Endorsement�Board�to�undertake�the�work�of�assessing,�endorsing�and�adopting�any�new�or�amended�International� Accounting�Standards�published�by�the�IASB.
When�adopted�IFRS�9�replaces�the�existing�IAS�39�‘Financial�Instruments�–�Recognition�and�Measurement’�and�will�affect�the� following�three�areas: The classification and the measurement of financial assets and liabilities IFRS�9�redefines�the�classification�of�financial�assets.�Based�on�the�way�in�which�the�assets�are�managed�in�order�to�generate�cash�flows� and�their�contractual�cash�flow�characteristics�(whether�the�cash�flows�represent�‘solely�payments�of�principal�and�interest’),�financial� assets�are�classified�into�one�of�the�following�categories:�amortised�cost,�fair�value�through�other�comprehensive�income�(FVOCI)�and�fair� value�through�profit�or�loss�(FVTPL).�An�option�is�also�available�at�initial�recognition�to�irrevocably�designate�a�financial�asset�as�at�FVTPL� if�doing�so�eliminates�or�significantly�reduces�accounting�mismatches.
The calculation of the impairment charge relevant for financial assets held at amortised cost or FVOCI A�new�impairment�model�based�on�an�expected�credit�loss�approach�replaces�the�existing�IAS�39�incurred�loss�impairment�model,� resulting�in�earlier�recognition�of�credit�losses�compared�to�IAS�39.�This�aspect�is�the�most�complex�area�of�IFRS�9�to�implement�and�will� involve�significant�judgements�and�estimation�processes.�The�Group�is�currently�assessing�the�scope�of�assets�to�which�these� requirements�will�apply.
The hedge accounting requirements which are more closely aligned with the risk management activities of the Company No�significant�change�to�the�Group’s�hedge�accounting�is�currently�anticipated,�but�this�remains�under�review.
Financial assets, net of derivative liabilities, on the Group’s statement of financial position at 31 Dec 2019
Derivative�assets,�net�of�derivative�liabilities� – – 1,353 (5,825) Other�investments – – 1,302 44 Deposits 2,615 – – – Cash�and�cash�equivalents 6,965 – – –
Financial assets, net of derivative liabilities, on the Group’s statement of financial position at 31 Dec 2018
Accrued�investment�income 167 – – – Other�debtors 270 – – – Loans 149 – – – Equity�securities�and�holdings�in�collective�investment�schemes – – 4,683 (375) Debt�securities – – 5,409 115 Deposits 452 – – – Cash�and�cash�equivalents 504 – – –
IFRS 17 ‘Insurance Contracts’ In�May�2017,�the�IASB�issued�IFRS�17�‘Insurance�Contracts’�to�replace�the�existing�IFRS�4�‘Insurance�Contracts’.�The�standard,�which�is� subject�to�endorsement�in�the�EU�and�other�regions,�applies�to�annual�periods�beginning�on�or�after�1�January�2021.�In�June�2019,�the� IASB�issued�an�exposure�draft�proposing�amendments�to�IFRS�17�which�includes�a�delay�of�the�effective�date�of�IFRS�17�by�one�year�to� periods�beginning�on�or�after�1�January�2022.�As�a�result�of�comments�on�this�exposure�draft,�the�IASB�redeliberated�on�a�number�of� areas�of�the�IFRS�17�with�an�amended�standard�expected�to�be�issued�in�mid-2020.�The�IASB�staff�have�proposed�that�the�IASB�Board� delay�the�effective�date�by�a�further�year�to�1�January�2023.�The�IASB�will�make�a�decision�on�this�proposal�at�its�16-20�March�2020� meeting.�Early�application�of�IFRS�17�is�permitted�after�the�standard�has�been�endorsed,�provided�the�entity�also�applies�IFRS�9�on�or� before�the�date�it�first�applies�IFRS�17.�The�Group�intends�to�adopt�the�new�standard�on�its�mandatory�effective�date,�alongside�the� adoption�of�IFRS�9.
Profit from continuing operations before tax attributable to shareholders 1,922 3,450 3,466 (44)% (45)%
Based�on�profit�for�the�year�from�continuing�operations B5 75.1¢ 111.7¢ 112.5¢ (33)% (33)% Based�on�(loss)�profit�for�the�year�from�discontinued�operations B5 (44.8)¢ 44.3¢ 42.4¢ (201)% (206)%
Notes (i)� For�definitions�of�AER�and�CER�refer�to�note�A1.� (ii)� Interest�charged�to�the�income�statement�on�debt�that�was�substituted�to�M&G�plc�in�October�2019�for�2019�was�$(179)�million�(2018:�$(128)�million). (iii)� Corporate�expenditure�as�shown�above�is�primarily�for�head�office�functions�in�London�and�Hong�Kong. (iv)� Restructuring�costs�include�group-wide�costs�incurred�for�IFRS�17�implementation�in�2019�from�continuing�operations. (v)� Amortisation�of�acquisition�accounting�adjustments�principally�relate�to�the�REALIC�business�of�Jackson�which�was�acquired�in�2012. (vi)� Tax�charges�have�been�reflected�as�operating�and�non-operating�in�the�same�way�as�for�the�pre-tax�items.�Further�details�on�tax�charges�are�provided�in�note�B4.
B1.2 Short-term fluctuations in investment returns on shareholder-backed business 2019� $m 2018� $m
Asia�operations note (i) 657 (684) US�operations note (ii) (3,757) (134) Other�operations (103) 27
Net�equity�hedge�result note (a) (4,582) (78) Other�than�equity-related�derivatives note (b) 678 (85) Debt�securities note (c) 156 (42) Equity-type�investments:�actual�less�longer-term�return� 18 51 Other�items (27) 20
� The�purpose�of�the�inclusion�of�this�item�in�short-term�fluctuations�in�investment�returns�is�to�segregate�the�amount�included�in�pre-tax�profit�that�relates�to�the�accounting� effect�of�market�movements�on�both�the�value�of�guarantees�in�Jackson’s�variable�annuity�and�fixed�index�annuity�products�and�on�the�related�derivatives�used�to�manage�the� exposures�inherent�in�these�guarantees.�The�level�of�fees�recognised�in�non-operating�profit�is�determined�by�reference�to�that�allowed�for�within�the�reserving�basis.�The� variable�annuity�guarantees�are�valued�in�accordance�with�either�Accounting�Standards�Codification�(ASC)�Topic�820,�Fair�Value�Measurements�and�Disclosures�(formerly�FAS� 157)�or�ASC�Topic�944,�Financial�Services�–�Insurance�(formerly�SOP�03-01)�depending�on�the�type�of�guarantee.�Both�approaches�require�an�entity�to�determine�the�total�fee� (‘the�fee�assessment’)�that�is�expected�to�fund�future�projected�benefit�payments�arising�using�the�assumptions�applicable�for�that�method.�The�method�under�FAS�157�requires� this�fee�assessment�to�be�fixed�at�the�time�of�issue.�As�the�fees�included�within�the�initial�fee�assessment�are�earned,�they�are�included�in�non-operating�profit�to�match�the� corresponding�movement�in�the�guarantee�liability.�Other�guarantee�fees�are�included�in�operating�profit,�which�in�2019�was�$699�million�(2018:�$657�million),�net�of�related� DAC�amortisation.�As�the�Group�applies�US�GAAP�for�the�measured�value�of�the�product�guarantees,�the�net�equity�hedge�result�also�includes�asymmetric�impacts�where�the� measurement�bases�of�the�liabilities�and�associated�derivatives�used�to�manage�the�Jackson�annuity�business�differ.�
Determination of adjusted IFRS operating profit based on longer-term investment returns for investment and liability movements (a) With-profits business For�Asia’s�with-profits�business�in�Hong�Kong,�Singapore�and�Malaysia,�the�adjusted�IFRS�operating�profit�based�on�longer-term� investment�returns�reflects�the�shareholders’�share�in�the�bonuses�declared�to�policyholders.�Value�movements�in�the�underlying�assets� of�the�with-profits�funds�only�affect�the�shareholder�results�through�indirect�effects�of�investment�performance�on�declared�policyholder� bonuses�and�therefore,�do�not�affect�directly�the�determination�of�adjusted�IFRS�operating�profit�based�on�longer-term�investment�returns.
