1 Group overview 03–13 04 Chairman’s statement 06 Group Chief Executive’s report 2 Strategic report 15-70 16 Our world 18 Our strategy and operating principles 19 How our business works 20 Measuring our performance 22 Our businesses and their performance 39 Chief Financial Officer’s report on our 2014 financial performance 51 Group Chief Risk Officer’s report on the risks facing our business and our capital strength 61 Corporate responsibility review 3 Governance 72 Board of Directors 76 Chairman’s introduction 77 Board governance 80 Group governance 81 Board committee reports 89 Additional information 90 Statutory and regulatory disclosures 91 Index to principal Directors’
P ru d en tial plc A n n u al R ep ort 20
The Directors’ Report of Prudential plc for the year ended 31 December 2014 is set out on pages 1 to 14, 71 to 92 and 313 to 352 and includes the sections of the Annual Report referred to in these pages.
This performance has been driven by a consistent focus on the long term and on the needs of our customers. We build sustainable businesses and we know that the service we provide to our customers is central to this goal. As our businesses grow and we continue to develop our highperforming teams in Asia, the US, the UK, Europe, and now in Africa, we ensure that this clear focus is at the core of everything we do.
We also make sure that we adhere to our founding values. We were established in London in 1848 on the principles of integrity, security and prudence. More than 166 years later, those principles are still central to our culture, while we also take the initiative to capture new opportunities.
Our commitment to creating sustainable value for our customers and our principled approach enable us also to deliver strong returns for our shareholders. I am delighted to report that all four of our major business units have made significant contributions to our profitability in 2014, with Asia remaining our primary focus for growth.
Our second key advantage is the strength of our leadership. Tidjane Thiam has been an exceptional servant of the Group since 2008, first as Chief Financial Officer and then as Group Chief Executive. As announced, he will be leaving Prudential once his successor is appointed. We will be sorry to see him go but understand his desire to take on a new challenge elsewhere and we wish him every success in his new role at Credit Suisse. We are fortunate to have strength in depth in our management team and the Board has been very focused on succession planning. At the time of writing, I can say that we expect to announce a new Group Chief Executive very shortly.
In October we also announced that Lord Turnbull, who has been a member of the Board since May 2006, as well as Chairman of the Remuneration Committee since June 2011, would be stepping down at our next Annual General Meeting. I would like to thank Lord Turnbull for his contribution over nine years, which has been of considerable value to the Group. He will be succeeded as Chairman of the Remuneration Committee by Anthony Nightingale CMG, who will also join the Nomination Committee.
Prudential was established on the principles of integrity, security and prudence. Those principles are still central to our culture, while we also take the initiative to capture new opportunities.
h airm an ’s statem en t channel for discussion with shareholders and maintaining good relationships with regulators. The changes we have made in 2014 ensure it is well placed to deal with both the opportunities and the challenges we face.
In 2014, we increased the scale of our corporate responsibility activities, deepening the impact we are having in this area. The projects we support range from encouraging street children in Indonesia to develop life skills and helping with disaster preparedness across South-east Asia, to teaching new skills to financially disadvantaged people in the US and providing apprenticeship opportunities in our businesses here in the UK. We are also beginning equivalent programmes in our new markets in Africa, offering muchneeded scholarships in high schools and supporting students of actuarial science.
Our volunteers on these many different projects are achieving great things. I will continue to work with our excellent corporate responsibility teams to increase further our impact in these areas.
Our strategy and operating principles page 18 36.93p full-year dividend increase on 2013 £29.2bn EEV shareholders’ funds equivalent to 1,136p per share
I am pleased to report that Prudential delivered a strong, broad-based performance in 2014. Our core strategy of focusing on the three main opportunities available to us in Asia, the US and the UK – serving the protection and investment needs of the growing middle class in Asia, providing income in retirement to American baby boomers and meeting the financial needs of an ageing British population – is unchanged. It continues to serve us well.
The execution of this strategy, driven by the operating principles set out in 2009, is central to the Group’s continued success and reflects the dedication and quality of our people and their focus on meeting the distinct needs of our customers across the business. This has been one of the key factors enabling Prudential to outperform in the markets in which it competes, delivering value for our customers and sustainable returns for our shareholders.
The Group delivered double-digit growth across our key metrics of IFRS operating profit, new business profit and cash, with all four of our business units delivering good performance in challenging operating conditions.
— Asia life and asset management operating profit was up 17 per cent to £1,140 million. Our ability to proactively manage our diverse portfolio of businesses at the regional level has enabled us to partially offset the short-term headwinds experienced in a few of our key Asia markets. Strong external net inflows of £5.4 billion and positive market movements have driven operating profit and total funds under management to record levels at Eastspring, our Asia-based asset management business; — US life IFRS operating profit increased 21 per cent to £1,431 million. The strong variable annuity inflows we have been able to capture at attractive margins generate higher levels of fee income. This, combined with favourable market movements, increased the value of separate account assets, a key driver of our profits in the US; The Group delivered doubledigit growth across our key metrics of IFRS operating profit, new business profit and cash.
Measuring our performance page 20 flexibility, as illustrated by our ability to agree a new deal with Standard Chartered Bank in 2014. The ability of the Group to generate both growth and cash remains a distinctive feature of Prudential in our industry.
APE sales4 increased by 12 per cent to £4,650 million. In Asia, APE sales were 15 per cent higher at £2,237 million with APE sales from our ‘sweet spot’ markets5 continuing to be a strong driver of growth. In the US, APE sales were up 4 per cent at £1,556 million as we continued to proactively manage our sales of variable annuities with guarantees. We continue to diversify our product mix with sales of Elite Access, our innovative variable annuity without guarantees, increasing by 26 per cent and contributing to an increase in the proportion of variable annuities sold without living benefit guarantees to 34 per cent of total variable annuity sales. In the UK, APE sales grew by 18 per cent to £857 million, reflecting strong bulk annuity and investment bond volumes which offset the significant contraction of the retail annuity market that followed the Budget reform. M&G delivered net inflows of £7.1 billion (2013: £9.5 billion) as it continued to benefit from high levels of retail sales from Continental Europe, while Eastspring
The Group’s strategy remains unchanged and is focused on capturing three long-term opportunities: — The significant protection gap and investment needs of the Asian middle class; — The transition of US baby boomers into retirement; and
Our disciplined execution of this strategy has continued to drive profitable growth and higher cash generation, underlining our commitment to delivering both ‘Growth and Cash’.
Investments, our Asia asset management business, delivered record third-party net inflows of £5.4 billion (2013: £1.4 billion, on a constant exchange rate basis).
We are continuing to make solid progress towards our 2017 objectives announced in December 2013 as for the Asia objectives, we have now passed four half-year reporting periods out of the 10 half-year reporting periods of this programme.
Asia Asia delivered excellent results across all metrics during 2014. IFRS operating profit of £1,140 million was up 17 per cent over 2013 (6 per cent on actual exchange rate basis) and free surplus generation increased 15 per cent to £592 million (3 per cent on actual exchange rate basis), reflecting our
While product innovations are important we are increasingly finding that customer service is a key differentiator in 2017 objectives*
Asia objectives 1. Asia IFRS operating profit Asia life and asset management pre-tax IFRS operating profit to grow at a compound annual rate of at least 15 per cent over the period 2012–2017 (2012: £924 million8) £924m objective >£1,858m 2. Asia underlying free surplus Asia underlying free surplus generation7 of £0.9 billion to £1.1 billion in 2017 (2012: £484 million)
Key 2017 objective * The objectives assume exchange rates at December 2013 and economic assumptions made by Prudential in calculating the EEV basis supplementary information for the half year ended 30 June 2013, and are based on regulatory and solvency regimes applicable across the Group at the time the objectives were set. The objectives assume that the existing EEV, IFRS and free surplus methodology at December 2013 will be applicable over the period.
Our joint venture with CITIC in China continues to perform well, with APE sales increasing by 35 per cent, with progress in both the agency and bank channels. In India our joint venture with ICICI Bank remains the leader in the private sector with a market share of 10 per cent, and post-elections in May we have seen a significant increase in new business.
In addition to running these established businesses, we continue to keep an eye on the future and are setting foundations for growth in new markets. Following the successful launch of our life business in Cambodia in 2013, we are now the market leader. We also opened a representative office in Myanmar during 2014 and recently received a licence for a representative office in Laos.
US Our US business delivered a strong performance in 2014, with total IFRS operating profit of £1,443 million, up 17 per cent (11 per cent on an actual exchange rate basis). Jackson’s life IFRS operating profit grew 21 per cent (15 per cent on an actual exchange rate basis) to £1,431 million, driven primarily by increased fee income from higher levels of separate account assets. The growth in operating profit underpinned significant levels of capital generation in the period, enabling Jackson to remit a record £415 million of cash to the Group the marketplace, an evolution we welcome given the emphasis we have always placed on service and customer satisfaction. For example, our pioneering PRUhospital Friend concierge service in Indonesia is now four years old and has been extended to 49 hospitals covering 15 cities. It handles over 50 per cent of all protection claims. In Singapore, PRUhealthcare assist is the first-to-market dedicated hotline, staffed by experts who help customers to decide what treatments to pursue and which hospitals to use. Across the region, our success in looking after our customers and anticipating their needs is demonstrated by our ‘repeat sales’ to our existing customers: more than 40 per cent of new business APE sales in 2014 were generated by existing customers and our customer retention rate was over 90 per cent, a very important indicator of quality for us. The incentives of our staff in Asia are well aligned with this philosophy of emphasising quality growth and customer satisfaction.
In Singapore, we continue to lead the market with our popular regular premium and PRUshield products. Agency APE sales grew by 16 per cent as a result of increases in manpower and productivity. Bancassurance sales volumes were impacted by the cessation of the Maybank partnership during 2014, although volumes increased from our successful partnerships with Standard Chartered Bank and United Overseas Bank (‘UOB’).
Indonesia had a challenging year, with exceptional flooding disrupting sales in the first quarter, and the transition to a new president impacting sentiment during the year. Although APE sales were down 4 per cent on prior year, the resilience of our business is demonstrated by our significant market outperformance, which has seen our market share increased to 24 per cent9 as other providers were more severely affected by these factors than we were. We remain very optimistic about the outlook for the Indonesian economy and we experienced an encouraging rebound in activity during December 2014, with APE sales 36 per cent higher than November, passing the 1 trillion rupiah level for the first time.
UK, Europe and Africa Our UK business continues to focus on its core strengths of investment (with the with-profits offering as a core proposition) and retirement solutions. In 2014, Prudential UK delivered life IFRS operating profit of £752 million, up 7 per cent year-on-year, primarily as a result of higher sales of bulk annuities, partially offset by the impact of the contraction of the individual annuities market following market reforms. Cash remitted to the Group was £325 million, compared to £355 million in 2013, as we increased our investment in new business and upgraded our UK pre- and post-retirement customer proposition.
The UK market continues to be heavily influenced by a high level of regulatory and legislative change. The significant reforms of the pensions industry announced by the UK government, including removal of the requirement to purchase a pension annuity from April 2015, have resulted in an increasing proportion of customers deferring the decision to convert their pension savings into retirement income. The increased flexibility afforded by these reforms should ultimately help create an environment where more people are encouraged to save. The changes have also opened up opportunities for us to meet customer needs for alternative retirement solutions, including income drawdown. In December 2014 we launched a flexible drawdown product ahead of the introduction of the April 2015 pension reforms. This product will allow customers to access income drawdown without limits from April 2015, and is suited to customers who want more choice over how they use their retirement savings for income.
Retail sales growth across our range of investment products reflected the strength of our distribution capability, particularly our intermediary channel, as we responded to the challenges and opportunities created by the pension reforms. Sales in this segment, which includes onshore and offshore bonds, individual pensions and income drawdown, together delivered APE sales growth of 41 per cent. We will continue to develop our with-profits proposition, enhancing the range of investment choices available to policyholders, and have recently made PruFund available in the Individual Savings Account market. The growth in our investment products was offset by a 49 per cent reduction in APE sales of individual annuities, reflecting the market contraction since the UK budget announcement. Despite this market disruption, overall retail APE sales of £686 million were 2 per cent lower than 2013 and increased by 3 per cent in the second half of the year compared with the
(2013: £294 million), while maintaining a healthy balance sheet. Jackson’s risk-based capital ratio at the end of 2014 was 456 per cent, compared to 450 per cent at the end of 2013.
Fixed annuity APE sales of £53 million remained relatively flat compared to 2013, while fixed index annuity APE sales of £37 million decreased 57 per cent, primarily as a result of product changes implemented in late 2013 to ensure appropriate returns on shareholder capital.
EEV life operating profit3 was £1,528 million, up 5 per cent from 2013, reflecting growth in the scale of our in-force book, favourable experience variances, and higher new business profit. We continue to write business at overall new business margins close to post-crisis highs, demonstrating the positive effect of proactive product and pricing actions that have helped to mitigate the adverse impact of the low interest rate environment.
IFRS operating profit from non-life operations in the US decreased to £12 million (2013: £56 million), due to a Curian loss of £18 million that included a £38 million charge related primarily to the refund of certain fees by Curian.
Jackson’s strategy is unchanged, serving the 77 million baby boomers as they enter retirement, while delivering operating earnings and cash. We continue to price new business on a conservative basis, targeting value over volume. Our hedging remains focused on optimising the economics of our exposures, therefore accepting a degree of volatility in our accounting results where they are not aligned with the underlying economics. Thanks to this approach, Jackson has been able to deliver significant profitable growth across the cycle, while maintaining a strong balance sheet. Since 1 January 2008, Jackson has remitted nearly US$2.6 billion of cash to the Group. Jackson’s approach has successfully translated into value for customers and into profits and cash for shareholders, the metrics through which we ultimately measure the success of our strategy.
The strength and focus of our teams and of our businesses enabled us to deliver good financial and operational progress.
M&G M&G is an investment-led business that has managed money on behalf of individual and institutional investors for more than 80 years. Its focus on producing superior long-term investment returns, coupled with well-established distribution in the UK and across Europe, has underpinned another strong set of financial results, with funds under management and profits both reaching new highs.
During 2014, the combination of continued net fund inflows and generally positive market movements increased M&G’s total funds under management by 8 per cent to £264 billion at the end of the year. Within this, external funds under management grew by 9 per cent to £137 billion and now account for 52 per cent of M&G’s total funds under management, compared with 40 per cent five years ago.
Within our retail business, we continue to make strong progress, with expansion of distribution in Continental Europe in recent years transforming the scale of funds under management and helping to diversify the business. Today, international clients account for 43 per cent of retail funds under management, compared with just 16 per cent five years ago, and M&G’s retail funds are now registered in 22 jurisdictions. Net inflows across Continental Europe were at a record level of £8.1 billion in 2014, compared to £7.6 billion in 2013. This more than offset a net outflow of £1.7 billion in the UK (2013: net outflow of £0.7 billion). In the UK, M&G achieved record net inflows into the M&G Property Portfolio Fund, which directly invests across different property sectors such as retail, offices and industrial on behalf of its UK retail client base. The Property Portfolio Fund finished 2014 with external funds under management of £3.0 billion, placing it as the largest retail property fund in the UK market.
M&G also continues to pursue business diversification by fund, with seven of its retail funds, representing all the major asset classes, achieving net inflows of at least same period in 2013. Retail new business profit was 23 per cent lower at £165 million, largely due to the reduced sales of higher-margin individual annuities.
APE sales from other retail products, including individual pensions, income drawdown and offshore bonds, increased by 44 per cent to £201 million. Offshore bond APE sales were 44 per cent higher, reflecting the growing popularity of our with-profits fund. Income drawdown APE sales grew by 133 per cent to £35 million and individual pensions APE sales increased by 44 per cent to £72 million, both driven by the strength of our with-profits PruFund offering, and by customers selecting more flexible retirement income solutions in anticipation of the pension reforms.
Corporate pensions APE sales of £147 million were 15 per cent lower, mainly due to changes to public sector pension schemes. We remain the largest provider of Additional Voluntary Contribution plans within the public sector, where we provide schemes for 72 of the 99 public sector authorities in the UK (2013: 69 of the 99).
In Poland, our new life company, Prudential Polska, conducted its second year of business in 2014, growing ahead of plan. Headquartered in Warsaw, the business now has 15 branches across the country and 712 financial planning consultants. Its success is evidence of our ability to build franchises in new territories, leveraging effectively in this case some of our Asian staff and skills.
EEV life operating profit3 of £746 million was 10 per cent lower than 2013, reflecting a non-recurring contribution of £98 million in 2013 from the reduction in the rate of UK corporation tax.
Group Chief Executive’s report continued £250 million during the year. One of these, the M&G Optimal Income Fund, became the top-selling10 European cross-border fund in 2014, based on annual net flows as of 31 December 2014.
At the end of 2014 retail funds under management were £74.3 billion, up 11 per cent from 2013 levels, driven by positive net inflows, which totalled £6.7 billion (2013: net inflows of £7.3 billion), including the contribution from our associate entity in South Africa.
A track record of innovation in the institutional market has enabled M&G to be at the forefront of a number of specialist fixed income markets, including leveraged finance and infrastructure investment. The consistency of institutional investment performance and its reputation for innovation earned M&G the prestigious 2014 Financial News Institutional Asset Management Awards for both fixed income and real estate for the second consecutive year.
Net institutional inflows were £401 million, compared with £2.1 billion in 2013. As expected, a number of segregated clients withdrew money from public debt funds as they reallocated scheme assets. There were also further planned redemptions from a large low-margin mandate. In general, outgoing assets have been replaced by flows into higher-margin products, helping to improve the profitability of the institutional business. M&G has in place a multi-billionpound pipeline of institutional commitments at the end of 2014 across a diverse range of investment strategies that has yet to be invested.
External institutional funds under management increased 7 per cent in 2014 to £62.7 billion.
We continue to take a disciplined approach to capital management and have implemented a number of measures over the last few years to enable us to make our capital work both more efficiently and more effectively for the Group. Using the regulatory measures of the IGD, our Group capital surplus position6 at 31 December 2014 was estimated at £4.7 billion (2013: £5.1 billion), after funding the fees payable for the new 15-year exclusive distribution agreement with Standard Chartered Bank. The IGD surplus is stated before allowing for the final dividend and is equivalent to a cover of 2.4 times.
In July 2013, Prudential plc was listed by the Financial Stability Board as one of nine companies to be designated as a Global Systemically Important Insurer (GSII). In July 2014 the International Association of Insurance Supervisors released a consultation paper on the Basic Capital Requirement, one of the two types of capital requirement proposed under the GSII framework. Prudential is monitoring the development and potential impact of the framework of policy measures and engaging closely with the Prudential Regulation Authority on the implication of this designation.
Solvency II is scheduled to come into effect on 1 January 2016 and our preparations are well advanced. While the Omnibus II Directive is now in place, there are still many areas which require further interpretation. We continue to work with the Prudential Regulation Authority on shaping the outcome to ensure that the £4.7bn estimated IGD capital surplus covering capital requirements times
2 Including Prudential Capital. 3 The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly, 2013 results are shown on a comparable basis.
4 Annual Premium Equivalent (APE) sales comprise regular premium sales plus one-tenth of single premium insurance sales.
6 Before allowing for final dividend. 7 Underlying free surplus generation comprises underlying free surplus released from long-term business (net of investment in new business) and that generated from asset management operations. The 2012 comparative is based on the retrospective application of new and amended accounting standards and excludes the 2012 one-off gain of £51 million from the sale of the Group’s holding in China Life Insurance Company of Taiwan.
9 Based on AAJI statistics to 30 September 2014. 10 Source: Lipper FMI, FundFile as of 31 December 2014. 11 Excluding performance fees, carried interest and share of profits from associate entity, PPM South Africa.
Outlook 2014 was a successful year for the Group, where the strength and focus of our teams and of our businesses enabled us to deliver good financial and operational progress and maintain a robust capital position, despite a number of challenges both globally and locally.
It is clear that we are operating in a period of considerable change. 2015 has already seen a continuation of macroeconomic volatility, political upheaval and unexpected shifts in central bank positioning, with the uncertainty of election outcomes in many countries in Europe, including in the UK, still to come before the end of the year. As a result, investment markets generally remain cautious on the global outlook, reflected in further declines in long-term interest rates in most of the major economies in early 2015. The persistently low level of interest rates is a challenge for insurance companies. However, in recent years we have positioned the Group through proactive actions on product mix, pricing and our balance sheet to mitigate the negative effects of the low interest rate environment and continue to grow our earnings. We have had the same strategy since 2009 and it has served us well. We continue to execute with discipline and purpose and we believe our strategy and operating principles enable us to deliver relative outperformance across the cycle, as evidenced during the financial crisis.
Asia, with its strong economic growth, young and growing population with savings and protection needs, and low levels of insurance penetration, continues to represent the most attractive opportunity in our industry today and therefore remains the primary focus of our profitable growth ambitions. Our established, growing multi-distribution platform puts us in a strong position to continue to capture profitably the opportunities available to us in Asia, while the breadth of our franchise, by geography, product and channel, provides us with the resilience that has allowed us to achieve relative outperformance through the cycle, even when individual countries presented short-term challenges. We will continue to invest in enhancing our agency and bancassurance distribution capabilities, to ensure our customers have effective advice-led access to our products. This was most recently evidenced by the renewal in 2014 of our pan-regional relationship with Standard Chartered Bank for another 15 years. The strong underlying fundamentals of economic growth and increasing affluence in Asia, and the quality of our products, people and distribution, remain powerful drivers of our ability to generate profitable growth while delivering value for our customers.
It has been a privilege and a pleasure to lead Prudential, one of the iconic companies in UK financial services. We have successfully navigated some challenging times, including the global financial crisis, and have emerged with four profitable and strongly cash-generative businesses. I owe an enormous debt of gratitude to the staff and agents of Prudential around the world who have made these achievements possible and I want to thank them personally for their hard work and dedication. I leave the Group in good shape and look forward to seeing shareholders at my final Annual General Meeting as Group Chief Executive in May.
Prudential plc is an international financial services group serving around 24 million insurance customers and with £496 billion of assets under management. We are listed on stock exchanges in London, Hong Kong, Singapore and New York.
Jackson Jackson is one of the largest life insurance companies in the US, providing retirement savings and income solutions aimed at the 77 million ‘baby boomers’. Founded over 50 years ago, Jackson has a long and successful record of providing advisers with the products, tools and support to design effective retirement solutions for their clients.
Prudential UK & Europe Prudential is a long-established leading provider of life and pensions, with a relentless focus on the needs of the age cohorts where wealth is most heavily concentrated. Our core strengths in with-profits and retirement are underpinned by our expertise in areas such as longevity, risk management and multi-asset investment, together with our financial strength and highly respected brand.
O u r w o rld 24m life customers worldwide £496bn assets under management stock exchange listings 166 years of providing financial security
Our strategy is designed to create sustainable economic value for our customers and our shareholders. It is focused on three long-term opportunities: — The significant protection gap and investment needs of the Asian middle class; — The transition of US baby boomers into retirement; and — The UK ‘savings gap’ and ageing population in need of returns and income.
Our products are designed to provide peace of mind to our customers, whether that be in relation to saving for retirement or insuring against the risks of illness, death or critical life events. Satisfied customers are a key driver of our growth as they become our advocates, recommending our products and services to their friends and families.
Distribution plays a key role in our ability to reach, attract and retain these valued customers across our regions. Building out and diversifying our distribution capabilities in order to reach a growing customer base will help ensure that we fully capitalise on the opportunities available to us in each of our regions.
— To highlight the cash generation of our business, which over time is the ultimate measure of performance.
— Controlling sales of US variable annuities in a manner which appropriately balances value, volume, capital generation and balance sheet risk.
O u r strategy an d o p eratin g p rin cip les
H ow o u r bu sin ess w o rk s
Societies Supporting societies where we operate, through investment in business and infrastructure, tax revenues and community support activities 24m life customers worldwide total shareholders’ return2 achieved since 2010 employees worldwide £19.6m total community investment spend
Products Offer valued and innovative products underpinned by good investment performance
Brands and distribution Trusted brands, market span and strong distribution links help us to attract new monies and retain existing assets
Shareholders Generate value for shareholders through fee income from managing growing funds under management
Notes 1 On a Statutory (Pillar 1) basis. 2 Total shareholders’ return represents the growth in the value of a share plus the value of dividends paid, assuming that the dividends are reinvested in the
EEV new business profit3 (£m) Life insurance products are, by their nature, long term and generate profit over a significant number of years. Embedded value reporting provides investors with a measure of the future profits streams of the Group. EEV new business profit reflects the value of future profit streams which are not fully captured in the year of sale under IFRS reporting.
— EEV new business profit in 2014 increased by 10 per cent on a constant exchange rate basis (2 per cent on an actual exchange rate basis), compared to 2013, driven by a combination of higher volumes and pricing and product actions to increase profitability.
EEV operating profit3 (£m) EEV operating profit is provided as an additional measure of profitability. This measure includes EEV new business profit, the change in the value of the Group’s long-term in-force business, and profit from our asset management and other businesses. As with IFRS, EEV operating profit reflects the underlying results based on longerterm investment returns.
M easu rin g o u r p erfo rm an ce
Business unit remittances (£m) Remittances measure the cash transferred from business units to the Group. Cash flows across the Group reflect our aim of achieving a balance between ensuring sufficient net remittances from business units to cover the dividend (after corporate costs) and the use of cash for reinvestment in profitable opportunities available to the Group.
— Business unit remittances increased by 11 per cent in 2014, compared to 2013, with higher contributions from the US and M&G.
IGD capital surplus before final dividend5 (£bn) Prudential is subject to the capital adequacy requirements of the European Union IGD as implemented by the Prudential Regulation Authority in the UK. The IGD capital surplus represents the aggregated surplus capital (on a Prudential Regulation Authority consistent basis) of the Group’s regulated subsidiaries less the Group’s borrowings6. No diversification benefit is recognised. 2010 2011 2012 2013 2014
— We operate with a strong solvency position, with our estimated IGD capital surplus after funding the fees paid for renewing our exclusive distribution agreement with Standard Chartered Bank until 2029 and before final dividend covering the capital requirements 2.4 times.
Chief Financial Officer’s report on our 2014 financial performance page 39
4 Free surplus generation represents ‘underlying free surplus’ based on operating movements, including the general insurance commission earned during the period and excludes market movements, foreign exchange, capital movements, shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs. In addition, following its reclassification as held for sale, operating results exclude the result of the Japan Life insurance business.
8 Underlying free surplus generated comprises underlying free surplus generated from long-term business (net of investment in new business) and that generated from asset management operations. The 2012 comparative is based on the retrospective application of new and amended accounting standards and excludes the one-off gain of £51 million from the sale of the Group’s holdings in China Life Insurance Company in Taiwan.
Group objective for cumulative period 1 January 2014 to 31 December 2017 to 31 Dec 2014 1 Jan 2014 to
* Gain on sale of China Life Insurance Company in Taiwan
Net cash remittances £m Eastspring Investments funds under management £bn www.prudentialcorporation-asia.com Measuring our performance page 20
u r bu sin esses an d th eir p erfo rm an ce 23 Prudential plc Annual Report 2014
u r bu sin esses an d th eir p erfo rm an ce 25 Prudential plc Annual Report 2014
– Key indicators for Asia and the Pacific 2010. Prudential estimates.
* Prudential’s rank in insurance market by new business APE. Based on formal (competitors’ results releases, local regulators, insurance associations) and informal (industry exchange) market-share data.
For—example,—in—markets—such—as— Indonesia—and—Malaysia—there—is—a—high— demand—for—regular—premium—unit-linked— policies—that—provide—coverage—for—hospital— and—surgical—and—critical—illnesses,— combined—with—savings—for—items—such—as— children’s—education.—In—Hong—Kong—there—is— high—demand—for—participating—products— where—the—smoothed—investment—returns— are—particularly—appealing—as—part—of—a— broader—financial—plan.
Jackson’s strategy remains focused on providing value to its customers and driving shareholder value while operating within a conservative risk-management framework. This approach has enabled us to successfully navigate the significant macroeconomic and financial market challenges of the last six years and ensured a continuation of our strong performance in 2014.
Prudential’s strategy of ‘build on strength’ in the US is well established and continues to focus on: —— Capitalising—on—the—‘baby—boomer’— retirement—opportunities;—
Jackson’s—long-term—strategy—consists— of—capitalising—on—the—profitable—growth— opportunities—created—by—the—demands— for—retirement—income—and—accumulation— products—due—to—the—demographic— transitions—within—the—world’s—largest— retirement—market.—Jackson—takes—a— disciplined—approach—to—this—opportunity— by—leveraging—its—distinctive—distribution— capabilities—and—asset—liability—management— expertise—to—offer—prudently—priced—annuity— products—aligned—with—our—risk—appetite.—We— continue—to—see—strong—consumer—demand— for—our—products—and—will—continue—to—drive— product—innovation—as—a—way—of—meeting— the—needs—of—customers—and—generating— shareholder—value.—With—a—long-term—focus— on—balancing—the—needs—of—multiple— stakeholders,—Jackson—has—forged—a—solid— reputation—among—advisers—for—financial— stability,—innovative—products—and— market-leading—wholesale—support.—Our— relentless—pursuit—of—excellence—has—earned— us—a—leading—position—within—the—industry.
Elite—Access—helps—customers—prepare— for—any—market—conditions—by—offering: —— A—wide—array—of—traditional—equity—and— fixed-income—investments—that—provide— core—market—exposure; —— Additional—diversification—from— alternative—assets—and—strategies— that—help—customers—modernise— their—portfolio; —— Access—to—expertise—previously— available—to—only—institutional—and— accredited—investors,—through— ready-to-go—Guidance—PortfoliosSM— managed—and—crafted—to—meet— specific—investment—objectives— using—a—complement—of— investments—and—strategies;—
Distribution capabilities Our—distribution—teams—set—us—apart—from— our—competitors—within—the—markets—in— which—we—compete.—Jackson’s—wholesaling— force—is—the—largest—in—the—industry,— supporting—thousands—of—advisers—across— multiple—channels—and—distribution—outlets.— Our—wholesalers—provide—extensive—training— across—a—variety—of—topics—to—these—advisers,— and—in—2014—continued—to—focus—training— efforts—around—its—newest—product,—Elite— Access,—with—a—total—of—374—Elite—Access— meetings—and—over—10,000—advisers— in—attendance.—
Curian—is—Jackson’s—retail—asset— management—arm,—distributing—investment— solutions—which—include—separate—accounts,— mutual—funds,—mutual—fund—wraps—and— exchange-traded—funds—through—an—online— platform.—Curian—gives—financial—advisers— efficient—access—to—a—broad—range—of— investment—solutions—that—are—developed— with—institutional-level—investment—manager— due—diligence,—portfolio—construction—and— asset—allocation—resources.—
Operational efficiencies We—support—our—industry-leading— distribution—teams—with—award-winning— customer—service.—Jackson—was—awarded—by— Service—Quality—Measurement—Group,—Inc.— ‘World—Class—Certification’—in—customer— satisfaction—and—received—the—‘Highest— Customer—Satisfaction—by—Industry’—award,— achieving—the—top—rating—for—the—financial— industry,—for—the—ninth—consecutive—year.— High-quality—information—technology— systems—are—critical—for—providing—awardwinning —customer—service.—We—leverage— technology—to—minimise—processing—errors— and—reduce—the—time—required—to—process— new—business—and—commissions.—The— flexibility—of—our—information—technology— systems—contributes—to—our—ability—to— manufacture,—distribute—and—service—an— unbundled—product—design—and—to— distinguish—us—from—others—in—the—industry.
Our—hedge—philosophy—has—not—changed— in—2014.—Jackson—is—able—to—aggregate— financial—risks—across—the—Company,—obtain— a—unified—view—of—our—risk—positions,—and— actively—manage—net—risks—through— economically-based—hedging—programmes.— A—key—element—of—our—core—strategy—is—to— protect—the—Company—from—severe— economic—scenarios—while—maintaining— adequate—regulatory—capital.—We—benefit— from—the—fact—that—the—competitive— environment—continues—to—favour— companies—with—good—financial—strength— ratings—and—a—strong—track—record—of— financial—discipline,—both—key—elements— of—our—long-term—strategy.—
3 Source: US Census Bureau. 4 Based on total annuity sales, LIMRA, U.S.
The strategy in the UK business continues to be one of ‘focus’: —— Selective—participation; —— Capital—discipline; —— Sustainable—cash—generation;—
The business proved resilient despite unprecedented regulatory change in 2014, delivering a stable, robust financial performance while favourable brand recognition, diversified distribution and a market leading with-profits proposition positions us strongly to help customers save with confidence to secure a dependable retirement income.
In—addition—to—our—customers,—our— shareholders—also—continue—to—benefit—from— the—steady—performance—of—our—with-profits— based—products—and—the—cash—they— generate.—The—chart—overleaf—shows—the— outperformance—of—our—with-profit—funds— when—compared—to—peers.—This— performance—has—allowed—us—to—add—an— estimated—£1.9—billion—to—with-profits—policies— in—the—year.—Policyholders—will—typically— have—seen—year-on-year—increases— —
Save for retirement — Pension (DC) — Greater use of other vehicles
Our product set and balance sheet strength position us well for the change
Prudential—has—a—long-standing— reputation—as—a—leading—provider—in—the—bulk— annuity—marketplace—participating—at—the— higher—end—of—the—market—with—the—seven— transactions—completed—in—2014—generating— sales—in—excess—of—£1.7—billion.—In—a—market— that—has—around—£1.8—trillion4—of—liabilities— that—scheme—trustees—are—increasingly—keen— to—remove—from—their—balance—sheets,—we— selectively—participate—where—premiums— are—larger—and—the—added—complexity—and— greater—focus—on—financial—strength—is—better— suited—to—our—core—capabilities.
We—are—also—positive—about—the— long-term—opportunities—in—Africa,—where— we—see—many—of—the—favourable—structural— characteristics—of—our—Asia—markets,— although—most—sub-Saharan—life—insurance— markets—are—in—the—very—early—stages—of— development—and—therefore—are—not—likely—to— be—material—for—many—years.—During—2014—we— acquired—Express—Life—in—Ghana—and—Shield— Assurance—Company—in—Kenya,—both—of— which—have—been—renamed—using—the— Prudential—brand.