(b) Unit-linked business including the US variable annuity separate accounts The�policyholder�unit�liabilities�are�directly�reflective�of�the�underlying�asset�value�movements.�Accordingly,�the�adjusted�IFRS�operating� profit�based�on�longer-term�investment�returns�reflect�the�current�period�value�movements�in�both�the�unit�liabilities�and�the�backing� assets.
Guaranteed benefit option for variable annuity guarantee minimum income benefit The�GMIB�liability,�which�is�substantially�reinsured,�subject�to�a�deductible�and�annual�claim�limits,�is�accounted�for�using�‘grandfathered’� US�GAAP.�This�accounting�basis�substantially�does�not�recognise�the�effects�of�market�movements.�The�corresponding�reinsurance�asset� is�measured�under�the�‘grandfathered’�US�GAAP�basis�applied�for�IFRS�in�a�manner�consistent�with�IAS�39�‘Financial�Instruments:� Recognition�and�Measurement’,�and�the�asset�is�therefore�recognised�at�fair�value.�As�the�GMIB�is�economically�reinsured,�the�mark�to� market�element�of�the�reinsurance�asset�is�included�as�a�component�of�short-term�fluctuations�in�investment�returns.
(e) Assets backing other shareholder-financed long-term insurance business Except�in�the�case�of�assets�backing�liabilities�which�are�directly�matched�(such�as�unit-linked�business)�adjusted�IFRS�operating�profit� based�on�longer-term�investment�returns�for�assets�backing�shareholder-financed�business�is�determined�on�the�basis�of�expected� longer-term�investment�returns.�Longer-term�investment�returns�comprise�actual�income�receivable�for�the�period�(interest/dividend� income)�and�for�both�debt�and�equity-type�securities�longer-term�capital�returns.�
For�US�insurance�operations,�as�at�31�December�2019,�the�equity-type�securities�for�non-separate�account�operations�amounted�to� $1,481�million�(31�December�2018:�$1,731�million).�For�these�operations,�the�longer-term�rates�of�return�for�income�and�capital�applied� in�the�years�indicated,�which�reflect�the�combination�of�the�average�risk-free�rates�over�the�year�and�appropriate�risk�premiums�are� as�follows: Equity-type�securities�such�as�common�and�preferred�stock�and�portfolio�holdings�in�mutual�funds 5.5% to 6.7% 6.7%�to�7.2% Other�equity-type�securities�such�as�investments�in�limited�partnerships�and�private�equity�funds 7.5% to 8.7% 8.7%�to�9.2%
(f) Fund management and other non-insurance businesses For�these�businesses,�the�determination�of�adjusted�IFRS�operating�profit�based�on�longer-term�investment�returns�reflects�the� underlying�economic�substance�of�the�arrangements.�Generally,�realised�gains�and�losses�are�included�in�adjusted�IFRS�operating�profit� based�on�longer-term�investment�returns�with�temporary�unrealised�gains�and�losses�being�included�in�short-term�fluctuations.�In�some� instances,�realised�gains�and�losses�on�derivatives�and�other�financial�instruments�are�amortised�to�adjusted�IFRS�operating�profit�based� on�longer-term�investment�returns�over�a�time�period�that�reflects�the�underlying�economic�substance�of�the�arrangements.
Acquisition�costs�and�other�operating�expenditure�note B2, (5,157) (1,402) (6,559) (724) (7,283) Interest�on�core�structural�borrowings – (20) (20) (496) (516) Gain�(loss)�on�disposal�of�businesses�and�corporate��
Profit�(loss)�before�tax�(being tax attributable to shareholders’ and policyholders’ returns) note (v) 4,558 (725) 3,833 (1,546) 2,287
B1.6 Additional analysis of performance by segment components (a) Asia 2019� $m 2018� $m
Profit�before�tax�(being tax attributable to shareholders’ and policyholders’ returns) 4,275 283 – 4,558 2,291
shareholder-backed�business 657 – – 657 (684) Amortisation�of�acquisition�accounting�adjustments (5) – – (5) (5) Profit�(loss)�on�disposal�of�businesses�and�corporate�
Benefits�and�claims* (54,734) – – (54,734) (11,736) Acquisition�costs�and�other�operating�expenditure* (1,343) (152) 93 (1,402) (2,773) Interest�on�core�structural�borrowings (20) – – (20) (20) Loss�on�disposal�of�businesses�and�corporate��
Total continuing operations 19,004 21,759 Discontinued UK and Europe operations† 5,672 6,447
(b) Outstanding options and awards The�following�table�shows�the�movement�in�outstanding�options�and�awards�under�the�Group’s�share-based�compensation�plans: Options outstanding under SAYE schemes
Expected�option�life�(years) – 3.96 3.47 – – 3.94 – Weighted�average�exercise�price�(£) – 11.12 11.18 – – 13.94 – Weighted�average�share�price�at�grant�date�(£) 16.07 13.94 13.77 – 17.46 16.64 – Weighted�average�fair�value�at�grant�date�(£) 6.32 2.90 3.35 15.39 6.64 3.29 17.04
Fees�payable�to�the�Company’s�auditor�for�the�audit�of�the�Company’s�annual�accounts 2.2 2.8 Fees�payable�to�the�Company’s�auditor�and�its�associates�for�other�services: Audit�of�subsidiaries�pursuant�to�legislation 9.5 12.3 Audit-related�assurance�services* 5.7 6.3 Other�assurance�services�� 5.7 1.5 Services�relating�to�corporate�finance�transactions 7.3 0.3 All�other�services – 1.2
Prudential is subject to tax in numerous jurisdictions and the calculation of the total tax charge inherently involves a degree of estimation and judgement. Current tax expense is charged or credited based upon amounts estimated to be payable or recoverable as a result of taxable amounts for the current year and adjustments made in relation to prior years. The positions taken in tax returns where applicable tax regulation is subject to interpretation are recognised in full in the determination of the tax charge in the financial statements if the Group considers that it is probable that the taxation authority will accept those positions. Otherwise, provisions are established based on management’s estimate and judgement of the likely amount of the liability, or recovery by providing for the single best estimate of the most likely outcome or the weighted average expected value where there are multiple outcomes.
The total tax charge includes tax expense attributable to both policyholders and shareholders. The tax expense attributable to policyholders comprises the tax on the income of the consolidated with-profits and unit-linked funds. In certain jurisdictions, life insurance companies are taxed on both their shareholders’ profits and on their policyholders’ insurance and investment returns on certain insurance and investment products. Although both types of tax are included in the total tax charge in the Group’s consolidated income statement, they are presented separately in the consolidated income statement to provide the most relevant information about tax that the Group pays on its profits.
based�on�longer-term�investment�returns 436 437 (100) 773 666 Tax�on�non-operating�profit�(loss) 32 (782) (54) (804) (97)
B4.2 Reconciliation of shareholder effective tax rate for continuing operations continued
B6.1 Demerger dividend in specie of M&G plc On�21�October�2019,�following�approval�by�the�Group’s�shareholders,�Prudential�plc�demerged�M&G�plc�its�UK�and�Europe�operations� via�a�dividend�in�specie.�As�required�by�IFRIC�17�‘Distributions�of�Non-cash�Assets�to�Owners’,�the�dividend�has�been�recorded�at�the�fair� value�of�M&G�plc�being�$7,379�million.
B6.2 Other dividends First and second interim dividends are recorded in the period in which they are paid. Final dividends (if applicable) are recorded in the period in which they are approved by shareholders.