Prudential—UK—&—Europe—will—continue—to— focus—on—its—core—strengths—of—with-profits— and—retirement—income,—while—utilising—its— highly—regarded—brand—franchise—in—order—to— help—its—consumers—accumulate—savings—to— help—fund—a—dependable—income—in— retirement.—It—will—do—so—by—expanding—the— PruFund—range—initially—to—the—Individual— Savings—Account—market,—developing—its— annuity—and—income—drawdown— propositions,—and—exploring—the— opportunity—to—bring—further—saving—and— investment—products—to—market—following— the—introduction—of—pensions—freedoms— in—April—2015.—
2 Financial Adviser Service Awards. 3 Prudential, Financial Express. All figures to 31 December 2014. The with-profits gross performance is gross of tax, charges and the effects of smoothing. Cumulative returns for Company A, B and C have been calculated internally based on bonus announcements gathered from publicly available sources; these may differ from figures quoted by the Company.
Market backdrop over the past year The—global—economy—appeared—to—lose— momentum—towards—the—end—of—2014.— While—the—US—showed—signs—of—improving— economics,—the—Eurozone—and—Japan— struggled—to—generate—positive—growth—with— the—Chinese—economy—softening.—Concerns— about—slower—economic—activity—fuelled—an— upsurge—in—market—volatility,—as—investors— worried—whether—central—banks—would—be—
Our—success—is—evident—in—the—fact—that— we—have—achieved—positive—net—inflows— from—external—clients—for—12—consecutive— years,—reflecting—the—attractiveness—of—our— diverse—fund—range—and—strong—investment— returns.—M&G—recorded—net—fund—inflows— of—£7.1—billion—in—2014,—compared—with— £9.5—billion—during—2013.—While—these—levels— are—lower,—we—expected—new—business—to— return—to—more—normal—levels—following—an— exceptionally—strong—period—since—2009.— It—is—the—consistency—with—which—we— generate—net—sales—that—drives—our—business— growth—and—profitability.—During—the—last— five—years,—we—have—produced—average— annual—net—sales—of—£9.4—billion—with—external— funds—under—management—growing—at—a— compound—rate—of—14—per—cent—per—annum— over—the—same—period.—Our—ability—to— maintain—a—strong—sales—performance—over— such—a—time—period—demonstrates—M&G’s— ongoing—strength—in—depth—across—all—the— principal—asset—classes—and—distribution— channels.—In—2014,—no—fewer—than—seven— of—M&G’s—retail—funds,—representing—all— of—the—main—asset—classes,—achieved—net— sales—in—excess—of—£250—million—over—the— full—year.
Retail—clients—favour—pooled—funds,—such— as—open-ended—investment—companies,— which—they—buy—directly—from—M&G—or,— more—typically,—through—an—intermediary— such—as—an—independent—financial—adviser— or—discretionary—fund—manager.—By—total— UK—assets—under—management,—M&G—is—the— second—largest—retail—fund—manager,—with— £40.7—billion—of—assets—under—management,— equivalent—to—a—market—share—of—7.7—per—cent4.— In—Europe,—where—M&G—has—distributed— funds—since—2002,—it—has—over—£31.8—billion— of—assets—under—management—and—a—market— share—of—0.59—per—cent5.
Fixed income:—M&G—is—one—of—Europe’s— largest—fixed-income—investors.—Our—fund— managers—benefit—from—one—of—the—region’s— largest—and—most—experienced—in-house— credit—research—teams,—whose—knowledge— covers—the—full—range—of—fixed-income— investment,—from—the—management—of— sovereign—debt—and—public—corporate—bond— portfolios,—through—to—private—debt—such—as— leveraged—finance,—real—estate—finance,— direct—lending—and—infrastructure.—In—a— ranking—of—global—private—debt—managers— for—2014,—M&G—ranked—fifth6—and—was— the—only—European—firm—in—the—top—105.
Real estate:—M&G—Real—Estate—is—a— leading—global—property—investor—and— manager—covering—all—major—real—estate— sectors—including—business—space,—retail— and—leisure,—residential—and—alternatives.— We—actively—manage—our—assets,—drawing— on—our—long—heritage—of—expertise—and— knowledge—and—our—extensive—network— of—contacts.—This—approach—enables—the— business—to—identify—and—capitalise—on— attractive—investment—opportunities.— We—also—have—a—track—record—for—identifying— and—exploiting—real-estate—development— opportunities—and—for—the—successful—
Over—the—last—few—years,—M&G—has—met— this—need—by—building—a—comprehensive— range—of—fixed-income—credit—funds— designed—to—provide—returns—above—either— inflation—or—an—interest—rate.—The—range— includes—a—public—corporate—bond—fund—for— clients—with—daily—dealing—requirements,— funds—that—allocate—to—private—and—illiquid— credit—(such—as—corporate—and—social— housing—loans)—and—a—fund—with—the— flexibility—to—seek—the—best—investment— opportunities—across—public—and—private— debt—markets.
5 Lipper FMI FundFile, 31 December 2014, based on Europe excluding UK and International region. M&G data sourced internally.
6 Private Debt Investor figures based on amount of capital raised over the last five years for discrete private debt strategies.
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I n 2014 Prudential delivered strong growth in IFRS operating profit and underlying free surplus generation, the two metrics that underpin our 2017 financial objectives. The Group’s overall financial performance increasingly benefits from ongoing enhancements in the quality of our earnings – delivered through stronger growth in non-interest sensitive sources – and from improvements in the balance of profit and cash across different geographies, products and distribution channels.
During—2014,—the—performance—of—the— equity—markets—in—the—countries—that—we— operate—in—has—been—broadly—positive,—with— the—US—S&P—500—index—up—11—per—cent,—while— the—UK—FTSE—100—index—and—the—MSCI—Asia— ex-Japan—index—were—flat.—Continued— speculation—on—global—growth—prospects—and— the—timing—of—key—interest—rate—decisions—has— led—to—some—volatility—in—long-term—yields,— with—most—markets—experiencing—a—significant— decline—in—10-year—bond—yields—during—2014,— largely—reversing—the—increases—seen—in—2013.— As—significant—long-term—holders—of— investment—securities,—insurance—company— results—reflect—the—negative—and—positive— fluctuations—in—the—value—of—these—assets.— We—include—the—impact—of—these—short-term— market—movements—outside—the—operating— result,—which—is—based—on—longer-term— investment—assumptions,—on—both—the—IFRS— and—the—European—Embedded—Value—(‘EEV’)— reporting—bases.—In—addition,—we—continue—to— take—steps—to—protect—ourselves—from—the— downside—risks—to—the—Group’s—financial— position—associated—with—the—guarantees—that— we—offer—to—our—customers—and—this—also—gives— rise—to—short-term—investment—fluctuations,— particularly—on—the—IFRS—reporting—basis— where—the—corresponding—movement—in—the— economic—effects—associated—with—these—
Asset—management—business: Total operating profit based on longer-term investment returns 3,186 2,954 8 2,787 14
Short-term—fluctuations—in—investment—returns: Profit before tax attributable to shareholders 2,614 1,635 60 1,532 71 Tax—charge—attributable—to—shareholders’—returns (398) (289) (38) (262) (52)
Profit for the year attributable to shareholders 2,216 1,346 65 1,270 74
Basic—earnings—per—share—based—on—operating—profit—after—tax 96.6 90.9 6 85.9 12 Basic—earnings—per—share—based—on—total—profit—after—tax 86.9 52.8 65 49.8 74
—— Asia total operating profit—of— £1,140—million—was—17—per—cent—higher— than—the—previous—year,—(6—per—cent—on—an— actual—exchange—rate—basis),—with—strong— growth—in—both—life—insurance—and— Eastspring—Investments,—our—Asia-based— asset—management—business
Life insurance operations:—taken— together,—IFRS—operating—profit—from—our— life—insurance—operations—in—Asia,—the—US— and—the—UK—increased—16—per—cent—to— £3,233—million.—This—increase—reflects—the— growth—in—the—scale—of—these—operations,— driven—primarily—by—positive—business— inflows.—We—track—the—progress—that—we— make—in—growing—our—life—insurance—business— by—reference—to—the—scale—of—our—obligations— to—our—customers,—which—are—referred—to—in— the—financial—statements—as—policyholder—
liabilities.—Each—year—these—liabilities— increase—as—we—collect—premiums,—and— decrease—as—we—pay—claims—and—policies— mature.—The—overall—scale—of—these— policyholder—liabilities—is—relevant—in— evaluating—our—profit—potential,—in—that—it— reflects,—for—example,—our—ability—to—earn— fees—on—the—unit-linked—element,—and—it—sizes— the—risk—that—we—carry—on—the—insurance— element,—for—which—Prudential—needs—to— be—rewarded.—
At 31 December * Including reduction of £1,026 million following reclassification of Japan as held for sale
Note 1(a): Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver page 313
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UK—life—IFRS—operating—profit—was— 7—per—cent—higher—than—2013—at—£752—million— (2013:—£706—million),—principally—due—to—a— £105—million—profit—contribution—from—bulk— annuity—transactions—(2013:—£25—million),— the—result—of—our—selective—approach—of—only— writing—this—business—on—attractive—returns.— The—UK—market—reforms—announced— in—March—2014—triggered—a—dramatic— market-wide—decline—in—sales—of—individual— annuities.—Our—UK—life—business—was— similarly—affected—and—experienced—a— £53—million—decline—in—profit—from—new—retail— annuity—sales—(from—£110—million—in—2013—to— £57—million—in—2014).—Life—IFRS—operating— profit—includes—a—contribution—of—£23—million— from—our—25—per—cent—share—of—the—PruHealth— and—PruProtect—businesses—which—we— disposed—in—November—2014.—
Asset management:—our—asset— management—businesses—in—the—UK— and—Asia—collectively—contributed—IFRS— operating—profit—of—£578—million,—up— 14—per—cent—on—2013.—Similar—to—the—trend— observed—in—our—life—operations,—growth— in—asset—management—operating—profit— primarily—reflects—the—increased—scale—of— these—businesses,—as—measured—by—funds— managed—on—behalf—of—external—institutional— and—retail—customers—and—our—internal—life— insurance—operations.—Net—inflows—from— external—parties—into—these—funds,—excluding— Money—Market—Funds—(MMF),—were— £12.5—billion—in—2014—(2013:—£10.9—billion—on— a—constant—exchange—rate—basis)—and—helped— drive—external—retail—and—institutional—funds— under—management—(excluding—MMF)—to— £162.4—billion—at—31—December—2014— compared—to—£143.9—billion—at—— 31—December—2013.—
Total tax contribution The—Group—continues—to—make—significant— tax—contributions—in—the—countries—in—which— it—operates,—with—£2,237—million—remitted—to— tax—authorities—in—2014.—This—was—higher— than—the—equivalent—amount—of— £1,797—million—in—2013,—reflecting—increased— profits—and—the—non-recurrence—of—the—2013— tax—refunds—for—previous—overpaid—taxes.—
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The—increase—in—free—surplus—generated—by— our—life—insurance—businesses—reflects—our— growing—scale—and—the—highly—capital— generative—nature—of—our—business—model.— We—drive—this—metric—by—targeting—markets— and—products—that—have—low-strain,— high-return—and—fast-payback—profiles,—and— by—delivering—both—good—service—and—value— to—improve—customer—retention.—Our—ability— to—generate—both—growth—and—cash—is—a— distinctive—feature—of—Prudential—in—our— industry.—In—line—with—this—approach,—Asia— and—the—US—reported—strong—increases—in— free—surplus—generation.—In—the—UK,—a—higher— underlying—contribution—from—the—in-force— portfolio—was—masked—by—the—nonrecurrence —of—a—positive—assumption—change— in—2013.—The—closing—value—of—free—surplus—in— our—life—and—asset—management—operations— increased—to—£5,059—million—at—31—December—
— Cash—remitted—by—the—business—units—to— the—corporate—centre—in—2014—increased— by—11—per—cent—to—£1,482—million—with— significant—contributions—from—each—of— our—four—major—business—units.—The—higher— overall—total—in—2014—has—been—driven—by— growth—in—the—remittance—from—the—US—to— a—record—£415—million—(2013:—£294—million),— reflecting—both—the—strong—capital— generation—of—Jackson’s—life—business—in— the—year—and—its—effective—approach—to—risk— management.—Notwithstanding—the— depreciation—of—many—Asia—currencies— against—sterling,—net—remittances—from—these— operations—proved—resilient—at—£400—million.— As—announced—earlier—in—2014,—regulatory— developments—in—the—UK—require—us—to— increase—the—level—of—investment—in—new— business—and—in—upgrading—our—UK—pre-— and—post-retirement—customer—proposition.—
Cash—remitted—to—the—Group—in—2014—was— used—to—meet—central—costs—of—£353—million— (2013:—£315—million),—pay—dividends—of— £895—million—(2013:—£781—million)—and— repay—£445—million—(US$750—million)—of— 11.75—per—cent—perpetual—subordinated— debt.—In—addition,—£503—million— (US$850—million)—of—central—cash—was—used— to—finance—the—initial—up-front—payment—for— the—renewal—of—the—distribution—agreement— with—Standard—Chartered—Bank.—Reflecting— these—movements—in—the—year,—total—holding— company—cash—at—the—end—of—2014—was— £1,480—million—compared—to—£2,230—million— at—the—end—of—2013.
Asset—management—business: Post-tax operating profit based on longer-term investment returns 4,096 4,204 (3) 3,933 4
Note 2: Results analysis by business area page 280 £1,482m net cash remittances from business units increase on 2013
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On—an—EEV—basis,—Group—post-tax—operating— profit—based—on—longer-term—investment— returns—was—4—per—cent—higher—(negative— 3—per—cent—on—an—actual—exchange—rate—basis)— at—£4,096—million—in—2014.—The—increase—is— primarily—due—to—higher—new—business—profit— from—the—Group’s—life—businesses,—which— increased—by—10—per—cent—to—£2,126—million.— Contributions—both—from—new—business—and— from—our—in-force—portfolio—were—negatively— impacted—by—the—fall—in—long-term—interest— rates—over—2014.—If—long-term—interest—rates— at—the—end—of—2014—had—remained—at—the— same—levels—as—those—at—the—start—of—the—year,— new—business—profit—and—EEV—operating— profit—would—have—increased—year-on-year— by—14—per—cent—and—11—per—cent—respectively— (on—a—constant—exchange—rate—basis).
The—reduction—in—long-term—yields—since—the— end—of—2013—has—an—adverse—impact—on—the— overall—level—of—future—earnings—that—we— expect—to—generate—from—our—existing—book— of—business.—Once—this—and—other—changes—in— investment—market—conditions—are—factored— into—the—EEV—calculations,—they—give—rise—to—a— negative—movement—of—£369—million—in—2014— (2013:—positive—£629—million—on—an—actual— exchange—rate—basis)—partly—offsetting—the— overall—positive—short-term—fluctuations— reported—in—the—year.—
Shareholders’ funds at end of the year 11,811 9,650 29,161 24,856
IFRS Consolidated statement of changes in equity page 125 and Note 12: Reconciliation of movement in shareholders’ equity page 291
In—the—second—half—of—2014—the—US—dollar— appreciated—strongly—relative—to—sterling— reflecting—market—expectations—of—a— sustained—recovery—in—the—US.—With— approximately—36—per—cent—of—the—Group’s— IFRS—net—assets—(52—per—cent—of—EEV—net— assets)—denominated—in—US—dollars—(or— currencies—that—are—either—pegged—or— managed—by—reference—to—US—dollars),—this— generated—a—positive—foreign—exchange— movement—on—net—assets—in—the—year.—In— addition,—the—reduction—in—US—10-year— treasury—rates,—produced—unrealised—gains— on—fixed-income—securities—held—by—Jackson— that—are—accounted—on—an—amortised—cost— basis—under—IFRS.—
Sale of PruHealth and PruProtect On—10—November—2014,—Prudential— Assurance—Company—Limited—completed— the—sale—of—its—25—per—cent—equity—stake—in— the—PruHealth—and—PruProtect—businesses— to—Discovery—Group—Europe—Limited—for— £155—million—in—cash.—This—resulted—in—an— IFRS—profit—of—£86—million—and—EEV—gain—of— £44—million,—both—of—which—have—been— included—in—non-operating—profit.—
Notes 1 The 2014 EEV results of the Group are presented on a post-tax basis and, accordingly 2013 results are shown on a comparable basis.
2 After Asia development costs. 3 Refer to note B1.1 in IFRS financial statements for the breakdown of other income and expenditure, and other non-operating items.
8 Net inflows exclude Asia Money Market Fund (MMF) inflows of £9 million (2013: net inflows £522 million). External funds under management exclude Asia MMF balances of £4,800 million (2013: £4,296 million).
12 The full holding company cash flow is disclosed in note II (a) of additional unaudited IFRS financial information.
15 The methodology and assumptions used in calculating the economic capital results are set out in note II (c) of additional unaudited financial information. The economic capital ratio is based on outputs from the Group’s Solvency II internal model which will be subject to Prudential Regulation Authority review and approval before its formal adoption in 2016. We remain on track to submit our Solvency II internal model to the Prudential Regulation Authority for approval in 2015 but, given the degree of uncertainty remaining, these economic capital disclosures should not be interpreted as outputs from an approved internal model.
16 Net of related charges to deferred acquisition costs and tax.
17 Operating profit after tax and non-controlling interests as percentage of opening shareholders’ funds.
W e generate shareholder value by selectively taking exposure to risks that are adequately rewarded and that can be appropriately quantified and managed. We retain material risks only where consistent with our risk appetite and risk-taking philosophy, that is: (i) they contribute to value creation; (ii) adverse outcomes can be withstood; and (iii) we have the capabilities, expertise, processes and controls to manage them.