Dividends�relating�to�reporting�year: � First�interim�ordinary�dividend 20.29¢ 528 20.55¢ 530 Second�interim�ordinary�dividend 25.97¢ 675 42.89¢ 1,108
Dividends�paid�in�reporting�year: Current�year�first�interim�ordinary�dividend 20.29¢ 526 20.55¢ 530 Second�interim�ordinary�dividend�for�prior�year 42.89¢ 1,108 43.79¢ 1,132
classified�as�investment�contracts�under�IFRS�4) C4.1 115,943 269,549 186 – 385,678 Unallocated�surplus�of�with-profits�funds C4.1 4,750 – – – 4,750 Core�structural�borrowings�of�shareholder-financed�businesses C6.1 – 250 5,344 – 5,594
Assets�held�for�sale – – – – 13,472 – 13,472 Cash�and�cash�equivalents note (iii) 2,789 3,827 2,778 9,394 6,048 – 15,442
Comprising: Cash and cash equivalents from continuing operations 9,394 Cash and cash equivalents from discontinued operations 6,048
C3.1 Group assets and liabilities – measurement The Group holds financial investments in accordance with IAS 39, whereby subject to specific criteria, financial instruments are required to be accounted for under one of the following categories: �— Financial assets and liabilities at fair value through profit or loss – this comprises assets and liabilities designated by management as fair value through profit or loss on inception and derivatives that are held for trading. This includes instruments that are managed and the performance evaluated on a fair value basis and includes liabilities related to net assets attributable to unit holders of consolidated investment funds and, in Asia, policyholder liabilities for investment contracts without discretionary participation features. All investments within this category are measured at fair value with all changes thereon being recognised in investment return in the income statement; �— Financial investments on an available-for-sale basis – this comprises assets that are designated by management as available-for-sale and/or do not fall into any of the other categories. These assets are initially recognised at fair value plus attributable transaction costs. Available-for-sale assets are subsequently measured at fair value. Interest income is recognised on an effective interest basis in the income statement. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset. Except for foreign exchange gains and losses on debt securities, which are included in the income statement, unrealised gains and losses are recognised in other comprehensive income. Upon disposal or impairment, accumulated unrealised gains and losses are transferred from other comprehensive income to the income statement as realised gains or losses; and
at�fair�value – (1,011) – (1,011) Net�asset�value�attributable�to�unit�holders�of�consolidated�investment�funds (5,973) (23) (2) (5,998) Other�financial�liabilities�held�at�fair�value – – (3,760) (3,760)
Assets and liabilities at amortised cost and their fair value The�table�below�shows�the�financial�assets�and�liabilities�carried�at�amortised�cost�on�the�statement�of�financial�position�and�their�fair� value.�Cash�deposits,�accrued�income,�other�debtors,�accruals,�deferred�income�and�other�liabilities�are�excluded�from�the�analysis� below,�as�these�are�carried�at�amortised�cost,�which�approximates�fair�value.
(c) Fair value measurements for level 3 fair valued assets and liabilities Reconciliation of movements in level 3 assets and liabilities measured at fair value The�following�table�reconciles�the�value�of�level�3�fair�valued�assets�and�liabilities�at�1�January�2019�to�that�presented�at�31�December�2019.
Reconciliation of movements in level 3 assets and liabilities measured at fair value Loans
Net asset value attributable to unit holders of consolidated investment funds
Transfers�into�level�3 – 11 – – – – – – 11 Transfers�out�of�level�3 – – – – 84 – (44) – 40 *�Of�the�total�net�gains�and�(losses)�in�the�income�statement�of�$537�million�for�continuing�operations�in�2019,�$19�million�relates�to�net�unrealised�gains�and�losses�of�financial�instruments� still�held�at�the�end�of�the�year�(2018:�$111�million�of�the�$579�million�shown�above�was�for�continuing�operations,�of�which�$153�million�related�to�financial�instruments�still�held�at�the�end� of�the�year),�which�can�be�analysed�as�follows: 2019� $m 2018� $m
Equity�securities�and�holdings�in�collective�investment�schemes (11) (10) Debt�securities – 3 Other�investments� 34 133 Derivative�liabilities – 36 Net�asset�value�attributable�to�unit�holders�of�consolidated�investment�funds – (9) Other�financial�liabilities (4) –
Movements in unrealised gains and losses on Jackson available-for-sale securities The�movement�in�the�statement�of�financial�position�value�for�debt�securities�classified�as�available-for-sale�from�a�net�unrealised�loss� of�$527�million�to�a�net�unrealised�gain�of�$3,496�million�as�analysed�in�the�table�below.�
Changes in unrealised appreciation reflected in other comprehensive income $m $m
Jackson debt securities classified as available-for-sale in an unrealised loss position (i) Fair value of securities as a percentage of book value The�following�table�shows�the�fair�value�of�the�debt�securities�in�a�gross�unrealised�loss�position�for�various�percentages�of�book�value: 31 Dec 2019� $m 31 Dec 2018� $m
(ii) Unrealised losses by maturity of security 31 Dec 2019� $m 31 Dec 2018� $m 1�year�to�5�years (1) (92) 5�years�to�10�years (12) (555) More�than�10�years (7) (474) Mortgage-backed�and�other�debt�securities (7) (57)
Further,�the�following�table�shows�the�age�analysis�of�the�securities�whose�fair�values�were�below�80�per�cent�of�the�book�value: Age analysis 31 Dec 2019� $m 31 Dec 2018� $m
Less�than�3�months – – 41 (13) 3�months�to�6�months – – 2 (1) More�than�6�months – – 3 (2)
(c) Asset-backed securities The�Group’s�holdings�in�asset-backed�securities�(ABS),�which�comprise�residential�mortgage-backed�securities�(RMBS),�commercial� mortgage-backed�securities�(CMBS),�collateralised�debt�obligations�(CDO)�funds�and�other�asset-backed�securities,�as�at�31�December� 2019�are�as�follows: 31 Dec 2019� $m 31 Dec 2018� $m
99.8�per�cent)�are�investment�grade.� (ii)� US�operations’�exposure�to�asset-backed�securities�comprises: 31 Dec 2019� $m 31 Dec 2018� $m
Exposure to sovereign debts 31 Dec 2019� $m 31 Dec 2018� $m
(e) Impairment of US available-for-sale debt securities and other financial assets In�accordance�with�the�Group’s�accounting�policy�set�out�in�note�A3.1,�impairment�reviews�were�performed�for�available-for-sale� securities�and�loans�and�receivables.�
C3.4 Financial instruments – additional information (a) Financial risk Liquidity analysis Contractual maturities of financial liabilities on an undiscounted cash flow basis The�following�table�sets�out�the�contractual�maturities�for�applicable�classes�of�financial�liabilities,�excluding�derivative�liabilities� and�investment�contracts�that�are�separately�presented.�The�financial�liabilities�are�included�in�the�column�relating�to�the�contractual� maturities�of�the�undiscounted�cash�flows�(including�contractual�interest�payments)�due�to�be�paid�assuming�conditions�are�consistent� with�those�of�year�end.
Maturity analysis of derivatives The�following�table�shows�the�gross�and�net�derivative�positions�together�with�a�maturity�profile�of�the�net�derivative�position: Carrying value of net derivatives� $m Maturity profile of net derivative position� $m
(c) Derecognition, collateral and offsetting Derecognition of financial assets and liabilities The Group’s policy is to derecognise financial assets when it is deemed that substantially all the risks and rewards of ownership have been transferred.
Reverse repurchase agreements The Group is party to various reverse repurchase agreements under which securities are purchased from third parties with an obligation to resell the securities. The securities are not recognised as investments in the statement of financial position but the right to receive the cash paid is recognised as deposits.
The note provides information of policyholder liabilities and unallocated surplus of with-profits funds held on the Group’s statement of financial position: C4.1 Group overview (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds notes (a), (b)
Demerger of UK and Europe operations – – (210,002) (210,002) Net flows: Shareholders’ transfers post-tax (99) – – (99) Investment-related items and other movements 12,824 32,922 – 45,746 Foreign exchange translation differences 1,299 – – 1,299
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 263
The policyholder liabilities shown include investment contracts without discretionary participation features (as defined in IFRS 4) and their full movement in the year but exclude liabilities that have not been allocated to a reporting segment. The items above are shown gross of external reinsurance.
(e) Average policyholder liabilities have been based on opening and closing balances, adjusted for acquisitions, disposals and other corporate transactions arising in the year, and exclude unallocated surplus of with-profits funds.
Comprising: – Policyholder liabilities on the consolidated statement of financial position (excludes $186 million classified as unallocated to a segment) 50,385 269,549 – 319,934 – Group’s share of policyholder liabilities relating to joint ventures and associate 11,877 – – 11,877
Note Including net flows of the Group’s insurance joint ventures and associate.
(iii) Movement in insurance contract liabilities and unallocated surplus of with-profits funds Further analysis of the movement in the year of the Group’s gross contract liabilities, reinsurer’s share of insurance contract liabilities and unallocated surplus of with-profits funds (excluding those held by joint ventures and associate) is provided below: Gross insurance contract liabilities $m
Demerger of UK and Europe operations note (e) 87,824 (2,169) 105,196 16,982 Income and expense included in the income statement for continuing operations note (c) (55,579) 1,795 (311) (1,415) Other movements note (d) – – (63) (112) Foreign exchange translation differences (1,441) 37 (18) (25)
Notes (a) Includes reinsurers’ share of claims outstanding of $1,094 million (31 December 2018: $1,280 million).
(b) This comprises investment contracts with discretionary participation features of $633 million at 31 December 2019 (31 December 2018: $85,858 million) and investment contracts without discretionary participation features of $4,902 million at 31 December 2019 (31 December 2018: $24,481 million).
(c) The total charge for benefits and claims from continuing operations in 2019 shown in the income statement comprises the amounts shown as ‘income and expense included in the income statement’ in the table above of $(55,510) million (2018: $2,450 million) together with claims paid of $(29,585) million (2018: $(26,926) million), net of amounts attributable to reinsurers of $1,190 million (2018: $1,050 million).
(e) The balances of the discontinued UK and Europe operations are removed from the opening balances to show the underlying movement from continuing operations. The $2,169 million of reinsurer’s share of insurance contract liabilities in the table above excluded the intra-group reinsurance assets of $1,412 million for the with-profits business ceded to the Asia insurance operations.
Analysed as: From continuing operations 12,024 From discontinued UK and Europe operations 2,169
Notes (a) The reinsurers’ share of insurance contract liabilities for Asia primarily relates to protection business written in Hong Kong. (b) The reinsurer’s share of insurance contract liabilities for Jackson as shown in the table above primarily relates to certain fully collateralised former REALIC business retained by Swiss Re through 100 per cent reinsurance agreements. Apart from the reinsurance of REALIC business, the principal reinsurance ceded by Jackson outside the Group is on term-life insurance, direct and assumed accident and health business and GMIB variable annuity guarantees.
The Group cedes certain business to other insurance companies. Although the ceding of insurance does not relieve the Group from its liability to its policyholders, the Group participates in such agreements for the purpose of managing its loss exposure. The Group evaluates the financial condition of its reinsurers and monitors concentration of credit risk from similar geographic regions, activities or economic characteristics of the reinsurers to minimise its exposure from reinsurer insolvencies. Of the reinsurers’ share of insurance contract liabilities balance of $13,856 million at 31 December 2019 (31 December 2018: $12,024 million from continuing operations), 97 per cent (31 December 2018: 95 per cent from continuing operations) of the balance was from reinsurers with rating A- and above by Standard & Poor’s or other external rating agencies.
Comprising: – Policyholder liabilities on the consolidated statement of financial position 44,592 22,001 18,496 85,089 – Unallocated surplus of with-profits funds on the consolidated statement of financial
– Group’s share of policyholder liabilities relating to joint ventures and associate note (a) – 5,092 5,009 10,101
– Group’s share of policyholder liabilities relating to joint ventures and associate note (a) – 4,858 5,516 10,374
Shareholders’ transfers post-tax (99) – – (99) Investment-related items and other movements note (c) 8,638 1,663 2,523 12,824 Foreign exchange translation differences note (d) 522 363 414 1,299
– Group’s share of policyholder liabilities relating to joint ventures and associate note (a) – 5,279 6,598 11,877
Notes (a) The Group’s investment in joint ventures and associate are accounted for on an equity method and the Group’s share of the policyholder liabilities as shown above relate to the life business of the China JV, India and the Takaful business in Malaysia.
(b) The rate of surrenders for shareholder-backed business (expressed as a percentage of opening policyholder liabilities) was 7.0 per cent in 2019 (2018: 6.6 per cent). (c) Investment-related items and other movements in 2019 primarily represent equity market gains from the with-profits business and effects from lower interest rates. (d) Movements in the year have been translated at the average exchange rates for the year ended 31 December 2019. The closing balance has been translated at the closing spot rates as at 31 December 2019. Differences upon retranslation are included in foreign exchange translation differences.
(e) Average policyholder liabilities have been based on opening and closing balances, adjusted for any acquisitions, disposals and other corporate transactions arising in the year, and exclude unallocated surplus of with-profits funds.
(iii) Summary policyholder liabilities (net of reinsurance) and unallocated surplus At 31 December 2019, the policyholder liabilities and unallocated surplus for Asia operations (excluding joint ventures and associate), net of external reinsurance of $5,458 million (31 December 2018: $3,537 million), comprised the following: Hong Kong 58,800 43,997
C4.3 US insurance operations (i) Analysis of movements in policyholder liabilities
Net flows note (a) (1,555) 1,802 247 Transfers from general to separate account 951 (951) – Investment-related items and other movements note (b) 32,373 549 32,922
Notes (a) Net inflows in 2019 are $247 million with new inflows into fixed annuity, fixed index annuity and the general account exceeding withdrawals and surrenders on this business, partially offset by net outflows from variable annuity business as the portfolio matures. (b) Positive investment-related items and other movements largely represent positive separate account returns following the increase in the US equity market in the year and asset gains arising from declining bond yields. (c) Average policyholder liabilities have been based on opening and closing balances, adjusted for any acquisitions, disposals and other corporate transactions arising in the year.
(ii) Duration of policyholder liabilities The table below shows the carrying value of policyholder liabilities and maturity profile of the cash flows on a discounted basis at the balance sheet date: Variable annuity separate account liabilities $m
Fixed annuities and the fixed account portion of variable annuities Interest-sensitive life business
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 269
The approach to determining the contract liabilities is generally driven by the local solvency basis. A gross premium valuation method is used in those local businesses where a risk-based capital framework is adopted for local solvency. Under the gross premium valuation method, all cash flows are valued explicitly using best estimate assumptions with a suitable margin for prudence.
This is achieved either through adding an explicit allowance for assumptions to deviate from best estimate or by applying an overlay constraint so that on day one no negative reserves (ie where future premium inflows are expected to exceed prudent future claims and outflows) are derived at an individual policyholder level, or a combination of both.
Approximately 65 per cent (31 December 2018: 64 per cent) of the fixed interest rate annuities Jackson wrote in 2019 provide for a (positive or negative) market value adjustment (MVA) on surrender. This formula-based adjustment approximates the change in value that assets supporting the product would realise as interest rates move.
Guaranteed minimum interest rate. At 31 December 2019, Jackson had fixed interest rate annuities totalling $15.9 billion (31 December 2018: $16.1 billion) in account value with minimum guaranteed rates ranging from 1.0 per cent to 5.5 per cent and a 2.88 per cent average guaranteed rate (31 December 2018: 1.0 per cent to 5.5 per cent and a 2.91 per cent average guaranteed rate), depending on the particular product, jurisdiction where issued and the date of issue.
With minor exceptions, the following is applied to most of Jackson’s contracts. Contracts are accounted for as investment contracts as defined for US GAAP purposes by applying a retrospective deposit method to determine the liability for policyholder benefits.
At 31 December 2019, fixed index annuities accounted for 5 per cent (31 December 2018: 5 per cent) of Jackson’s policy and contract liabilities.