Primary—responsibility—for—strategy,— performance—management—and—risk—control— lies—with—the—Board,—which—has—established— the—Group—Risk—Committee—to—assist—in— providing—leadership,—direction—and— oversight—in—respect—of—the—Group’s— significant—risks,—and—with—the—Group—Chief— Executive—and—the—Chief—Executives—of—each— of—the—Group’s—business—units.—Some—of—the— key—responsibilities—of—the—Group—Risk— Committee—include—the—responsibility—for— recommending—the—Own—Risk—and—Solvency— Assessment—and—other—regulatory— submissions—to—the—Board,—keeping—the— ‘three—lines—of—defence’—framework—under— review—and—monitoring—the—effectiveness—of— the—Group—Chief—Risk—Officer.— —
We take exposure to risks that are consistent with our risk appetite framework and philosophy towards risk-taking, and where doing so contributes to value creation on a risk-adjusted basis.
Group—Risk—has—responsibility—for— establishing—and—embedding—a—capital— management—and—risk—oversight—framework— and—culture—consistent—with—our—risk— appetite—that—protects—and—enhances—the— Group’s—embedded—and—franchise—value.— Group—Compliance—provides—verification—of— compliance—with—regulatory—standards—and— informs—the—Board,—as—well—as—the—Group’s— management,—on—key—regulatory—issues— affecting—the—Group.—Group—Security—is— responsible—for—developing—and—delivering— appropriate—security—measures—with—a—view— to—protecting—the—Group’s—staff,—physical— assets—and—intellectual—property.—
Material—risks—will—only—be—retained— where—this—is—consistent—with—Prudential’s— risk—appetite—framework—and—its—philosophy— towards—risk-taking.—The—Group’s—current— approach—is—to—retain—such—risks—where— doing—so—contributes—to—value—creation—and— the—Group—is—able—to—withstand—the—impact— of—an—adverse—outcome,—and—has—the— necessary—capabilities,—expertise,— processes—and—controls—to—appropriately— manage—the—risk.—
Risk appetite and limits (Audited) The—extent—to—which—we—are—willing—to—take— risk—in—the—pursuit—of—our—objective—to—create— shareholder—value—is—defined—by—a—number— of—risk—appetite—statements,—operationalised— through—measures—such—as—limits,—triggers— and—indicators.—These—appetite—statements— and—measures—are—approved—by—the— Board—on—recommendation—of—the—Group— Risk—Committee—and—are—subject—to— annual—review.
We—define—and—monitor—aggregate—risk— limits—based—on—financial—and—non-financial— stresses—for—our—earnings—volatility,—liquidity— and—capital—requirements—as—follows: Earnings volatility:—the—objectives—of—the— limits—are—to—ensure—that: a.— —the—volatility—of—earnings—is—consistent— with—the—expectations—of—stakeholders; b.— —the—Group—has—adequate—earnings—(and— cash—flows)—to—service—debt,—expected— dividends—and—to—withstand—unexpected— shocks;—and c.— —earnings—(and—cash—flows)—are—managed— properly—across—geographies—and—are— consistent—with—funding—strategies.—
GEC Group Executive Committee BSCMC Balance Sheet & Capital Management Committee GERC Group Executive Risk Committee TAC Technical Actuarial Committee GCRC Group Credit Risk Committee GORC Group Operational Risk Committee GwIRC Group-wide information Risk Committee GABCSC Group Anti-Bribery and Corruption Steering Committee STOC Solvency II Technical Oversight Committee
In keeping with this philosophy, the Group has five objectives for risk and capital management which are as follows: 1 Framework Design, implement and maintain a capital management and risk oversight framework, which is consistent with the Group’s risk appetite and philosophy towards risk-taking 2 Monitoring Establish a ‘no surprises’ risk management culture by identifying the risk landscape, assessing and monitoring risk exposures and understanding change drivers 3 Control Implement suitable risk mitigation strategies and remedial actions where exposures are deemed inappropriate, and to manage the response to potentially extreme events 4 Communication Effectively communicate the
Group’s risk, capital and profitability position to both internal and external stakeholders 5 Culture Foster a risk management culture, providing quality assurance and facilitating the sharing of best practice
Risk-taking and the management thereof forms the first line of defence and is facilitated through both the Group Executive Committee and the Balance Sheet and Capital Management Committee.
The Group-level risk committees are supported by the Group Chief Risk Officer, with functional oversight provided by Group Security, Group Compliance and Group Risk. Group Security is responsible for developing and delivering appropriate security measures with a view to protecting the Group’s staff, physical assets and intellectual property. Group Compliance provides verification of compliance with regulatory standards and informs the Board, as well as management, on key regulatory issues affecting the Group. Group Risk has responsibility for establishing and embedding a capital management and risk oversight framework and culture consistent with Prudential’s risk appetite that protects and enhances the Group’s embedded and franchise value.
Group Executive Risk Committee (GERC) Purpose: Oversees the Group’s risk exposures, including market, credit, liquidity, insurance and operational risks, and also monitors the Group’s capital position.
Group Credit Risk Committee (GCRC) Purpose: Reviews the Group’s investment and counterparty credit risk positions
Group Operational Risk Committee (GORC) Purpose: Overseas the Group’s operational risk exposures.
Solvency II Technical Oversight Committee (STOC) Purpose: Provides ongoing technical oversight and advice to the Board and executive in respect of their duties with regard to the Group’s Internal Model.
Our—risk—appetite—framework—forms—an— integral—part—of—our—annual—business— planning—cycle.—The—Group—Risk—Committee— is—responsible—for—reviewing—the—risks— inherent—in—the—Group’s—business—plan—and— for—providing—the—Board—with—input—on—the— risk/reward—trade-offs—implicit—therein.— This—review—is—supported—by—the—Group— risk—function,—which—uses—submissions— by—business—units—to—calculate—the—Group’s— aggregated—position—(allowing—for— diversification—effects—between—business— units)—relative—to—the—aggregate—risk—limits.—
Risk policies (Audited) Risk—policies—set—out—specific—requirements— for—the—management—of,—and—articulate—the— risk—appetite—for,—key—risk—types.—There—are— policies—for—credit,—market,—insurance,— liquidity,—operational—and—tax—risk,—as—well— as—dealing—controls.—They—form—part—of—the— Group—Governance—Manual,—which—was— developed—to—make—a—key—contribution—to— the—sound—system—of—internal—control—that— we—are—expected—to—maintain—under—the— UK—Corporate—Governance—Code—and— the—Hong—Kong—Code—on—Corporate— Governance—Practices.—Group—Head—Office— and—business—units—confirm—that—they—have— implemented—the—necessary—controls—to— evidence—compliance—with—the—Group— Governance—Manual.
Risk reporting (Unaudited) An—annual—‘top-down’—identification—of—our— top—risks—assesses—the—risks—that—have—the— greatest—potential—to—impact—the—Group’s— operating—results—and—financial—condition.— The—management—information—received—by— the—Group—Risk—Committee—and—the—Board— is—tailored—around—these—risks,—and—it—also— covers—ongoing—developments—in—other—key— and—emerging—risks.—A—discussion—of—the—key— risks,—including—how—they—affect—our— operations—and—how—they—are—managed,— follows—below.—
Market risk (i) Investment risk (Audited) In—Prudential—UK,—investment—risk—arising—on— the—assets—in—the—with-profits—fund—impacts— the—shareholders’—interest—in—future— transfers—and—is—driven—predominantly—by— equities—in—the—fund—as—well—as—by—other— investments—such—as—property—and—bonds.— The—value—of—the—future—transfers—is—partially— protected—against—equity—falls—by—hedging— conducted—outside—of—the—fund.—The—fund’s— large—inherited—estate—–—estimated—at— £7.2—billion—as—at—31—December—2014— (1—January—2014:—£6.8—billion,—after—the— domestication—of—Hong—Kong—business)—–— can—absorb—market—fluctuations—and—protect— the—fund’s—solvency.—The—inherited—estate—is— partially—protected—against—falls—in—equity— markets—through—an—active—hedging—policy— within—the—fund.—
The—Jackson—IFRS—shareholders’—equity— and—US—statutory—capital—are—sensitive—to—the— effects—of—policyholder—behaviour—on—the— valuation—of—GMWB—guarantees.—Jackson— hedges—the—guarantees—on—its—variable— annuity—book—on—an—economic—basis—and,— thus,—accepts—variability—in—its—accounting— results—in—the—short—term—in—order—to—achieve— the—appropriate—economic—result.—In— particular,—under—Prudential’s—Group—IFRS— reporting,—the—measurement—of—the—Jackson— variable—annuity—guarantees—is—typically—less— sensitive—to—market—movements—than—the— corresponding—hedging—derivatives,—which— are—held—at—market—value.—However,— depending—on—the—level—of—hedging— conducted—regarding—a—particular—risk—type,— certain—market—movements—can—drive—
Interest—rate—risk—arises—in—our—UK— business—from—the—need—to—match—cash—flows— for—annuity—payments—with—those—from— investments;—movements—in—interest—rates— may—have—an—impact—on—profits—where— durations—are—not—perfectly—matched.—As—a— result,—we—aim—to—match—the—duration—of— assets—and—liabilities—as—closely—as—possible— and—the—position—is—monitored—regularly.— The—with-profits—business—is—exposed—to— interest—rate—risk—as—a—result—of—underlying— guarantees.—Such—risk—is—largely—borne—by— the—with-profits—fund—but—shareholder— support—may—be—required—in—extremis.—
(iii) Foreign exchange risk (Audited) We—principally—operate—in—Asia,—the—US—and— the—UK.—The—geographical—diversity—of—our— businesses—means—that—we—are—inevitably— subject—to—the—risk—of—exchange—rate— fluctuations.—Our—international—operations— in—the—US—and—Asia,—which—represent—a— significant—proportion—of—our—operating— profit—and—shareholders’—funds,—generally— write—policies—and—invest—in—assets— denominated—in—local—currency.—Although— this—practice—limits—the—effect—of—exchange— rate—fluctuations—on—local—operating—results,— it—can—lead—to—significant—fluctuations—in—our— consolidated—financial—statements—when— results—are—expressed—in—UK—sterling.
(i) Debt and loan portfolio (Audited) Our—UK—business—is—primarily—exposed—to— credit—risk—in—the—shareholder-backed— portfolio,—where—fixed—income—assets— represent—37—per—cent—or—£31.7—billion— of—our—exposure.—Credit—risk—arising—from— £46.6—billion—of—fixed—income—assets—is— largely—borne—by—the—with-profits—fund,— although—shareholder—support—may—be— required—should—the—with-profits—fund— become—unable—to—meet—its—liabilities.—
Credit—risk—arises—in—the—general—account— of—our—US—business,—where—£33.0—billion—of— fixed—income—assets—back—shareholder— liabilities—including—those—arising—from—fixed— annuities,—fixed—index—annuities—and—life— insurance.—Included—in—the—portfolio—are— £2.3—billion—of—commercial—mortgagebacked —securities—and—£1.6—billion—of— residential—mortgage-backed—securities,—of— which—£0.8—billion—(52—per—cent)—are—issued— by—US—government-sponsored—agencies.
(ii) Group sovereign debt and bank debt exposure (Audited) Sovereign—debt1—represented—15—per—cent—or— £11.0—billion—of—the—debt—portfolio—backing— shareholder—business—at—31—December—2014— (31—December—2013:—15—per—cent—or— £10.2—billion).—43—per—cent—of—this—was—rated— AAA—and—95—per—cent—investment—grade— (31—December—2013:—44—per—cent—AAA,— 92—per—cent—investment—grade).—At— 31—December—2014,—the—Group’s— shareholder-backed—business’s—holding—in— Eurozone—sovereign—debt1—was—£476—million.— 82—per—cent—of—this—was—AAA—rated— (31—December—2013:—84—per—cent—AAA— rated).—Shareholder—exposure—to—the— Eurozone—sovereigns—of—Italy—and—Spain—is— £63—million—(31—December—2013:— £54—million).—We—do—not—have—any—sovereign— debt—exposure—to—Greece,—Cyprus,—Portugal— or—Ireland.—
Insurance risk (Audited) The—processes—of—determining—the—price—of— our—products—and—reporting—the—results—of— our—long-term—business—operations—require— us—to—make—a—number—of—assumptions.—In— common—with—other—industry—players,—the— profitability—of—our—businesses—depends—on— a—mix—of—factors—including—mortality—and— morbidity—levels—and—trends,—persistency,— investment—performance,—unit—cost—of— administration—and—new—business— acquisition—expenses.—
We—continue—to—conduct—research—into— longevity—risk—using—both—industry—data—and— experience—from—our—substantial—annuity— portfolio.—The—assumptions—that—we—make— about—future—rates—of—mortality— improvement—within—our—UK—annuity— portfolio—are—key—to—our—pricing—and— reserving.—Recent—changes—to—UK— legislation,—removing—an—individual’s— requirement—to—convert—a—pension—fund— into—an—annuity,—are—also—demanding— particular—scrutiny.—We—continue—to—seek— opportunities—to—transfer—longevity—risk—to— reinsurers—or—to—the—capital—markets—and— have—transacted—when—terms—are—sufficiently— attractive—and—aligned—with—our—risk— management—framework.
Liquidity risk (Audited) Our—parent—company—has—significant— internal—sources—of—liquidity—that—are— sufficient—to—meet—all—of—its—expected— requirements—for—the—foreseeable—future— without—having—to—make—use—of—external— funding.—In—aggregate,—the—Group—currently— has—£2.6—billion—of—undrawn—committed— facilities,—expiring—in—2018—and—2019.—In— addition,—the—Group—has—access—to—liquidity— via—the—debt—capital—markets.—We—also—have— in—place—an—unlimited—commercial—paper— programme—and—have—maintained—a— consistent—presence—as—an—issuer—in—this— market—for—the—last—decade.—Liquidity—uses— and—sources—have—been—assessed—at—the— Group—and—at—a—business—unit—level—under— base—case—and—stressed—assumptions.—The— liquidity—resources—available—and—the— subsequent—liquidity—coverage—ratio—are— regularly—monitored—and—we—have—assessed— these—to—be—sufficient.
Operational risk (Unaudited) We—are—exposed—to—operational—risk—through— the—course—of—running—our—business.—We—are— dependent—on—the—successful—processing—of— a—large—number—of—transactions,—utilising— various—legacy—and—other—IT—systems—and— platforms,—across—numerous—and—diverse— products.—We—also—operate—under—the— ever-evolving—requirements—set—out—by— different—regulatory—and—legal—regimes— (including—tax),—as—well—as—utilising—a— significant—number—of—third—parties—to— distribute—products—and—to—support— business—operations.—
Our—IT,—compliance—and—other—operational— systems—and—processes—incorporate—controls— that—are—designed—to—manage—and—mitigate— the—operational—risks—associated—with—our— activities.—Although—we—have—not—identified—a— material—failure—or—breach—in—relation—to—our— legacy—and—other—IT—systems—and—processes— to—date,—we—have—been,—and—likely—will— continue—to—be,—subject—to—computer—viruses,— attempts—at—unauthorised—access—and— cyber-security—attacks.
ffi cer’s rep o rt o n th e risk s facin g o u r bu sin ess an d o u r cap ital stren gth facilitates—both—the—qualitative—and— quantitative—analysis—of—operational—risk— exposures.—The—output—of—this—framework,— in—particular—management—information— on—key—operational—risk—and—control— assessments,—scenario—analysis,—internal— incidents—and—external—incidents,—is— reported—by—the—business—units—and— presented—to—the—Group—Operational—Risk— Committee.—This—information—also—supports— business—decision-making—and—lessonslearned —activities,—the—ongoing— improvement—of—the—control—environment,— and—determination—of—the—adequacy—of—our— corporate—insurance—programme.
The—EU—has—developed—a—new—prudential— regulatory—framework—for—insurance— companies,—referred—to—as—Solvency—II.—The— Solvency—II—Directive,—which—sets—out—the— new—framework,—was—formally—approved— by—the—Economic—and—Financial—Affairs— Council—in—November—2009—although—its— implementation—was—delayed—pending— agreement—on—a—directive—known—as— Omnibus—II—which,—having—been—adopted— by—the—Council—of—the—European—Union— in—April—2014,—amended—certain—aspects— of—the—Solvency—II—Directive.—The—new— approach—is—based—on—the—concept— of—three—pillars—–—minimum—capital— requirements,—supervisory—review— of—firms’—assessments—of—risk,—and— enhanced—disclosure—requirements.
Specifically,—Pillar—1—covers—the— quantitative—requirements—around—own— funds,—valuation—rules—for—assets—and— liabilities—and—capital—requirements.—Pillar—2— provides—the—qualitative—requirements—for— risk—management,—governance—and— controls,—including—the—requirement—for— insurers—to—submit—an—Own—Risk—and— Solvency—Assessment—which—will—be—used— by—the—regulator—as—part—of—the—supervisory— review—process.—Pillar—3—deals—with—the— enhanced—requirements—for—supervisory— reporting—and—public—disclosure.