Guaranteed minimum rates are generally set at 1.0 to 3.0 per cent. At 31 December 2019, Jackson had fixed index annuities allocated to indexed funds totalling $9.8 billion (31 December 2018: $7.6 billion) in account value with minimum guaranteed rates on index accounts ranging from 1.0 per cent to 3.0 per cent and a 1.46 per cent average guaranteed rate (31 December 2018: 1.0 per cent to 3.0 per cent and a 1.77 per cent average guarantee rate).
Jackson offers an optional lifetime income rider, which can be elected for an additional fee.
Minimum guaranteed rates on fixed interest accounts range from 1.0 per cent to 3.0 per cent and a 2.75 per cent average guaranteed rate (31 December 2018: 1.0 per cent to 3.0 per cent and a 2.58 per cent average guaranteed rate).
The liability for the lifetime income rider is determined each period end by estimating the expected value of benefits in excess of the projected account balance and recognising the excess on a prorated basis over the life of the contract based on total expected assessments.
Group pay-out annuities consist of a block of defined benefit annuity plans assumed from John Hancock USA and John Hancock New York. A single premium payment from an employer (contract holder) funds the pension benefits for its employees (participants). The contracts are tailored to meet the requirements of the specific pension plan being covered. This is a closed block of business from two standpoints: (1) John Hancock USA and John Hancock New York are no longer selling new contracts, and (2) contract holders (companies) are no longer adding additional participants to these defined benefit pension plans.
The rate of return depends upon the performance of the selected fund portfolio. Policyholders may allocate their investment to either the fixed account or a selection of variable accounts. Most variable annuities are subject to early surrender charges for the first three to nine years of the contract. During the surrender charge period, the contract holder may cancel the contract for the surrender value. Jackson offers some fully liquid variable annuity products that have no surrender charges. Subject to benefit guarantees, investment risk on the variable account is borne by the policyholder, while investment risk on the fixed account is borne by Jackson through guaranteed minimum fixed rates of interest. At 31 December 2019, 4 per cent (31 December 2018: 5 per cent) of variable annuity funds were in fixed accounts.
The general principles for fixed annuity and fixed index annuity also apply to variable annuities.
The benefit guarantee types are further set out below: Benefits that are payable in the event of death (guaranteed minimum death benefit) The liability for Guaranteed Minimum Death Benefit (GMDB) is determined at each period end by estimating the expected value of benefits in excess of the projected account balance and recognising the excess rateably over the life of the contract based on total expected assessments. At 31 December 2019, these liabilities were valued using a series of stochastic investment performance scenarios, a mean investment return of 7.4 per cent (31 December 2018: 7.4 per cent) net of external fund management fees, and assumptions for policyholder behaviour, mortality and expense.
Benefits that are payable upon the depletion of funds (guaranteed minimum withdrawal benefit) The liability for the Guaranteed Minimum Withdrawal Benefit (GMWB) ‘for life’ portion is determined similarly to GMDB above.
Provisions for benefits under GMWB ‘not for life’ features are recognised at fair value under US GAAP.
The direct Guaranteed Minimum Income Benefit (GMIB) liability is determined by estimating the expected value of the annuitisation benefits in excess of the projected account balance at the date of annuitisation and recognising the excess rateably over the life of the contract based on total expected assessments.
Benefits that are payable at the end of a specified period (guaranteed minimum accumulation benefit) This feature is no longer offered.
The present value of the estimated gross profit is computed using the rate of interest that accrues to policyholder balances (sometimes referred to as the contract rate).
Life products include term life, traditional life and interest-sensitive life (universal life and variable universal life).
— Term life provides protection for a defined period and a benefit that is payable to a designated beneficiary upon death of the insured.
— Universal life provides permanent individual life insurance for the life of the insured and includes a savings element.
At 31 December 2019, institutional products accounted for 1 per cent (31 December 2018: 1 per cent) of Jackson’s policy and contract liabilities.
Funding agreements feature either lump sum or periodic policyholder deposits. Interest is paid at a fixed or index linked rate. Funding agreements have a duration of between one and 30 years. In 2019 and 2018 there were no funding agreements terminable by the policyholder with less than 90 days’ notice.
C5.1 Goodwill Business combination Business acquisitions are accounted for by applying the purchase method of accounting, which adjusts the net assets of the acquired company to fair value at the date of purchase. The excess of the acquisition consideration over the fair value of the assets and liabilities of the acquired business is recorded as goodwill. The Group chooses the full goodwill method or the partial goodwill method to calculate goodwill on an acquisition by acquisition basis. Expenses related to acquiring new subsidiaries are charged to the income statement in the period in which they are incurred and not included in goodwill. Income and expenses of acquired businesses are included in the income statement from the date of acquisition.
Where the Group writes a put option over its non-controlling interests as part of its business acquisition, which if exercised triggers the purchase by the Group of the non-controlling interests, the put option is recognised as a financial liability at the acquisition date with a corresponding amount, deducted directly from shareholder’s equity due to the significant risks and rewards of ownership remaining with the non-controlling interests. Any subsequent changes to the carrying amount of the put liability are also recognised within equity.
Goodwill Goodwill is capitalised and carried on the Group consolidated statement of financial position as an intangible asset at initial value less any accumulated impairment losses. Goodwill impairment testing is conducted annually and when there is an indication of impairment.
Goodwill shown on the consolidated statement of financial position at 31 December 2019 is wholly attributable to shareholders and represents amounts allocated to businesses in Asia and Africa in respect of both acquired asset management and life businesses.
Carrying value at beginning of year 2,365 2,005 Demerger of UK and Europe operations (1,731) – Additions in the year 299 503 Disposals/reclassifications to held for sale – (13) Exchange differences 36 (130)
The goodwill in respect of asset management businesses comprised mainly the goodwill arising from the acquisition of Thanachart Fund Management Co., Ltd. (TFUND) in 2019 and TMB Asset Management Co., Ltd. (TMBAM) in Thailand in 2018. At 31 December 2019, the recoverable amount of these businesses has been determined by calculating the value in use of each of these businesses (considered to be the cash-generating units) using a discounted cash flow valuation.
Management believes that any reasonable change in the key assumptions would not cause the recoverable amount of the asset management businesses acquired to fall below its carrying amount.
Other intangible assets, including computer software, attributable to with-profits funds From continuing operations 67 71 From discontinued operations – 106
(i) Deferred acquisition costs and other intangible assets attributable to shareholders The deferred acquisition costs and other intangible assets attributable to shareholders comprise: Deferred acquisition costs related to insurance contracts as classified under IFRS 4 14,206 12,758 Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4 33 99
Deferred acquisition costs related to insurance and investment contracts note (ii) 14,239 12,857
Notes (a) Total deferred acquisition costs and other intangible assets attributable to shareholders can be further analysed by business operations as follows: Deferred acquisition costs
(b) The DAC amount in respect of US arises in the insurance operations which comprises the following amounts: 31 Dec 2019 $m $m
Variable annuity business 12,406 10,796 Other business 529 381 Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive income)* (695) (64)
Total DAC for US operations 12,240 11,113 * A loss of $(631) million (2018: a gain of $328 million) for shadow DAC amortisation is booked within other comprehensive income to reflect the impact from the positive unrealised valuation movement of $4,023 million (2018: negative unrealised valuation movement of $(2,159) million). These adjustments reflect the movement from year to year, in the changes to the pattern of reported gross profit that would have happened if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 31 December 2019, the cumulative shadow DAC balance as shown in the table above was negative $(695) million (31 December 2018: negative $(64) million).
(c) Sensitivity of US DAC amortisation charge The amortisation charge to the income statement in respect of the US DAC asset is reflected in both adjusted IFRS operating profit based on longer-term investment returns and short-term fluctuations in investment returns. The amortisation charge to adjusted IFRS operating profit based on longer-term investment returns in a reporting period comprises: — A core amount that reflects a relatively stable proportion of underlying premiums or profit; and — An element of acceleration or deceleration arising from market movements differing from expectations.