Having—assessed—the—requirements—of— Solvency—II,—an—implementation—programme— was—initiated—with—dedicated—teams—to— manage—the—required—work—across—the— Group.—The—activity—of—the—local—Solvency—II— teams—is—coordinated—centrally—to—achieve— consistency—in—the—understanding—and— application—of—the—requirements.—We—are— continuing—our—preparations—to—adopt—the— regime—when—it—comes—into—force—on— 1—January—2016—and—are—undertaking—in— parallel—an—evaluation—of—the—possible— actions—to—mitigate—its—effects.—We—regularly— review—our—range—of—options—to—maximise— the—strategic—flexibility—of—the—Group.—This— includes—consideration—of—optimising—our— domicile—as—a—possible—response—to—an— adverse—outcome—on—Solvency—II.—
Over—the—coming—months—we—will—remain— in—regular—contact—with—the—Prudential— Regulation—Authority—as—we—continue—to— engage—in—the—approval—process—for—the— internal—model.—In—addition,—we—are—engaged— in—the—Prudential—Regulation—Authority’s— ‘Individual—Capital—Adequacy—Standards— Plus’—(ICAS+)—regime,—which—is—enabling— our—UK—insurance—entities—to—leverage—the— developments—made—in—relation—to—the— Solvency—II—internal—model—for—the—purpose— of—meeting—the—existing—ICAS+—regime.—
We—use—a—range—of—risk—management—and— mitigation—strategies.—The—most—important— of—these—include:—adjusting—asset—portfolios— to—reduce—investment—risks—(such—as— duration—mismatches—or—overweight— counterparty—exposures);—using—derivatives— to—hedge—market—risks;—implementing— reinsurance—programmes—to—manage— insurance—risk;—implementing—corporate— insurance—programmes—to—limit—the—impact— of—operational—risks;—and—revising—business— plans—where—appropriate.
Stress testing (Unaudited) As—at—31—December—2014,—stress—testing—of— our—IGD—capital—position—to—various—events— has—the—following—results: —— An—instantaneous—20—per—cent—fall—in— equity—markets—from—31—December—2014— levels—would—have—no—impact—on—the— IGD—surplus; £4.7bn estimated IGD capital surplus covering capital requirements times
Other capital metrics (Unaudited) We—use—an—internal—economic—capital— assessment—calibrated—on—a—multi-term—basis— to—monitor—our—capital—requirements—across— the—Group.—This—approach—considers,—by—risk— drivers,—the—timeframe—over—which—each—risk— can—threaten—the—ability—of—the—Group—to— meet—claims—as—they—fall—due,—allowing—for— realistic—diversification—benefits.—This— assessment—provides—valuable—insights— into—our—risk—profile—and—for—continuing— to—maintain—a—strong—capital—position.—
During—2014,—the—Group—economic— capital—surplus—reduced—from—£11.3—billion— to—£9.7—billion.—The—total—movement—in—the— Group—economic—capital—surplus—over—the— year—was—driven—by: —— Operating experience positive £1.8 billion:—generated—by—in-force— business,—new—business—written—in—2014,— the—impact—of—non-market—assumption— changes—and—non-market—experience— variances—over—the—year; —— Non-operating experience negative £0.9 billion:—mainly—arising—from—negative— market—experience—during—2014,— principally—driven—by—the—reduction—in— long-term—interest—rates—in—the—UK; —— Other capital movements negative £2.2 billion:—representing—a—reduction— in—surplus—from—the—repayment—of— subordinated—debt—(negative— £0.4—billion),—renewal—of—the— bancassurance—partnership—agreement— with—Standard—Chartered—Bank— (negative—£0.8—billion),—the—negative— capital—effect—of—the—domestication—of— the—Hong—Kong—branch—(negative— £0.3—billion),—the—sale—of—the—PruHealth— and—PruProtect—businesses—(positive— £0.1—billion),—foreign—currency— translation—effects—(positive—£0.1—billion)— and—dividend—payments—in—2014— (negative—£0.9—billion);—and—
The—economic—capital—results—are—based—on— outputs—from—our—Solvency—II—internal—model— with—a—number—of—key—working—assumptions.— Further—explanation—of—the—underlying— methodology—and—assumptions—are—set—out— in—note—II—of—Additional—unaudited—financial— information.—Certain—aspects—of—the— methodology—and—assumptions— underpinning—these—results—will—differ—from— those—which—are—applied—in—obtaining—final— internal—model—approval.—The—eventual— Solvency—II—Pillar—I—ratio,—therefore,—remains— uncertain—and—is—expected—to—be—lower—than— our—economic—capital—ratio.—
Stress testing (Unaudited) At—31—December—2014,—stress—testing—the— economic—capital—position—gives—the— following—results—and—demonstrates—the— Group’s—ability—to—withstand—significant— deteriorations—in—market—conditions: —— An—instantaneous—20—per—cent—fall—in— equity—markets—would—reduce—surplus—by— £0.6—billion—and—reduce—the—economic— solvency—ratio—to—214—per—cent; —— An—instantaneous—40—per—cent—fall—in— equity—markets—would—reduce—surplus—by— £2.2—billion—and—reduce—the—economic— solvency—ratio—to—195—per—cent; —— A—50—basis—points—reduction—in—interest— rates—(subject—to—a—floor—of—zero)—would— reduce—surplus—by—£1.4—billion—and— reduce—the—economic—solvency—ratio—to— 195—per—cent; —— A—100—basis—points—increase—in—interest— rates—would—increase—surplus—by— £1.8—billion—and—increase—the—economic— solvency—ratio—to—254—per—cent;—and—
In 2014 we increased the scale of our corporate responsibility activities. In partnership with charitable organisations, we provide long-term funding and deploy the expertise of the many volunteers from our workforce on projects that help to improve the lives of individuals and strengthen communities.
US Prudential’s—US—operation—develops—and— distributes—products—that—seek—to—address— the—retirement—needs—of—its—more—than— four—million—contract-holders—through—the— ups—and—downs—of—financial—market—cycles.— Jackson—offers—a—diverse—suite—of—variable,— fixed—and—fixed-index—annuity—products,— designed—with—a—variety—of—customisable— features—and—options—to—fit—a—wide—range— of—investor—needs,—wants—and—goals.
Asia Listening—to—and—understanding—customers’— needs—is—the—first—step—before—the—launch—of— any—new—initiative,—product—or—service.— This—results—in—financial—solutions—that—are— customised—to—the—needs—of—each—segment— of—the—population,—from—young—parents— starting—a—family—to—middle-aged—people— providing—for—their—extended—family.—The— business—has—been—operating—in—Asia—for— more—than—90—years—and—has—become—a— leading—provider—of—health—and—protection— products,—typically—attached—to—a—long-term— savings—policy.—These—products—are—driven— by—the—needs—of—Asia’s—rapidly—growing— middle—classes—and—their—aspirations—to—save— for—the—future,—protect—their—families—and— increase—their—wealth.—
Prudential—Assurance—Malaysia—Berhad— introduced—PRUcancer—plan,—a—first-of-itskind —cancer—plan—in—the—market—where— underwriting—is—based—on—cancer—risk—only.— Conditions—such—as—stroke,—hypertension,— obesity—and—diabetes,—which—have—very—little— or—no—correlation—with—cancer—risk,—may—not— be—taken—into—consideration—when— determining—eligibility—to—the—plan.—Further— protection—is—provided—as—the—remaining— sum—assured—will—revert—to—the—full— original—amount—six—months—after—the— policyholder—has—been—diagnosed—with— early-stage—cancer.—
o rp o rate resp o n sib ility rev iew 63 Prudential plc Annual Report 2014
with—recruitment—firms—to—mitigate— unconscious—bias,—and—awareness— campaigns—to—diversify—the—pool—of—potential— candidates.—In—addition,—we—have— collaborative—partnerships—with— organisations—and—participate—in—events—that— further—the—diversity—and—inclusion—agenda,— including—a—long-term—partnership—with— Peckham,—an—American—non-profit— community—rehabilitation—organisation.—— Prudential—UK—is—an—active—member—and— supporter—of—Workingmums,—a—recruitment— agency—that—supports—working—mothers—in— returning—to—the—workplace.—
M&G—is—a—long-term,—active—investor—that— takes—seriously—its—responsibility—to—look— after—clients’—assets,—often—working—closely— with—the—management—of—the—companies—in— which—it—invests.—Active—voting—is—an—integral— part—of—M&G’s—investment—approach—both— adding—value—and—protecting—our—interests— as—shareholders.—The—M&G—website— provides—an—overview—of—voting—history:— www.mandg.co.uk/corporate/— about-mg/investment-philosophy/— corporate-governance/voting-history/
We—maintain—an—inclusive—culture—that—is— sensitive—to—the—needs—of—all—employees—and— provide—opportunities—for—our—people— regardless—of—their—gender,—ethnicity,—age,— religion,—caring—responsibilities,—sexual— orientation—or—disability—status.—We—make— appropriate—disability—adjustments—as— required,—and—provide—training—and—career— development—opportunities—for—all.—We—also— give—full—and—fair—consideration—and— encouragement—to—all—applicants—with— suitable—aptitude—and—abilities.
— senior—leaders—across—the—organisation,— succession—planning—for—senior—roles,—and— development—of—our—leadership—talent— pipeline.—We—invest—in—succession—planning— for—our—leaders—and—critical—specialists,—and— segment—our—talent—to—identify—short,— medium—and—long-term—successors—and— support—them—with—the—appropriate— development—and—career—planning,—to—ensure— that—we—maintain—an—appropriate—balance—of— internal—progression—and—external—hires.
Individually—tailored—development— offerings—are—provided—for—our—most—senior— executives—so—they—are—well—prepared—to— deliver—the—long-term—ambitions—of—the— Group.—In—addition,—in—2014—more—than— 130—senior—high-potential—individuals—have— participated—in—our—Group-wide—leadership— development—programmes—‘Impact’—and— ‘Agility’,—developed—in—partnership—with— world-leading—academic—institutions—such— as—Duke—Corporate—Education—and—the— Oxford—Saïd—Business—School.
Helping provide resources, such as clean water and shelter, that are essential for health and a thriving future
We—recognise—and—reward—high— performance—while—operating—a—fair—and— transparent—system—of—reward.—Reward—is— linked—to—the—delivery—of—business—goals—and— expected—behaviours,—and—we—ensure—that— rewards—for—our—people—are—consistent—with— our—values—and—do—not—incentivise— inappropriate—risk-taking.—To—enable—this,— employees—are—not—only—regularly—assessed— on—‘what’—they—have—achieved,—but—also—on— ‘how’—they—did—so.
In—the—US—in—2013,—Jackson—opened—The— Zone,—a—satellite—office—next—to—the—Michigan— State—University—campus,—with—the—aim—of— offering—students—real-life—work—experience— that—could—potentially—lead—to—career— opportunities—after—graduation.—In—2014,— The—Zone—grew—from—152—to—255—student— employees—and—has—been—a—successful— talent—pipeline—and—staffing—support—to—the— whole—organisation.—Of—the—original—152— employees,—100—are—still—with—Jackson.— Furthermore,—in—its—first—year—the—Strategic— Support—Programme,—which—includes— employees—at—The—Zone,—has—promoted— more—than—40—people—to—full-time—positions— with—the—company—or—professional— internships—in—their—area—of—study.—While—
Disaster readiness and relief As—a—life—insurance—and—asset—management— company,—our—core—business—is—the—provision— of—protection,—security—and—risk—mitigation—to— families.—Over—the—past—four—decades,—the— Asia—Pacific—region—has—experienced— 75—per—cent—of—the—world’s—natural—disasters,— resulting—in—a—loss—of—nearly—two—million—lives.— The—Prudence—Foundation—is—working—with— NGOs—to—help—communities—be—better— prepared—with—vital—skills—before— disasters—strike.
In—May—2014—the—Prudence—Foundation,— in—partnership—with—National—Geographic— Channel—and—endorsed—by—the—International— Federation—of—Red—Cross—and—Red—Crescent— Societies,—launched—Safe Steps,—a—first-ofits -kind—pan-Asian—public—service—initiative— to—enhance—disaster—preparedness—and— awareness—through—the—dissemination—of— educational—survival—tips—in—the—event—of— natural—disasters.—Safe Steps—is—a— programme—with—multiple—platforms— covering—on-air—videos,—an—informative— website—and—educational—collateral—that—can— be—shared—through—community—outreach— initiatives.—Core—to—the—programme—is—a— series—of—60-second—educational—videos— featuring—Safe Steps—ambassador—Manny— Pacquiao,—a—renowned—Filipino—ten-time— world—champion—boxer,—who—advises— individuals—and—households—on—what—they— should—do—when—disasters—strike.—The—public— service—announcements—cover—what—to—do— in—a—typhoon,—earthquake,—flood—or—fire—and— how—to—prepare—an—emergency—kit.—
Since—its—launch,—Safe Steps—has—been— well—received—across—the—region,—with— numerous—partnerships—being—established— to—widen—the—reach—of—the—programme.—In— the—Philippines,—we—partnered—with—the— Office—of—the—President,—the—Ministry—of— Defence,—and—the—National—Disaster—Risk— Reduction—Management—Council—to— have—the—campaign—rolled—out—under— existing—national—Disaster—Risk— Reduction—programmes.
Furthermore,—the—Philippines’—Movie— and—Television—Review—Commission—Board— has—approved—the—public—service— announcements—to—be—shown—in—cinemas— throughout—the—country.—The—Prudence— Foundation—is—also—partnering—with—major— national—TV—networks—in—the—region—to—have— Safe Steps—run—on—free-to-air—television.—In— 2014,—Filipino—network—GMA,—Myanmar— network—MRTV-4—and—Cambodian—network— CTN—all—started—to—air—the—announcements.— Lastly,—international—NGOs—such—as—Plan— International,—Save—the—Children—and— ActionAid—will—also—be—running—Safe Steps— across—their—existing—Disaster—Risk— —
One—of—these—programmes—was—with— Habitat—for—Humanity,—under—which—the— Prudence—Foundation—has—funded—the— construction—of—135—new—disaster-resilient— homes—for—the—community—of—Santa—Fe—in— Bantayan—Island.—To—further—demonstrate— our—commitment—in—2014,—we—also—arranged— for—two—Prudential—regional—volunteers— programmes—to—help—with—rebuilding—the— new—homes—on—Bantayan—Island.—Each— group—comprised—around—100—volunteers— from—across—12—markets—in—Asia—and—the—UK.—
their—lives—to—normal.—This—area—suffered— 90—per—cent—housing—destruction—and—the— local—economy—was—severely—affected—by— the—typhoon.—Recognising—the—importance— of—helping—the—community—re-establish—its— livelihood,—the—Prudence—Foundation—also— funded—the—provision—of—183—new—motorised— fishing—boats—with—nets—and—142—new— pedicabs—for—members—of—the—community,— who—were—selected—by—the—Mayor—and—his— municipality—office.—
Prudential—UK—&—Europe—works—with— Age—UK—on—programmes—and—initiatives— that—centre—on—making—a—difference—to—older— people—who—are—vulnerable—and—in—need—of— support.—Call—in—Time—volunteers—contact—a— matched—older—person—on—a—regular—basis,— usually—once—a—week,—for—around—20-30— minutes.—In—many—cases,—this—is—the—only— phone—call—the—older—person—receives— that—week.—The—Age—UK—Call—in—Time— coordinators—match—the—employee— volunteers—and—older—people—based—on—
Through—running—their—own—banks,— students—learn—how—to—save—and—acquire— basic—business—skills.—The—environmental— banking—forums—extend—the—concept—of— banking—by—encouraging—children—to— develop—their—enterprise—and—business— skills.—The—activities—of—the—environmental— banks—include—the—development—of— garbage—banks,—fertiliser—banks—and—tree— banks,—which—contributed—to—increased— resilience—to—disasters.
prudential.co.uk/indonesia 420 hours spent by Prudential volunteers delivering educational programmes to young people
Since—2012,—M&G—has—supported—the— Good—Times—project—at—the—Dulwich—Picture— Gallery.—Good—Times—partners—with—over— 100—community—centres—and—organisations— for—the—elderly,—and—reaches—over—2,000— people—each—year.—Working—with—day— centres,—community—centres—and—care— homes,—the—project—challenges—negative— perceptions—about—ageing—and—dementia— and—improves—links—between—generations— by—celebrating—the—positive—contributions— that—older—people—make—in—society.—
More—than—6,000—employees— volunteered—through—Prudential’s—flagship— international—programme,—the—Chairman’s— Challenge,—which—encourages—people—from— across—the—Group—to—volunteer—on—projects— initiated—by—our—global—charity—partners,— including—Plan—International,—Help—Age— International—and—Junior—Achievement.— Each—volunteering—project—focuses—on—one— or—more—of—our—Strong—Foundations—themes— and—allows—us—to—support—both—large,—well— established—charities—and—innovative,— smaller-scale—activities—with—volunteers—as— well—as—financial—support.—Prudential— donates—£150—to—our—charity—partners—for— every—employee—who—registers—for—the—
In—the—US,—the—Lansing—Corporate—Social— Responsibility—team—has—moved—to—The— Zone—to—expand—the—existing—Jackson—in— Action—volunteer—programme—and— connect—the—East—Lansing—staff—with—new— opportunities.—More—than—100—Zone— employees—have—participated—in—a—Jackson— in—Action—volunteer—project—in—the—past—year,— donating—nearly—1,000—hours—of—service— throughout—the—Lansing—community.—The— partnership—between—Jackson,—the—city—of— East—Lansing—and—Michigan—State—University— has—helped—provide—professional—work— experience—for—students—and—recent— graduates.—Overall,—Jackson—employees— spent—more—than—12,000—hours— volunteering—in—2014.