Change in shadow DAC related to movement in unrealised appreciation of debt securities classified as available-for-sale (631) – 328 –
Demerger of UK and Europe operations (1) – (8) (9) – – – –
Comprising: Notes (a) All of the net PVIF balances relate to insurance contracts. The PVIF attaching to investment contracts have been fully amortised. Amortisation is charged over the period of provision of asset management services as those profits emerge. (b) Distribution rights relate to fees paid in relation to the bancassurance partnership arrangements for the bank distribution of Prudential’s insurance products for a fixed period of time. The distribution rights amounts are amortised on a basis to reflect the pattern in which the future economic benefits are expected to be consumed by reference to new business production levels.
Central operations: Subordinated debt substituted to M&G plc in 2019: £600m 5.56% (30 Jun and 31 Dec 2018: 5.0%) Notes 2055 note (i) – 753 £700m 6.34% (30 Jun and 31 Dec 2018: 5.7%) Notes 2063 note (i) – 886
Notes (i) In 2019, the Group agreed with the holders of these two subordinated debt instruments that, in return for an increase in the coupon of the two instruments and upfront fees totalling $182 million for both instruments, they would permit the substitution of M&G plc as the issuer of the instruments, together with other modifications of terms to ensure the debt meet the requirements of Solvency II. In accordance with IAS 39, this has been accounted for as an extinguishment of the old debt and the issuance of new debt, recognised at fair value. The debt was substituted to M&G plc in October 2019. The $182 million of upfront fees have been paid by Prudential plc and have been treated as a non-operating expense from continuing operations.
Ratings Prudential plc has debt ratings from Standard & Poor’s, Moody’s and Fitch. Prudential plc’s long-term senior debt is rated A2 by Moody’s, A by Standard & Poor’s and A- by Fitch.
Borrowings in respect of short-term fixed income securities programmes – commercial paper 520 601 Lease liabilities under IFRS 16 note (a) 371 – Non-recourse borrowings of consolidated investment funds note (b) 1,045 448 Bank loans and overdrafts 29 115 Finance lease liability under IAS 17 note (a) – 25
Non-recourse borrowings of consolidated investment funds note (b) – 2,153 Lease liabilities under IFRS 16 note (a) 259 – Other borrowings 44 2,865
Notes (a) The Group adopted IFRS 16 that replaces IAS 17 as at 1 January 2019, using the modified retrospective approach. Under this approach, comparative information is not restated (as described in note A3). The finance lease liabilities recognised under IAS 17 in the comparative was principally held by the discontinued UK and Europe operations. Further details on the Group’s IFRS 16 adoption and operating leases are provided in notes A3 and C13.
(b) In all instances, the holders of the debt instruments issued by consolidated investment funds do not have recourse beyond the assets of those funds. (c) Other borrowings mainly include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson. (d) Operational borrowings attributable to with-profits businesses at 31 December 2018 were mainly attributable to the discontinued UK and Europe operations ($4,994 million) held in consolidated investment funds.
C7.1 Group overview The Group’s risk framework and the management of the risk, including those attached to the Group’s financial statements including financial assets, financial liabilities and insurance liabilities, together with the inter-relationship with the management of capital have been included in the audited sections of the ‘Group Chief Risk and Compliance Officer’s Report on the risks facing our business and how these are managed’.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 283
For the sensitivity analysis as shown in the table below, the reasonably possible interest rate movement used is 1 per cent for all local business units (subject to a floor of zero).
The pre-tax impacts, if they arose, would mostly be recorded within short-term fluctuations in investments returns in the Group’s segmental analysis of profit before tax.
The degree of sensitivity of the results of the non-linked shareholder-backed business of the Asia operations to movements in interest rates depends upon the degree to which the liabilities under the ‘grandfathered’ IFRS 4 measurement basis reflects market interest rates from year to year. This varies by local business unit. For example, for businesses applying US GAAP, the results can be more sensitive as the effect of interest rate movements on the backing investments may not be offset by liability movements. Further, the level of options and guarantees in the products written in the particular business unit will also affect the degree of sensitivity to interest rate movements. The direction of the sensitivity of the Asia operations as a whole in a given year can also be affected by a change in the geographical mix.
In addition, the degree of sensitivity of the results is dependent on the interest rate level at that point of time. At 31 December 2018 the sensitivities were dominated by the impact of interest rate movements on the value of government and corporate bond investments, which are expected to increase in value as interest rates fall to a greater extent than the offsetting increase in liabilities (and vice versa if rates rise). This arises because the discount rate in some operations does not fluctuate in line with interest rate movements. This feature remains for most local business units at 31 December 2019 and is evident in the ‘increase of 1%’ sensitivity. The ‘decrease of 1%’ sensitivity at 31 December 2019 reflects that some local business units’ liabilities become more sensitive at lower interest rates and the fluctuations in liabilities begin to exceed asset gains. As noted above, the results only allow for limited management actions, and if such economic conditions persisted management could take additional actions to help mitigate the impact of these stresses, including (but not limited to) rebalancing investment portfolios, increased use of reinsurance, changes to new business pricing and the mix of new business being sold.
(iii) Sensitivity to insurance risk In Asia, adverse persistency experience can impact the IFRS profitability of certain types of business written in the region. This risk is managed at a local business unit level through regular monitoring of experience and the implementation of management actions as necessary. These actions could include product enhancements, increased management focus on premium collection, as well as other customer retention efforts. The potential financial impact of lapses is often mitigated through the specific features of the products, eg surrender charges, or through the availability of premium holiday or partial withdrawal policy features. The reserving basis in Asia is such that a change in lapse assumptions has an immaterial effect on immediate profitability.
Many of the business units in Asia are exposed to mortality and morbidity risk and a provision is made within policyholder liabilities to cover the potential exposure. If all these assumptions were strengthened by 5 per cent then it is estimated that post-tax profit and shareholders’ equity would decrease by approximately $77 million (2018: $73 million). Weakening these assumptions by 5 per cent would have a similar equal and opposite impact.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 285
Jackson’s derivative programme, which is described in note C3.4(b), is used to manage the economic interest rate risk associated with a broad range of products and equity market risk attaching to its equity-based products. Movements in equity markets, equity volatility, interest rates and credit spreads materially affect the carrying value of derivatives that are used to manage the liabilities to policyholders and backing investment assets. Movements in the carrying value of derivatives combined with the use of US GAAP measurement (as ‘grandfathered’ under IFRS 4) for the insurance contracts assets and liabilities, which is largely insensitive to current period market movements, mean that the Jackson total profit (ie including short-term fluctuations in investment returns) is sensitive to market movements. In addition to these effects the Jackson shareholders’ equity is sensitive to the impact of interest rate and credit spread movements on the value of fixed income securities. Movements in unrealised appreciation on these securities are included as movement in shareholders’ equity (ie outside the income statement).
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 287
As noted above, Jackson is exposed to equity risk through the options embedded in the fixed index annuity liabilities and guarantees included in certain variable annuity benefits as illustrated above. This risk is managed using an equity hedging programme to minimise the risk of a significant economic impact as a result of increases or decreases in equity market levels. Jackson purchases futures and options that hedge the risks inherent in these products, while also considering the impact of rising and falling guaranteed benefit fees.
Profit before tax (net of related changes in amortisation of DAC) 964 256 1,848 770 1,347 544 74 (159)
* The table above has been prepared to exclude the impact of the instantaneous equity movements on the separate account fees. The sensitivity movements shown include those relating to the fixed index annuity and the reinsurance of GMIB guarantees.
Total net effect on shareholders’ equity (708) 20 (1,128) (553) 603 632 (1,936) (1,151)
These sensitivities above are shown for interest rates in isolation only and do not include other movements in credit risk that may affect credit spreads and valuations of debt securities. Similar to the sensitivity to equity risk, the sensitivity movements provided in the table above are at a point in time and reflect the hedging programme in place on the balance sheet date, while the actual impact on financial results would vary contingent upon a number of factors. The increase in the magnitude of the sensitivities at 31 December 2019 mainly reflects the lower interest rates at 31 December 2019 and the consequential reduction on assumed future separate account return, that is based on risk-free rates under grandfathered US GAAP. This has the effect of the IFRS liability reflecting a greater potential for policyholder payments under the variable annuity guarantees as interest rates fall. Jackson’s hedging programme is focused on managing the economic risks in the business and protecting statutory solvency under large market movements, and does not aim to hedge the IFRS accounting results.