In—2014,—Jackson—also—partnered—with—a— Nashville—Board—Training—programme,—the— Young—Leaders—Council,—to—educate—rising— leaders—in—the—Nashville—office—about—the— importance—of—board—leadership—in—the— charity—community.—Within—a—year—of— graduating—from—the—Board—Training—class,— half—of—the—participants—were—placed—on— charity—boards—throughout—the—community.— Following—the—success—of—the—Nashville— office,—Jackson—will—expand—this—annual— programme—to—its—Lansing—and—Denver— locations—by—creating—the—Jackson—Board—
The—management—of—environmental—issues— is—an—integral—part—of—managing—the—total—risks— faced—by—our—business.—Part—of—our—strategy—to— mitigate—against—climate—change—includes: —— Measuring,—reporting—and—improving— the—environmental—performance—of—our— global—operations; —— Investing—in—the—low-carbon—economy;— and—
Reducing our impact: property investment portfolio M&G—Real—Estate—forms—part—of—the— M&G—group—of—companies,—the—asset— management—arm—of—Prudential—plc—in— the—UK—and—Europe.—Its—approach—to— Responsible—Property—Investment—enables— it—to—manage—and—respond—to—the—growing— range—of—environmental—and—social—issues— that—can—impact—property—values.—This— approach—also—helps—M&G—Real—Estate—to— protect—and—enhance—fund—and—asset— performance—for—its—clients.
Statutory total CO2e emissions (Scope 1 & 2)* 142,647 0.0371 154,344 0.0471 (8%) (21%)
Business travel booked by UK employees only Occupied—total 9,818 0.1232 9,398 0.1201 4% 3%
Due—to—the—changing—size—and—nature—of— the—investment—portfolio,—absolute—and— normalised—comparisons—between—years— are—not—comparative.—Net—lettable—area—is— reported—for—all—properties—held—within—the— reporting—period.—In—line—with—best—practice— environmental—data—is—collected—for— properties—at—acquisition—and—at—date—of— divestment—therefore,—comparisons—for— absolute—change—and—normalised—change— are—not—directly—comparative.—For—more— information—on—sustainability—progress,— please—refer—to—the—annual—M&G—Real— Estate—Responsible—Property—Investment— report—for—further—details,—including— like-for-like—comparisons.
Relevant skills and experience Pierre-Olivier joined Prudential in 2008 and has held positions as Business Representative for Asia, Director of Strategy and Corporate Development and Managing Director CEO Office.
From 2004 until 2008, Pierre-Olivier worked for Aviva, first as Director, Group Strategy and then as Director, Central &
Eastern Europe. Pierre-Olivier began his career as a civil servant in the French Treasury, where he worked at the Secretariat of the Paris Club, before joining McKinsey in 2000 as a consultant working mainly in the international financial institutions sector. Age 44.
Jackie is Chief Executive, Prudential UK & Europe, a position she has held since September 2013, and she took on responsibility for Africa in early 2014.
Relevant skills and experience Jackie joined Prudential from Standard Life where she was Chief Financial Officer. Prior to this, Jackie held a number of senior financial management positions in companies including Norwich Union Insurance, Aviva, Hibernian Group, Royal & Sun Alliance and PricewaterhouseCoopers.
Grosvenor Group Limited in March 2012. He has been a member of the Finance Committee of the MCC since October 2005. Age 53.
Relevant skills and experience Before joining Prudential, Barry was President, Accident & Health Worldwide for AIG Life Companies. He joined AIG in 1995, and prior to that was President and CEO of Nisus, a subsidiary of Pan-American Life, from 1992 to 1995. Before joining Nisus, Barry spent 12 years at Willis Corroon in the US. From October 2008 to October 2011, Barry was a director of the Life Insurance Marketing Research Association (LIMRA) and the Life Office Management Association (LOMA).
Mike is President and Chief Executive Officer of Jackson National Life Insurance Company (Jackson), a position he has held since January 2011.
Relevant skills and experience Mike has served in a number of strategic and leadership roles at Jackson over the last 19 years, responsible for Jackson and its United States affiliates. During this period he has led the development of Jackson’s variable annuity business and has been responsible for IT, strategy, operations, communications, distributions, Curian and the retail broker dealers. Age 54.
Takeover Panel from 2001 to 2003, and again in 2010. He served on the Board of Northern Rock plc from 2008 to 2010, and from 2007 to 2012 was Chairman of the Shareholder Executive.
Current external appointments Philip is a Deputy Chairman of the Takeover Panel, a non-executive director of Severn Trent plc (since March 2014) and Senior Independent Director of UK Financial Investments Limited. Philip is also Chairman of City of London Investment Trust plc (since 2011). Age 60.
Relevant skills and experience Ann began her career in 1976 with Sun Life of Canada, joining Mercantile & General Reinsurance Group in 1981, where she held a number of management roles rising to Senior Vice President and Controller for life and health and property/casualty businesses in
Current external appointments Alistair is a visiting Professor at Cass Business School, a Trustee of the Design Museum in London and a Trustee of The Royal Academy of Arts. Age 62.
Kai worked for Standard Chartered PLC where he was a Group Executive director responsible for Asia Governance and Risk. Prior to that, he spent 19 years at Bank of America and from 1990 was based in Asia as Group Executive Vice President and Head of the Asia Wholesale Banking Group. From 2004 to 2007, he was a nonexecutive director at Tate & Lyle plc and at Visa International, where he served on the Asia Pacific Board.
Relevant skills and experience Anthony was Managing Director of the Jardine Matheson Group from 2006 to 2012. He joined that Group in 1969 and held a number of senior positions before joining the Board of Jardine Matheson Holdings in 1994. Anthony is now a non-executive director of Jardine Matheson Holdings and of other Jardine Matheson group companies. These include Dairy Farm, Hongkong Land, Jardine Cycle & Carriage, Jardine Strategic and Mandarin Oriental. Anthony is also a commissioner of Astra International.
Relevant skills and experience Alice began her career as a qualified accountant at Ernst & Young in 1980, where she worked for 11 years before leaving to join the Financial Accounting Standards Board as a manager.
From September 1993 she worked at various investment banks leading teams of analysts specialising in property-casualty insurance before joining Morgan Stanley, where she became a Managing Director in 2001 heading the Global Insurance Equity Research team. In May 2003, Alice became a senior adviser at Morgan Stanley leaving in November 2009. Alice was an independent board member of the Cetera Financial Group until April 2014. She is author of the official biography of Warren Buffett.
Secretary at HM Treasury, Permanent Secretary at the Department of the Environment (later Environment, Transport and the Regions), Private Secretary (Economics) to the Prime Minister and Principal Private Secretary to Margaret Thatcher and then John Major. He joined HM Treasury in 1970. He was formerly Chairman of BH Global Limited until January 2013 and a non-executive director of the Arup Group from 2006 to 2007. He also worked part-time as a Senior Adviser to the London partners of Booz and Co (UK) until February 2011.
Current external appointments Lord Turnbull is a non-executive director of Frontier Economics Limited and The British Land Company PLC. Age 70.
Dear Shareholder Good governance is a key ingredient of Prudential’s success. Our governance policies, structures and processes contribute to the growth of our business, and the Board ensures that we have appropriate governance arrangements in place both to support our operations and protect our shareholders’ interests.
Role Monitoring the integrity of the Group’s financial reporting, including the effectiveness of the internal control and risk management systems; and monitoring the effectiveness of internal audit and the performance, independence and objectivity of external auditors.
Providing leadership, direction and oversight of the Group’s overall risk appetite and risk tolerance, as well as the Group’s risk and investment management frameworks.
The Board is accountable for the long-term success of the Group and for providing leadership within a framework of effective controls. The control environment enables the Board to identify significant risks and apply appropriate measures to manage and mitigate them. The Board is responsible for approving the strategy and for ensuring that the Group is suitably resourced to achieve it. In doing so, the Board takes account of its responsibilities to the Group’s stakeholders, including its shareholders, employees, suppliers and the communities in which Prudential operates.
The Board has terms of reference which specifically set out matters reserved for its decision. These include matters such as approving the Group’s strategy and monitoring its implementation, the approval of annual budgets and business plans, as well as the risk appetite of the Group and its capital and liquidity positions. The Board has approved a governance framework that requires all business units to seek approval from the Board for matters exceeding pre-determined authority limits. More information on this framework can be found on page 80.
Authority for the operational management of the Group’s businesses has been delegated to the Group Chief Executive for execution or further delegation by him in respect of matters which are necessary for the effective day-to-day running and management of the business. The chief executive of each business unit has authority for the management of that business unit and each has established a management board comprised of its key executives.
At the date of approving the Annual Report, the Board comprises sixteen individuals: the Chairman; eight nonexecutive directors considered under the UK and HK Codes to be independent and seven executive directors.
The directors’ biographies, including the skills and experience they bring to the Board, can be found on pages 72 to 75.
The roles of the Chairman and Group Chief Executive are separate and clearly defined. The scope of these roles is approved and kept under regular review by the Board so that no individual has unfettered decisionmaking powers.
In addition, detailed interviews were conducted with every director using a tailor-made agenda. The assessment team consulted senior managers and advisers, who have close contact with the Board and its committees, to obtain their input to the review.
Throughout the year, the Board also tracked progress through to completion against the actions agreed in respect of the 2013 performance evaluation of the Board and its committees. These actions focused on three broad areas: — Increasing Board time spent on business operations generally and on specific markets, which was addressed by extending time spent at Board away visits, allowing greater focus on operational aspects; — Continuing work on succession planning and reporting to the Board, with particular emphasis on Board committees and executive level succession planning. This has been reflected in the work of the Nomination Committee and by continuing the more detailed reporting to the Board, introduced during 2013, on senior management development initiatives; and
— Fine tuning the timing, format and content of Board meetings. These elements have been reviewed and adjusted to ensure Board time is used in the best possible way, balancing time spent on strategic and operational issues and management contact with time spent on regulatory and governance issues.
Philip Remnant, the Senior Independent Director, led the performance evaluation of Paul Manduca and was assisted by Independent Board Evaluation in this process. Feedback on the outcome was provided to the Chairman.
Consider ways of further increasing informal contact between non-executive directors and senior management, for example, inviting additional senior managers to attend committee meetings where appropriate and continuing to create opportunities for contact with local management during overseas visits.
The Board believes that the nonexecutive directors bring a wide range of business, financial and international experience to the Board and its committees. The executive directors, who head the main businesses of the Group, each bring an in-depth understanding to the Board of their particular business, its markets and challenges, ensuring the Group’s principal activities are represented.
Prudential is one of the UK’s largest institutional investors and the Board does not believe that this compromises the independence of those non-executive directors who are on the boards of companies in which the Group has a shareholding. The Board also believes that such shareholdings should not preclude the Company from having the most appropriate and highest calibre nonexecutive directors.
Committee members received detailed presentations at committee meetings focussing on areas of particular relevance to the respective committees and were kept updated on ongoing developments in these areas, as well as the impact these have on the Group. In 2014, the Audit Committee and Risk Committee held a joint session providing an update on the status of Solvency II and the Board received additional information on a number of key regulatory reports such as the Own Risk Solvency Assessment (ORSA) and new investment management metrics developed following the appointment of the Group Investment Director.
In the ordinary course of business, Board and committee papers are provided one week in advance of each meeting and where a director was unable to attend Board meetings, their views were canvassed by the Chairman prior to the meeting.
Executive directors Tidjane Thiam 10 – – – – 1 Nic Nicandrou 10 – – – – 1 Pierre-Olivier Bouée1 8/8 – – – – 1 John Foley2 2/2 – – – – 1 Jackie Hunt 10 – – – – 1 Michael McLintock 10 – – – – 1 Barry Stowe 10 – – – – 1 Mike Wells 10 – – – – 1
Notes 1 Pierre-Olivier Bouée was appointed as a director on 1 April 2014. 2 John Foley stepped down as a director from 1 April 2014.
The Board is responsible for establishing a system of internal control and for reviewing its effectiveness. To achieve this, the Board has established a framework of internal governance which is based on full accountability and transparency across all parts of the Group.
The framework of internal governance centres on clear delegated authorities, ensuring there is appropriate Board oversight and control of important decisions and the day-to-day business is managed effectively.
The Strategic report contains more detail on risk governance on page 51.
The framework of internal governance is underpinned by the Group Code of Business Conduct, which sets out the ethical standards the Board requires of itself, employees, agents and others working in the Group.
The system of internal control complies with the UK and HK Codes, as well as the relevant provisions required by the Company’s secondary listings in New York and Singapore.
Establishes the six key components of the framework which are governance, appetite, policies, culture, processes, and definition and categorisation
The Group Risk Framework is supported by the Group Dealing Controls Policy, Group Outsourcing and Third-Party Supply Policy and Group–wide Tax Risk Management Framework
The Board reviewed the framework of internal governance in December 2014 and the effectiveness of the system of internal control in February 2015, covering all material controls, including financial, operational and compliance controls, risk management systems and the adequacy of the resources, qualifications and experience of staff of the Group’s accounting and financial reporting function. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period and up to the date of this report and confirms that the system remains effective and adequate.
The—Committee—members—are—all— independent—non-executive—directors.— In—keeping—with—the—provisions—of—the—UK— and—HK—governance—codes,—the—Board—is— satisfied—that—Ann—Godbehere—has—recent— and—relevant—financial—experience.— Ann—Godbehere—is—also—designated—as—the— Audit—Committee—financial—expert—for—the— purposes—of—US—legislation.—This—will—be— reviewed—in—2015—in—conjunction—with— the—publication—of—the—Form—20-F.
During—2014,—the—Committee—held— 11—meetings.—Attendance—is—set—out—in— the—table—on—page—79.—The—Committee— continued—to—work—closely—with—the—Risk— Committee—to—ensure—that—any—significant— areas—of—overlap—were—appropriately— addressed.—Ann—Godbehere,—the— Committee—Chairman,—is—a—member—of—the— Risk—Committee—and—the—Chairman—of—the— Risk—Committee—is—likewise—a—member—of—the— Audit—Committee.—This—cross-membership— helps—to—ensure—that—both—Committees—work— together—effectively—to—cover—all—relevant— issues.—Where—there—is—a—perceived—overlap— of—responsibilities—between—these—two— committees,—the—terms—of—reference—enable— the—respective—Committee—Chairmen—to— determine—which—committee—is—the—most— appropriate—to—fulfil—the—obligation.—
Financial reporting The—Committee—assessed—whether—suitable— accounting—policies—had—been—adopted— throughout—the—accounting—period—and— whether—management—had—made— appropriate—estimates—and—judgements— over—recognition,—measurement—and— presentation—of—the—financial—results.— There—were—no—new—or—altered—accounting— standards—in—2014—that—had—a—material—effect— on—the—Group’s—financial—statements.—
— The—Committee—also—focused—on—the— accounting—for—material—transactions,— clarity—of—disclosures—in—financial—reports,— the—going-concern—assumptions,—and— compliance—with—accounting—standards— and—obligations—under—applicable—laws,— regulations—and—governance—codes.—The— Committee—further—considered—the—fair,— balanced—and—understandable—requirement— under—the—UK—Code,—providing—advice—to— the—Board—in—respect—of—this—requirement.—
External audit The—Group’s—external—auditor—is—KPMG—LLP— and—oversight—of—the—relationship—with— them—is—one—of—the—Committee’s—key— responsibilities.—The—Committee—approved— KPMG’s—terms—of—engagement—and— recommended—their—remuneration—for—the— statutory—audit.—The—Committee—met— privately—with—the—auditor—on—two—occasions— during—2014—and—the—Committee—Chairman— maintained—regular—contact—with—the—audit— partner—throughout—the—year.
— Considering the audit findings report and the terms of engagement and fees to be paid to the auditor
— Approving the internal audit plan, including resources, coverage and delivery
Audit tender The—Group—operates—a—policy—under—which— at—least—once—every—five—years—a—formal—review— is—undertaken—by—the—Committee—to—assess— whether—the—external—audit—should—be— re-tendered.—The—external—audit—was—last—put— out—to—competitive—tender—in—1999—when—the— present—auditor—was—appointed.—Since—2005,— the—Committee—has—annually—considered— the—need—to—re-tender—the—external—audit— service—and—it—again—considered—this— in—February—2015,—concluding—that—there— was—nothing—in—the—performance—of—the— auditor—which—required—a—change.
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—light—of—this,— and—conforming—to—the—requirements—of—the— European—Union—rules,—it—is—expected—that—the— Company—will—be—required—to—change—auditor— no—later—than—for—the—2023—financial—year-end.— The—Committee—also—recognises—that—the— industry—is—in—a—period—of—unprecedented— change—with—the—introduction—of—Solvency—II— in—2016,—and—the—IASB—expecting—to—issue—a— new—insurance—accounting—standard—for— implementation,—mostly—likely,—in—2019.—The— Committee—currently—believes—any—change— of—auditor—should—be—scheduled—to—limit— operational—disruption—during—such—a—period— of—change—and,—as—a—consequence,—is—not— currently—planning—to—re-tender—the—audit—
Internal audit The—independent—assurance—provided— by—Group-wide—Internal—Audit—formed—a— fundamental—part—of—the—Committee’s— deliberations—on—the—Group’s—overall—control— environment.—The—Committee—approved— Group-wide—Internal—Audit’s—annual—plan,— resource—and—budget,—and—considered—the— performance—of—the—Director—of—Groupwide —Internal—Audit.