(iii) Sensitivity to insurance risk Jackson is sensitive to mortality risk, lapse risk and other types of policyholder behaviour, such as the utilisation of its GMWB product features. Jackson’s persistency assumptions reflect a combination of recent experience for each relevant line of business and expert judgement, especially where a lack of relevant and credible experience data exists. These assumptions vary by relevant factors, such as product, policy duration, attained age and for variable annuity lapse assumptions, the extent to which guaranteed benefits are ‘in the money’ relative to policy account values. Changes in these assumptions, which are assessed on an annual basis after considering recent experience, could have a material impact on policyholder liabilities and therefore on profit before tax. Any changes in these assumptions are recorded within short-term fluctuations in investment returns in the Group’s supplementary analysis of profit (see note B1.2).
Note A4.1 describes the methodology applied by Jackson to amortise deferred acquisition costs. The amount of amortisation charged in any one period is sensitive to separate account investment returns.
At 31 December 2019, the current tax liability of $396 million (31 December 2018: $411 million from continuing operations) includes $198 million (31 December 2018: $190 million from continuing operations) of provisions for uncertain tax matters. Further detail is provided in note B4.
Deferred tax liabilities Unrealised losses or gains on investments (1,104) 1,053 (231) (713) 118 (877) Balances relating to investment and insurance
The deferred tax balances are further analysed as follows: Deferred tax assets Deferred tax liabilities
Of the benefit from unrecognised trading losses, $34 million will expire within the next ten years and the rest have no expiry date. Some of the Group’s businesses are located in jurisdictions in which a withholding tax charge is incurred upon the distribution of earnings. At 31 December 2019, deferred tax liabilities of $247 million (2018: $149 million from continuing operations) have not been recognised in respect of such withholding taxes as the Group is able to control the timing of the distributions and it is probable that the timing differences will not reverse in the foreseeable future.
The Group has historically operated a number of defined benefit pension schemes in the UK, with all pension surplus and deficit attributable to subsidiaries of M&G plc except for 30 per cent of the surplus attaching to the Prudential Staff Pension Scheme (PSPS), which was allocated to Prudential plc. In preparation for the demerger of M&G plc, at 30 June 2019, the 30 per cent of surplus attaching to PSPS was formally reallocated to M&GPrudential Services Limited. All UK schemes left the Group upon the demerger of M&G plc and Prudential plc will incur no further costs in respect of these schemes. Outside of the UK, there are two small defined benefit schemes in Taiwan which have negligible deficits.
Shares are classified as equity when their terms do not create an obligation to transfer assets. Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received on issue of the shares, net of share issue costs, and the nominal value of the shares issued, is credited to share premium. Where the Company purchases shares for the purposes of employee incentive plans, the consideration paid, net of issue costs, is deducted from retained earnings. Upon issue or sale any consideration received is credited to retained earnings net of related costs.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 291
Transactions by Prudential plc and its subsidiaries in Prudential plc shares The Group buys and sells Prudential plc shares (‘own shares’) either in relation to its employee share schemes or up until the demerger of its UK and Europe operations via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of $183 million at 31 December 2019 (31 December 2018: $217 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 31 December 2019, 8.4 million (31 December 2018: 9.6 million) Prudential plc shares with a market value of $161 million (31 December 2018: $172 million) were held in such trusts, all of which are for employee incentive plans. The maximum number of shares held during the year was 14.1 million which was in March 2019.
Within the trusts, shares are notionally allocated by business unit reflecting the employees to which the awards were made. On demerger, shares allocated to M&G plc were transferred to a separate trust established by M&G plc.
Analysed as: Continuing operations 427 Discontinued UK and Europe operations 946
Other provisions for continuing operations comprise staff benefits provisions of $408 million (31 December 2018: $364 million) that are generally expected to be paid out within the next three years and other provisions of $57 million (31 December 2018: $63 million).
Until Hong Kong’s GWS framework comes into force, Prudential will apply the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine group regulatory capital requirements (both minimum and prescribed levels). The LCSM surplus represents the summation of available capital across local solvency regimes for regulated entities of the Group and IFRS net assets (with some adjustments) for non-regulated entities less the summation of local statutory capital requirements across the Group, with no allowance for diversification between business operations.
As well as holding sufficient capital to meet LCSM requirements at Group level, the Group also closely manages the cash it holds within its central holding companies so that it can: — Maintain flexibility, fund new opportunities and absorb shock events; — Fund dividends; and — Cover central costs and debt payments.
The sensitivity of liabilities and other components of total capital vary depending upon the type of business concerned and this conditions the approach to asset/liability management.
C12.2 Local capital regulations (i) Asia insurance operations The local valuation basis for the assets, liabilities and capital requirements of significant operations in Asia are: China JV A risk-based capital, risk management and governance framework, known as the China Risk Oriented Solvency System (C-ROSS), applies in China. Under C-ROSS, insurers are required to maintain a core solvency ratio (core capital over minimum capital) and a comprehensive solvency ratio (available capital over minimum capital) of not lower than 50 per cent and 100 per cent, respectively. The China Banking Insurance Regulatory Commission is in the process of reviewing the C-ROSS formulae and parameters. The exact timing of updates is uncertain.
Hong Kong The capital requirements set out in the regulations vary by underlying risk type and duration of liabilities, but are generally determined as a percentage of mathematical reserves and capital at risk.
Indonesia Solvency capital is determined using a risk-based capital approach. The available capital is based on assets that are marked-to-market, with policyholder liabilities based on a gross premium valuation method using best estimate assumptions with a suitable margin for prudence. Liabilities are zeroised at a policy level (i.e. negative liabilities are not permitted at a policy level). For unit-linked policies an unearned premium reserve is established.
Malaysia A risk-based capital framework applies in Malaysia. The local regulator, Bank Negara Malaysia (BNM), has set a Supervisory Target Capital Level of 130 per cent below which supervisory actions of increasing intensity will be taken. Each insurer is also required to set its own Individual Target Capital Level to reflect its own risk profile and this is expected to be higher than the Supervisory Target Capital Level.
The available capital is based on assets that are marked-to-market, with policyholder liabilities based on a gross premium valuation method using best estimate assumptions with a suitable margin for prudence. Liabilities are zeroised at a fund level (i.e. negative liabilities are not permitted at a fund level). The BNM has initiated a review of its RBC framework. An exposure draft on valuation of liabilities was issued in December 2019 to gather industry feedback. The exact timing of implementation of potential revisions is uncertain.
Demerger of UK and Europe operations (846) (846) – Gains during the year 214 24 – 238 701 Movement in capital requirement (32) – – (32) (7)
Distributions made to the parent company (173) (40) – (213) (531) Exchange and other movements (27) 1 – (26) (212)
Available capital of the non-insurance business units is transferable after taking account of an appropriate level of operating capital, based on local regulatory solvency requirements, where relevant.
Property, plant and equipment comprise Group occupied properties and tangible assets. Following the adoption of IFRS 16 on 1 January 2019 (as described in note A3), property, plant and equipment also includes right-of-use assets for operating leases of properties occupied by the Group and leases of equipment and other tangible assets. All property, plant and equipment, including the right-of-use assets under operating leases, are held at cost less cumulative depreciation calculated using the straight-line method.
Demerger of UK and Europe operations† (143) (1,170) – (1,313) – – – Recognition of right-of-use asset on initial application of IFRS 16 – – 527 527 – – – Arising on acquisitions of subsidiaries 6 13 1 20 6 691 697
Effect of movements in exchange rates – 4 9 13 (7) (61) (68)
Capital expenditure: property, plant and equipment by segment The capital expenditure in 2019 of $64 million (2018: $386 million of which $133 million related to continuing operations) arose as follows: $44 million (2018: $69 million) in Asia and $5 million (2018: $62 million) in US with the remaining balance of $15 million (2018: $2 million) arising from unallocated corporate expenditure.
Total gain (loss) on disposal of business from continuing operations (142) (107)
Notes (i) In 2019, the $265 million gain on disposals principally relates to profits arising from a reduction in the Group’s stake (from 26 per cent to 22 per cent) in its associate in India, ICICI
In 2018, the $(107) million other transactions primarily related to exiting the NPH broker-dealer business in the US and costs related to the preparation for the demerger of M&G plc.
D1.2 Other corporate transactions Acquisition of Thanachart Fund Management Co., Ltd. in Thailand On 27 December 2019, the Group completed its acquisition of 50.1 per cent of Thanachart Fund Management Co., Ltd. (TFUND) from Thanachart Bank Public Company Ltd. (TBANK) and Government Savings Bank, with TBANK holding the remaining 49.9 per cent stake of TFUND. The acquisition complements the Group’s purchase of 65 per cent of TMB Asset Management, now TMBAM Eastspring, in September 2018.
The fair value of the acquired assets, assumed liabilities and resulting goodwill are shown in the table below: $m
The results and cash flows for the discontinued UK and Europe operations presented in the consolidated financial statements for the period of ownership up to the demerger in October 2019 are analysed below.
Earned premiums, net of reinsurance 10,920 (101) Investment return and other income note (1) 22,292 (2,386)
Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (26,975) 6,645 Acquisition costs and other expenditure (4,143) (3,296)
Notes (1) Includes share of profits from joint ventures and associates, net of related tax. (2) The re-measurement of the discontinued UK and Europe operations on demerger reflects the difference between the fair value of the UK and Europe operations and its net assets at the date of the demerger.
Cumulative exchange loss recycled through profit or loss 2,668 – Other items, net of related tax 203 (605)
Cash flows from operating activities 2,375 5 Cash flows from investing activities (454) (478) Cash flows from financing activities* – (137) Cash and cash equivalents divested on demerger (7,611) –
Net cash flows in the year (5,690) (610) Net cash flows between discontinued and continuing operations* (436) (842) Cash and cash equivalents at beginning of year 6,048 7,857 Effect of exchange rate changes on cash and cash equivalents 78 (357)
Litigation and regulatory matters The Group is involved in various litigation and regulatory proceedings. These may from time to time include class actions involving Jackson. While the outcome of such litigation and regulatory issues cannot be predicted with certainty, the Company believes that their ultimate outcome will not have a material adverse effect on the Group’s financial condition, results of operations or cash flows.
Guarantees Guarantee funds in the US provide for payments to be made to policyholders on behalf of insolvent life insurance companies and are financed by payments assessed on solvent insurance companies based on location, volume and type of business. The estimated reserve for future guarantee fund assessments is not significant. The directors believe that sufficient provision has been made on the balance sheet for all anticipated payments for known insolvencies.
The Group has provided other guarantees and commitments to third-parties entered into in the normal course of business but the Group does not consider that the amounts involved are significant.
Dividends The 2019 second interim ordinary dividend approved by the Board of Directors after 31 December 2019 is as described in note B6.
Coronavirus outbreak The novel coronavirus outbreak, with thousands of cases reported in 2020 to date and the virus spreading to countries across Asia and the world, has disrupted the activity in the markets in which the Group operates, in particular Hong Kong and mainland China, and adversely impacted the economic conditions in the year to date. Given these conditions, lower levels of new business activity in affected markets are to be expected. Further details on the Group capital position are set out in note I(i) of the Additional unaudited financial information.
It is not practicable to quantify the potential financial effect of the outbreak on the Group at this stage.
Key management personnel of the Company, as described in note B2.3, may from time to time purchase insurance, asset management or annuity products marketed by Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons.
In 2019 and 2018, other transactions with key management personnel were not deemed to be significant both by virtue of their size and in the context of the individuals’ financial positions. All of these transactions were on terms broadly equivalent to those that prevailed in arm’s length transactions.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 299
The Group has provided, from time to time, certain guarantees and commitments to third parties. At 31 December 2019, Asia operations had unfunded commitments of $2,013 million (31 December 2018: $1,554 million) primarily related to investments in infrastructure funds and alternative investment funds. At 31 December 2019, Jackson had unfunded commitments of $889 million (31 December 2018: $846 million) related to investments in limited partnerships and $796 million (31 December 2018: $440 million) related to commercial mortgage loans and other fixed income securities. These commitments were entered into in the normal course of business and a material adverse impact on the operations is not expected to arise from them.
The Group performs a re-assessment of consolidation whenever there is a change in the substance of the relationship between the Group and an investee. Where the Group is deemed to control an entity it is treated as a subsidiary and its results, assets and liabilities are consolidated. Where the Group holds a minority share in an entity, with no control over the entity, the investments are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position.
(ii) Joint ventures and associates Joint ventures are joint arrangements arising from a contractual agreement whereby the Group and other investors have joint control of the net assets of the arrangement. In a number of these arrangements, the Group’s share of the underlying net assets may be less than 50 per cent but the terms of the relevant agreement make it clear that control is jointly exercised between the Group and the third party. Associates are entities over which the Group has significant influence, but it does not control. Generally it is presumed that the Group has significant influence if it holds between 20 per cent and 50 per cent voting rights of the entity.
With the exception of those referred to below, the Group accounts for its investments in joint ventures and associates by using the equity method of accounting. The Group’s share of profit or loss of its joint ventures and associates is recognised in the income statement and its share of movements in other comprehensive income is recognised in other comprehensive income. The equity method of accounting does not apply to investments in associates and joint ventures held by the Group’s insurance or investment funds. This includes venture capital business, mutual funds and unit trusts and which, as allowed by IAS 28, ‘Investments in Associates and Joint Ventures’, are carried at fair value through profit or loss.
Where the Group’s asset manager sets up investment funds as part of asset management operations, the Group’s interest is limited to the administration fees charged to manage the assets of such entities. With no participation in these entities, the Group does not retain risks associated with investment funds. For these investment funds, the Group is not deemed to control the entities but to be acting as an agent.
Other structured entities The Group holds investments in mortgage-backed securities, collateralised debt obligations and similar asset-backed securities, the majority of which are actively traded in a liquid market.
The table below provides aggregate carrying amounts of the investments in unconsolidated structured entities reported in the Group’s statement of financial position: Statement of financial position line items
Equity securities and holdings in collective investment schemes 23,620 195,070 – 27,021 163,301 –
As at 31 December 2019, the Group does not have an agreement, contractual or otherwise, or intention to provide financial support to structured entities that could expose the Group to a loss.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 301
Under UK company law, UK companies can only declare dividends if they have sufficient distributable reserves. Jackson is subject to state laws that limit the dividends payable to its parent company based on statutory capital, surplus and prior year earnings. Dividends in excess of these limitations require prior regulatory approval. The Group’s subsidiaries, joint ventures and associates in Asia may remit dividends to the Group, in general, provided the statutory insurance fund meets the capital adequacy standard required under local statutory regulations and has sufficient distributable reserves. For further details on local capital regulations in Asia please refer to note C12.2.
(b) Investments in joint ventures and associates The Group has shareholder-backed joint venture insurance and asset management businesses in China with CITIC Group and a joint venture asset management business in India with ICICI Bank. In addition, there is an asset management joint venture in Hong Kong with Bank of China International Holdings Limited (BOCI) and Takaful insurance joint venture in Malaysia.
Asia insurance operations 291 238 Asia asset management operations 106 81
(c) Related undertakings In accordance with Section 409 of the Companies Act 2006 a list of Prudential Group’s subsidiaries, joint ventures, associates and significant holdings (being holdings of more than 20 per cent) along with the classes of shares held, the registered office address and the country of incorporation and the effective percentage of equity owned at 31 December 2019 is disclosed below.