Each—of—the—Group’s—business—units—has— an—internal—audit—team,—the—heads—of—which— report—to—the—Director—of—Group-wide— Internal—Audit.—The—function—also—has—a— Quality—Assurance—Director,—whose—primary— role—is—to—monitor—and—evaluate—adherence— to—industry—practice—guidelines—and— Group-wide—Internal—Audit’s—own—standards— and—methodology.—Internal—audit—resources,— plans,—budgets—and—its—work—are—overseen— by—both—the—Committee—and—the—relevant— business—unit—audit—committee.—The— Director—of—Group-wide—Internal—Audit— reports—functionally—to—the—Chairman—of—the— Committee—and—for—management—purposes— to—the—Group—Chief—Executive.
Internal auditor performance In—addition—to—the—periodic—external— effectiveness—review—required—every—five— years—(last—conducted—by—PwC—in—2012);— the—Committee—annually—assesses—the— performance—and—effectiveness—of—the— internal—audit—function.—The—internal— effectiveness—review,—performed—by—the— Group-wide—Internal—Audit—Quality— Assurance—Director,—was—conducted—in— accordance—with—the—professional—practice— standards—of—the—Chartered—Institute—of— Internal—Auditors—(CIIA).—The—review— concluded—that—Group-wide—Internal—Audit— continued—to—comply—with—the—requirements— of—internal—audit—policies,—procedures—and— practices,—and—standards—in—all—material— respects—and—that—the—function—continued—to— be—aligned—with—its—mandated—objectives.
Group—Compliance—is—responsible—for— ensuring—Group-wide—compliance—policies— remain—up—to—date—and—fit—for—purpose.—These— include—the—Group—Compliance—Policy,— Group—Sanctions—Policy,—Group—Anti-Money— Laundering—Policy—and—the—Policy—regulating— communications—with—the—Prudential— Regulation—Authority—and—Financial— Conduct—Authority.—All—these—were— reviewed—during—the—year—and—changes— considered—by—the—Committee—in—October.
Each—business—unit—audit—committee— has—adopted—the—Group’s—standard—terms— of—reference,—with—minor—variations—to— address—local—regulations—or—the—particular— requirements—of—the—business.—During— 2014,—and—with—the—approval—of—the— Committee,—these—were—updated—to— improve—alignment—with—the—Committee’s— own—terms—of—reference.—The—Committee— Chairman—also—reviewed—and—approved— appointments—of—business—unit—audit— committee—members—during—the—year.—
Members —— Paul—Manduca—(Chairman) —— Howard—Davies —— Ann—Godbehere —— Philip—Remnant— —— Lord—Turnbull
The role and responsibilities of the Committee are set out in its terms of reference, which are reviewed by the Committee and approved by the Board on an annual basis. The terms of reference can be found on the Company’s website. The Committee’s responsibilities include keeping under review the composition of the Board, identifying and nominating candidates for approval by the Board to fill any vacancies, evaluating the independence of the non-executive directors and authorising actual or potential conflicts of interest.
Board composition and succession planning The—Committee—reviewed—the—composition— of—the—Board—and,—in—particular,—the— non-executive—directors—to—ensure—that— the—balance—of—skills,—experience—and— knowledge—continued—to—be—appropriate— to—oversee—the—achievement—of—the—Group’s—
— Considering the overall skills and knowledge required to support strategic goals of the Group
Given—the—global—reach—of—the—Group’s— operations,—the—Board—makes—every—effort— to—ensure—it—is—able—to—recruit—directors— from—different—backgrounds,—with—diverse— experience,—perspectives—and—skills.—This— diversity—not—only—contributes—towards— Board—effectiveness—but—is—essential—for— successfully—delivering—the—strategy—of—an— international—Group.—The—Board—is—duty— bound—to—recruit—the—best—available—talent— and—remains—committed—to—appointing—the— most—appropriate—candidate—for—each—role.— This—same—approach—is—applied—by—all—our— businesses—and—bringing—the—right—skills— and—knowledge—to—every—role—is—key—to—the— ongoing—success—of—the—Group.—
The role and responsibilities of the Committee are set out in its terms of reference, which are reviewed by the Committee and approved by the Board on an annual basis. The terms of reference can be found on the Company’s website. The Committee is responsible for recommending the Group’s overall risk appetite and tolerance to the Board for approval, considering the Group’s key risks, advising the Board on the risks inherent in strategic transactions and business plans, reviewing the Group investment framework and advising the Remuneration Committee on risk weightings. The Committee has oversight for a number of risk-related regulatory submissions and for the ‘three lines of defence’ model which forms the basis for the Group’s approach to managing risk. The Committee also monitors the effectiveness of the Group Chief Risk Officer.
The—Committee—received—the—minutes— of—the—Group—Executive—Risk—Committee,— along—with—any—matters—escalated—by—the— other—risk—management—committees.—The— Committee—is—provided—with—regular—reports— on—the—activities—of—the—Group—Risk—function— and,—where—it—affects—the—results—of—the— assurances—under—the—Turnbull—compliance— statement,—the—Audit—Committee—also— receives—appropriate—reporting—from— this—function.—
— Considering the economic capital methodology and results including feedback to Prudential Regulation Authority
— Overseeing the process for compiling and the detailed review of the ORSA, making recommendations to the Board
— Overseeing and signing- off on key deliverables, including the Recovery Plan, Systemic Risk Management Plan, Liquidity Risk Management Plan
— Considering the remit of the Group Investment Director and scope of the Group investment function
— Overseeing the alignment of the Group’s risk and investment frameworks
— drivers—of—risk—throughout—the—Group.— It—received—regular—updates—from—the— Group—Investment—Director—and—various— departments—on—market—conditions—and— their—impact—on—the—business—as—a—whole.— The—committee—considered—the—stress— scenarios—and—results—of—the—Group’s— stress—testing,—and—considered—the— appropriateness—of—the—‘three—lines—of— defence’—model—on—which—the—Group—Risk— Framework—is—based.—More—information— on—the—model—can—be—found—in—the—Group— Chief—Risk—Officer’s—report—on—page—51.— The—information—received—enabled—the— committee—to—monitor—capital—and—liquidity— management,—and—to—assess—and—challenge— both—the—effectiveness—and—appropriateness— of—the—Group—Risk—Framework,—ensuring—that— it—continued—to—support—the—risk—appetite—as— determined—by—the—Board.—Adjustments—to— specific—limits—and—policies—within—the— established—risk—appetite—were—considered— and—approved—by—the—committee.
Globally Systemically Important Insurer (G-SII) In—July—2013,—the—Group—was—designated— as—a—Globally—Systemically—Important— Insurer—by—the—Financial—Stability—Board.— The—committee—continued—to—oversee—the— deliverables—required—as—a—result—of—the— Group’s—designation—and—dialogue— remained—ongoing—with—the—Prudential— Regulation—Authority—in—respect—of—the— growing—scope—of—this—project.—
Non-executive—directors—may—hold— positions—on—a—number—of—external—company— boards—or—other—bodies—provided—that—they— are—able—to—demonstrate—satisfactory—time— commitment—to—their—role—at—Prudential—and— that—they—discuss—any—new—appointment— with—the—Chairman—prior—to—accepting.— This—ensures—that—they—do—not—compromise— their—independence—and—that—any—potential— conflicts—of—interest—and—any—possible—issues— arising—out—of—the—time—commitments— required—by—the—new—role—can—be—identified— and—addressed—appropriately.—The—major— commitments—of—the—non-executive— directors—are—detailed—in—their—biographies— on—pages—74—to—75.
Suitable—insurance—cover—is—in—place—in— respect—of—legal—action—against—directors— and—senior—managers—of—companies—within— the—Group.—Directors—and—certain—senior— managers—of—companies—within—the—Group— are—provided—with—protection—against— personal—financial—exposure—which—may—be— incurred—in—their—capacity—as—such.—These— include—qualifying—third—party—indemnity— provisions—(as—defined—by—the—Companies— Act—2006)—for—the—benefit—of—directors—of— Prudential—plc—and—other—such—persons— including,—where—applicable,—in—their— capacity—as—directors—of—other—companies— within—the—Group.—These—indemnities—were— in—force—during—2014—and—remain—in—force.—
Non-executive—directors—are—appointed—on— the—understanding—that—they—serve—an—initial— term—of—three—years.—Subject—to—review—by— the—Nomination—Committee,—it—would—be— expected—that—they—would—serve—a—second— term—of—three—years.—In—both—instances,— non-executive—directors—remain—subject— to—annual—election—at—the—Annual—General— Meeting.—After—six—years—of—service,— non-executive—directors—may—be—appointed— for—a—further—year,—up—to—a—maximum—of—three— years,—subject—to—rigorous—annual—review— by—the—Nomination—Committee—and—annual— election—at—the—Annual—General—Meeting.— Good—governance—does—not—generally—support— the—practice—of—serving—longer—than—nine—years— on—the—Board—as—a—non-executive—director.—
The—Board—may—exercise—all—powers— conferred—on—it—by—the—Company’s—Articles— of—Association—and—the—Companies—Act— 2006.—This—includes—the—powers—of—the— Company—to—borrow—money—and—to— mortgage—or—charge—any—of—its—assets— (subject—to—the—limitations—set—out—in—the— Companies—Act—2006—and—the—Company’s— Articles—of—Association)—and—to—give—a— guarantee,—security—or—indemnity—in— respect—of—a—debt—or—other—obligation— of—the—Company.—
Under—the—agreements—governing— Prudential—Corporation—Holdings—Limited’s— life—insurance—and—fund—management—joint— ventures—with—China—International—Trust—&— Investment—Corporation—(‘CITIC’),—if—there—is— a—change—of—control—of—the—Company,—CITIC— may—terminate—the—agreements—and—either— (i)—purchase—the—Company’s—entire—interest— in—the—joint—venture—or—require—the—Company— to—sell—its—interest—to—a—third—party—designated— by—CITIC,—or—(ii)—require—the—Company—to— purchase—all—of—CITIC’s—interest—in—the—joint— venture.—The—price—of—such—purchase—or—sale— is—to—be—the—fair—value—of—the—shares—to—be— transferred,—as—determined—by—the—auditor— of—the—joint—venture.—
The—directors—who—held—office—at—the— date—of—approval—of—this—directors’—report— confirm—that,—so—far—as—they—are—each—aware,— there—is—no—relevant—audit—information—of— which—the—Company’s—auditor—is—unaware;— each—director—has—taken—all—the—steps—that—he— or—she—ought—to—have—taken—as—a—director—to— make—himself—or—herself—aware—of—any— relevant—audit—information—and—to—establish— that—the—Company’s—auditor—is—aware—of—that— information.—This—confirmation—is—given—and— should—be—interpreted—in—accordance—with— the—provisions—of—Section—418—of—the— Companies—Act—2006.
The Committee’s report is presented in the following sections: — An ‘at a glance’ summary of the Group’s remuneration arrangements on pages 96 to 97; — A summary of our Directors’ Remuneration Policy on pages 98 to 100, this describes how we pay directors and the rationale for these arrangements. This Policy was approved by shareholders at the 2014 AGM; — Our annual report on remuneration on pages 101 to 115 which describes how the Committee applied the Remuneration Policy in 2014 and the decisions it has made in respect of 2015; and
This letter shares the Committee’s thinking on a number of the key decisions that we took about rewarding the performance achieved in 2014 and about remuneration arrangements for 2015.
Rewarding 2014 Performance As set out in the Business Review section earlier in this Annual Report, the Group’s financial performance in 2014 was strong: Strategic priority Group performance £m
Business unit remittances Cash flows across the Group balance these net remittances (which support dividend payments) with the retention of cash for profitable reinvestment
C h airm an o f th e R em u n er atio n
The Group achievements in 2014 built on the strong results achieved in recent years. Over the longer term, the Group has created substantial value for shareholders through share price rises and by increasing dividend payments. £100 invested in Prudential on 1 January 2012 was worth £257 on 31 December 2014. This performance outstripped that of other international insurance companies; this measure of total returns was the performance condition attached to the Group Performance Share Plan awards made in 2012, therefore the Committee determined that these awards should be released in full in Spring 2015.
The Committee was pleased with the level of support which shareholders gave the Company’s Directors’ Remuneration Policy at the 2014 AGM. The Committee believes that the Policy remains appropriate and does not intend to present the Policy to shareholders for their approval in 2015.
The Committee will implement two refinements to executive pay arrangements in 2015 within the current Policy: — Economic capital measure – as the Group prepares for the implementation of Solvency II, it is increasingly using economic capital as a key measure of capital adequacy. To reflect this change, part of executive directors’ 2015 bonuses will be determined by the achievement of economic capital targets; and
— Power to recover incentive payments – the Committee has determined that it is appropriate for it to have the power to recover (‘clawback’) incentives after they are received by executives. Clawback provisions will apply to 2015 bonuses and long-term incentive awards, and may be applied in certain circumstances including the misstatement of financial results.
Recent years have seen significant increases in the complexity and scale of the Group. The Company’s geographic footprint and range of products have continued to grow in response to customers’ savings and protection needs. While these developments have delivered real and sustained value to shareholders, they have also required the organisation to operate in a more complex regulatory environment and to build effective relationships with new and more diverse groups of stakeholders. As a result, leadership roles have become more demanding and time consuming.
External pay data does not drive the level of executive directors’ salaries or non-executive directors’ fees. When the Committee has resolved on planned increases, we reference data as a sense check to ensure that the remuneration paid by the Company remains fair, competitive and within the range of that offered by similar organisations.
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 2014.
— Salary increases of 3% in 2014. — Salary increases of 3% in 20152.
A significant proportion, currently 40%, of bonus is deferred into shares for three years.
Aligned with our long-term business strategy and delivery of shareholder value, vesting is currently subject to: Relative TSR; and Group IFRS Profit; or Business unit IFRS profit
The Group Chief Executive has a maximum AIP opportunity of 200% of salary. For other executives the maximum is 180%.
2014 bonuses were paid based on performance measures related to profit, cash flow and capital adequacy, as well as personal objectives.
O u r execu tive rem u n eratio n at a glan ce
What this performance means for executive directors’ pay At Prudential, the remuneration packages are designed to ensure a strong alignment between pay and performance. As you can see from the charts on page 94, sustained growth across all of our key performance metrics has delivered substantial value to 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 2012 had stretching performance conditions attached to vesting and were denominated in shares. The value generated for shareholders through share price growth and dividends paid over the last three years is therefore reflected in the value of the 2014 long-term incentive plan (‘LTIP’) releases, as illustrated in the chart below.
Pierre-Olivier Bouée1 Group Chief Risk Officer 473 193 752 743 2,161 n/a John Foley2 Group Investment Director 162 65 255 3,147 3,629 4,040 Jackie Hunt Chief Executive, UK & Europe 644 324 1,016 1,420 3,404 3,564
Tidjane Thiam Group Chief Executive 1,061 397 2,122 8,254 11,834 8,702 Mike Wells President & CEO, JNL 676 77 4,348 6,292 11,393 11,883
Notes 1 Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The remuneration above was paid in respect of his service as an executive director. 2 John Foley stepped down from the Board on 1 April 2014. The remuneration above was paid in respect of his service as an executive director.
Executive director Role 2015 salary increase 2015 salary Maximum bonus Bonus deferred LTI Award (% salary)
Pierre-Olivier Bouée Group Chief Risk Officer 3% £649,000 160% 40% 250% Jackie Hunt Chief Executive, UK & Europe 3% £664,000 175% 40% 250%
Notes 1 The bonus opportunity for the CEO, M&G remains at the lower of 0.75 per cent of M&G’s IFRS profit or six times salary. He continues to receive awards under the
Prudential LTIP and the M&G Executive LTIP, which are both included in the above LTI award. 2 The CEO, JNL will also continue to have a 10 per cent share of the Jackson Senior Management Bonus Pool. 40 per cent of this is deferred in shares.
Market data is also reviewed so that salaries remain a competitive range relative to each executive director’s local market.
Current executives have the option to: — Receive payments into a defined contribution scheme; and/or
Jackson’s Defined Contribution Retirement Plan has a guaranteed element (6 per cent of pensionable salary) and additional contributions (up to a further 6 per cent of pensionable salary) based on the profitability of JNL.
ire cto rs’ rem u n er atio n p o lic y
Annual bonus Currently all executive directors participate in the Annual Incentive Plan (AIP).
AIP awards for all executive directors are subject to the achievement of financial and personal objectives. Business unit chief executives either have measures of their business unit’s financial performance in the AIP or they may participate in a business unit specific bonus plan. For example, the President and CEO, JNL currently participates in the Jackson Senior Management Bonus Pool as well as in the AIP.
The Chief Executive, M&G has a bonus opportunity of the lower of six times salary or 0.75 per cent of M&G’s IFRS profit. For other executive directors, the maximum AIP opportunity is up to 200 per cent of salary. Annual awards are disclosed in the relevant Annual Report on Remuneration.
Currently all executive directors participate in the Prudential Long Term Incentive Plan (‘PLTIP’). The PLTIP has a three-year performance period. Vesting of outstanding awards is dependent on: — Relative TSR (50 per cent of award); and
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding award in specific circumstances. From 2015 and future awards, the Committee also has the power to recover all, or a portion of, amounts already paid in specific circumstances and within a defined timeframe (clawback).
The maximum vesting under the PLTIP is 100 per cent of the original share award plus accrued dividend shares.
The guidelines for share ownership were increased to the following levels in 2013: — 350 per cent of salary for the Group Chief Executive; and
All non-executive directors receive a basic fee for their duties as a Board member. Additional fees are paid for added responsibilities such as chairmanship and membership of committees or acting as the Senior Independent Director. Fees are paid to nonexecutives in cash. Fees are reviewed annually by the Board with any changes effective from 1 July.
It is expected that non-executive directors will hold shares with a value equivalent to one times the annual basic fee (excluding additional fees for chairmanship and membership of any committees).
The Chairman is not eligible to receive a pension allowance or to participate in the Group’s employee pension schemes.
Prudential does not consult with employees when setting the directors’ remuneration policy; Prudential is a global organisation with employees, and agents in multiple business units and geographies. As such, there are practical challenges associated with consulting with employees directly on this matter. As many employees are also shareholders, they will be able to participate in the binding vote on the Directors’ Remuneration Policy.
irecto rs’ rem u n eratio n p o licy A
The principal responsibilities of the Committee are: — Determining and recommending to the Board for approval, the framework and policy for the remuneration of the Chairman and executive directors; — Approving the design of performance-related pay schemes operated for the executive directors and determining the targets and individual payouts under such schemes; — Reviewing the design and development of all share plans requiring approval by the Board and/or the Company’s shareholders; — Approving the share ownership guidelines for the Chairman and executive directors and monitoring compliance; — Reviewing and approving individual packages for the executive directors and the Chairman fee; — Review and approve packages to be offered to newly recruited executive directors; — Reviewing and approving the structure and quantum of any severance package for executive directors; — Ensuring the process for establishing remuneration policy is transparent and consistent with the Group’s risk appetite, encourages strong risk management and solvency management practices and takes account of remuneration practices across the Group; and
— Monitoring the remuneration and risk management implications of remuneration of senior executives across the Group, senior staff in the risk, control and governance functions and those with an opportunity to earn in excess of £1 million in a particular year.
In 2014, the Committee met six times. Key activities at each meeting are shown in the table below: Meeting Key activities
Individuals are never present when their own remuneration is discussed. During 2014, Deloitte LLP were the independent adviser to the Committee. Deloitte were appointed by the Committee in 2011 following a competitive tender process. As part of this process, the Committee considered the services that Deloitte provided to Prudential and its competitors as well as other potential conflicts of interests. Deloitte is a member of the Remuneration Consultants’ Group and voluntarily operate under their code of conduct when providing advice on executive remuneration in the UK. Deloitte regularly meet with the Chairman of the Committee without management present. The Committee is comfortable that the Deloitte engagement partner and team providing remuneration advice to the Committee do not have connections with Prudential that may impair their independence and objectivity. The total fees paid to Deloitte for the provision of independent advice to the Committee in 2014 were £80,500 charged on a time and materials basis. During 2014, Deloitte also gave Prudential management advice on remuneration, as well as providing guidance on Solvency II, taxation, internal audit, real estate and other financial, risk and regulatory matters. Remuneration advice is provided by an entirely separate team within Deloitte.
In addition, management received external advice and data from a number of other providers. This included market data and legal counsel. This advice, and these services, are not considered to be material.
Remuneration in respect of performance in 2014 Base salary Executive directors’ salaries were reviewed in 2013 with changes effective from 1 January 2014. When the Committee took these decisions it considered: — The salary increases awarded to other employees; — The performance and experience of each executive; — The relative size of each director’s role; and
Salary increases for the wider workforce vary across our business units, reflecting local market conditions; in 2014 salary budgets increased between 2.8 per cent and 6 per cent for the wider workforce.
Mike Wells President & CEO, JNL Towers Watson US Financial Services Survey LOMA US Insurance Survey
After careful consideration the Committee decided to increase salaries by 3 per cent for all executive directors with the exception of the Chief Financial Officer. Mr Nicandrou’s base salary increase of 5 per cent was part of a wider change to his remuneration package.
Notes 1 Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The maximum bonus opportunity shown represents his annual opportunity as an executive director – this was pro-rated for the portion of the year for which he was an Executive director. Please see the section on ‘2014 Annual Incentive Plan Payments’ for details.
3 Michael McLintock’s annual bonus opportunity in 2014 was the lower of 0.75 per cent of M&G’s IFRS profit and six times annual salary. M&G’s IFRS profit in 2014 was £446 million.
The performance measures, and the relative achievement compared to the performance range, is illustrated below. The Board believe that, due to the commercial sensitivity of these targets, disclosing further details may damage the competitive position of the Group.
Personal performance As set out in our Remuneration Policy, a proportion of the annual bonus for each executive director is based on the achievement of personal objectives. These objectives include the executive’s contribution to Group strategy as a member of the Board and specific goals related to their functional and/or business unit role. 2014 objectives were set for each executive prior to the start of the financial year and performance against these objectives was assessed by the Committee at its meeting in February 2015.
A n n u al rep o rt o n rem u n er atio n 2014 Annual Incentive Plan payments On the basis of the outstanding performance of the Group and its business units, and the Committee’s assessment of each executive’s personal performance, the Committee determined the following 2014 AIP payments: Executive Role 2014 salary
2014 Jackson bonus pool In 2014 the Jackson bonus pool was determined by Jackson’s profitability, capital adequacy, remittances to Group, in-force experience and credit rating. Across all of these measures Jackson delivered excellent performance and exceeded prior year performance. As a result of this performance the Committee determined that Mike Wells’ share of the bonus pool would be US$5,384,226.
Prudential TSR performance – vesting level = 100% Index x 120% – performance level required for awards to vest at 100% Index x 110% – performance level required for awards to vest at 75% Index – performance required for awards to vest at 25%
Notes 1 Companies in the peer group for the 2012 GPSP and UK BUPP awards are: Aegon, Allianz, Aviva, Axa, Generali, ING, Legal & General, Manulife, Old Mutual and Standard Life 2 A 2012 UK BUPP award was made to Rob Devey subject to identical performance conditions. This will be pro-rated for time employed as detailed in the 2013
Asia BUPP In 2012 Barry Stowe received an award under the Asia BUPP. This award vests based on new business profit, IFRS profit and cash remittances of the Asian business. The chart below illustrates the achievement against performance ranges for the 2012 Asia BUPP award: Measure Threshold Mid Maximum Overall 2014 vesting 1/3 cumulative new business pro�t 1/3 cumulative IFRS pro�t 1/3 cumulative cash remittances
Jackson BUPP Mike Wells received an award under the Jackson BUPP in 2012. The Jackson BUPP award vests subject to Shareholder Capital Value (SCV) growth over the performance period. This performance measure is an estimation of the shareholder value created by the Jackson business over the period. As a result of excellent SCV growth of 20.5 per cent per annum over the performance period this award will vest in full: Percentage of award that vests: Compound annual growth in SCV over three years: Actual performance
The value generated for shareholders through share price growth and dividends paid over the last three years is reflected in the value of 2014 LTIP releases, as illustrated in the chart below.
Pension entitlements Pension provisions in 2014 were: Executive 2014 pension arrangement Life assurance provision
Barry Stowe Pension supplement in lieu of pension of 25 per cent of salary and a HK$33,500 payment to the Hong Kong Mandatory Provident Fund.
An annual profit sharing contribution equivalent to 6 per cent of pensionable salary was made in 2014.
All other UK-based executives Pension supplement in lieu of pension of 25 per cent of salary Up to four times salary plus a dependants’ pension.
Michael McLintock previously participated in a contributory defined benefit scheme which was open at the time he joined the Company. The scheme provided a target pension of two thirds of final pensionable earnings on retirement for an employee with 30 years or more potential service who remained in service to Normal Retirement Date, he is now a deferred member of the scheme. Mr McLintock’s Normal Retirement Date under the scheme is age 60, should he claim his deferred pension before this age it will be subject to an actuarial reduction. There are no additional benefits payable should Mr McLintock retire early.
Pierre-Olivier Bouée1 473 75 752 451 301 743 118 2,161 John Foley2 162 24 255 153 102 3,147 41 3,629 Jackie Hunt 644 163 1,016 610 406 1,420 161 3,404 Michael McLintock 382 94 2,292 1,375 917 2,715 96 5,579 Nic Nicandrou 682 96 1,186 712 474 2,925 171 5,060 Barry Stowe3 665 710 1,046 628 418 2,929 169 5,519 Tidjane Thiam 1,061 132 2,122 1,273 849 8,254 265 11,834 Mike Wells4 676 58 4,348 2,609 1,739 6,292 19 11,393 * Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits. † In line with the regulations, the estimated value of LTIP releases has been calculated based on the average share price over the last three months of 2014. The actual value of LTIPs, based on the share price on the date awards are released, will be shown in the 2015 report. ‡ 2014 pension benefits include cash supplements for pension purposes, and contributions into DC schemes as outlined on the previous page. § 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.
Notes 1 Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The remuneration above was paid in respect of his service as an executive director. 2 John Foley stepped down from the Board on 1 April 2014. The remuneration above was paid in respect of his service as an executive director. 3 Barry Stowe’s 2014 benefits relate primarily to his expatriate status, including costs of £217,393 for housing, £18,272 for children’s education, £76,319 for home leave and a £340,473 Executive Director Location Allowance.
4 Mike Wells’ bonus figure excludes a contribution of £9,469 from a profit sharing plan which has been made into a 401(k) retirement plan. This is included under 2014 pension benefits.
John Foley 628 118 1,004 602 402 2,133 157 – 4,040 Jackie Hunt1 199 224 935 561 374 1,355 50 801 3,564 Michael McLintock 371 92 2,225 1,335 890 3,710 93 – 6,491 Nic Nicandrou 649 92 1,124 674 450 2,133 162 – 4,160 Barry Stowe2 679 624 1,037 622 415 2,447 172 – 4,959 Tidjane Thiam 1,030 123 2,056 1,234 822 5,235 258 – 8,702 Mike Wells3 691 58 3,415 2,049 1,366 7,699 20 – 11,883 * Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits. † In line with the regulations, the value of LTIP releases has been re-calculated based on the actual value of LTIPs, based on the share price on the date awards were released.
‡ 2013 pension benefits include cash supplements for pension purposes, and contributions into DC schemes as outlined in the 2013 report. § 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.
3 Mike Wells’ bonus figure excludes a contribution of £9,779 from a profit sharing plan which has been made into a 401(k) retirement plan. This is included under 2013 pension benefits.
Group Chief Executive Single Figure of total remuneration 3,737 640 5,293 5,339 9,533 8,702 11,834
The UK workforce has been chosen as the most appropriate comparator group as it reflects the economic environment for the location in which the Group Chief Executive is employed.
Long-term incentives awarded in 2014 2014 share-based long-term incentive awards The table below shows the awards made to executive directors in 2014 under share based long-term incentive plans and the performance conditions attached to these awards: Executive Role
Group TSR performance will be measured on a ranked basis. 25 per cent of the award will vest for TSR at the median of the peer group increasing to full vesting for performance at the upper quartile. The peer group for 2014 awards is: Aegon Aflac AIA AIG Allianz Aviva AXA Generali Legal & General Manulife MetLife Munich Re Old Mutual Prudential Financial Standard Life Sun Life Financial Swiss Re Zurich Insurance Group
Non-executive director remuneration in 2014 Chairman’s fees The annual fee paid to the Chairman, Paul Manduca, remained unchanged at £600,000 during 2014.
Basic fee 90,000 92,500 Additional fees: Audit Committee Chairman 70,000 70,000 Audit Committee member 25,000 25,000 Remuneration Committee Chairman 60,000 60,000 Remuneration Committee member 25,000 25,000 Risk Committee Chairman 65,000 65,000 Risk Committee member 25,000 25,000 Nomination Committee member 10,000 10,000 Senior Independent Director 50,000 50,000
Note 1 If, in a particular year, the number of meetings is materially greater than usual, the Company may determine that the provision of additional fees is fair and reasonable.
Notes 1 Holding requirement of the Articles of Association (2,500 ordinary shares) must be obtained within one year of appointment to the Board. 2 The increased guidelines for executive directors were introduced with effect from 1 January 2013. Executive directors have five years from this date (or date of joining if later) to reach the enhanced guideline. The guideline for non-executive directors was introduced on 1 July 2011. Non-executive directors have three years from this date (or date of joining if later) to reach the guideline.
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 and deferred annual incentive awards, detailed in the ‘Supplementary information’ section. It is only these shares that count towards the share ownership guidelines.
Non-executive directors * Based on the closing share price on 31 December 2014 (£14.92) † Further information on share awards subject to performance conditions are detailed in the ‘share-based long-term incentive awards’ section of the Supplementary information.
4 For the 1 January 2014 figure Mike Wells’ beneficial interest in shares is made up of 203,944 ADRs (representing 407,888 ordinary shares). For the 31 December 2014 figure his beneficial interest in shares is made up of 222,790 ADRs (representing 445,580 ordinary shares).
Beginning End Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period
Pierre-Olivier Bouée 23 Sep 14 1,155 1,492 1 Dec 17 31 May 18 – 1,558 – – – – 1,558
Jackie Hunt 23 Sep 14 1,155 1,492 1 Dec 17 31 May 18 – 1,558 – – – – 1,558 Michael
Nic Nicandrou 16 Sep 11 466 1,492 1 Dec 16 31 May 17 3,268 – – – – – 3,268 Nic Nicandrou 23 Sep 14 1,155 1,492 1 Dec 19 31 May 20 – 1,311 – – – – 1,311 Tidjane Thiam 16 Sep 11 466 1,492 1 Dec 14 29 May 15 965 – – – – – 965 Tidjane Thiam 20 Sep 13 901 1,492 1 Dec 16 31 May 17 499 – – – – – 499 Tidjane Thiam 23 Sep 14 1,155 1,492 1 Dec 17 31 May 18 – 1,168 – – – – 1,168
Pierre-Olivier Bouée 6 August 2013 12 months 12 months John Foley1 8 December 2010 12 months 12 months Jackie Hunt 25 April 2013 12 months 12 months Michael McLintock 21 November 2001 6 months 12 months Nic Nicandrou 26 April 2009 12 months 12 months Barry Stowe 18 October 2006 12 months 12 months Tidjane Thiam 20 September 2007 12 months 12 months Mike Wells2 15 October 2010 12 months 12 months
— Tidjane Thiam received £22,285 as a non-executive director for another organisation. This sum included deferred stock units.
Recruitment arrangements Pierre-Olivier Bouée Pierre-Olivier Bouée was appointed to the Prudential Board on 1 April 2014 in his role as Group Chief Risk Officer. He did not receive any recruitment payments on joining the Board. His outstanding share awards under deferred bonus plans and long-term incentives awarded before his appointment to the Board will continue to vest on the normal timescale and subject to the original performance conditions.
John Foley On stepping down from the Board, John Foley received no loss of office payment and his outstanding share awards under deferred bonus plans and long-term incentives will continue to vest on the normal timescale and subject to the original performance conditions.
Statement of voting at general meeting At the 2014 Annual General Meeting, shareholders were asked to vote on the following remuneration items: — Directors’ Remuneration Policy; and
Each of these resolutions received a significant vote in favour by shareholders; 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 Policy 1,745,240,139 91.85% 154,778,305 8.15% 1,900,018,444 46,152,673 To approve the Directors’ Remuneration Report 1,755,231,894 94.54% 101,417,177 5.46% 1,856,649,071 89,522,046
— The 2015 salary increase for the Chief Executive, PCA was 5 per cent, all other executive directors received a 3 per cent increase. These uplifts are in line with 2015 salary increase budgets for other employees across our business units (2.5 per cent to 5 per cent). 2015 salaries are set out in the ‘Our executive remuneration at a glance’ section.
Face value of conditional share awards outstanding at 1 January 2014
Note Under the M&G Executive LTIP, the value of each unit at award is £1. The value of units changes based on M&G’s profit growth and investment performance over the performance period. For the 2011 award of 1,318,148 units, the unit price at the end of the performance period was £2.30 which resulted in a payment of £3,031,740 to Michael McLintock during 2014. For the 2012 award of 952,960 units, the unit price at the end of the performance period was £2.07. This will result in payment of £1,972,627 to Michael McLintock in 2015.
As outlined in the 2013 Directors’ Remuneration Report, on 31 December 2013 the performance period for the JNL LTIP came to an end. Over the four-year performance period the shareholder value of the US business grew by 70.848 per cent. This resulted in 70.848 per cent of Mike Wells’ cash-settled award vesting. This was the last JNL LTIP award made before Mike Wells became an executive director and it is anticipated that no further awards will be made to him under this plan.
Deferred 2011 Group deferred bonus plan award 2012 11,228 277 11,505 31 Dec 14 750
Deferred 2010 annual incentive award 2011 59,836 59,836 – 31 Dec 13 31 Mar 14 721.5 1,268.5
Deferred 2012 annual incentive award 2013 38,710 964 39,674 31 Dec 15 1,055
Deferred 2013 annual incentive award 2014 30,244 752 30,996 31 Dec 16 1,317
Deferred 2010 Group Deferred Bonus Plan award 2011 96,536 96,536 – 31 Dec 13 14 Mar 14 721.5 1,346
Deferred 2011 annual incentive award 2012 98,850 2,464 101,314 31 Dec 14 750
Deferred 2012 annual incentive award 2013 82,460 2,054 84,514 31 Dec 15 1,055
Deferred 2013 annual incentive award 2014 99,646 2,484 102,130 31 Dec 16 1,317
2 The number of shares awarded initially awarded is calculated using the average share price over the three business days prior to the date of grant. For the awards from the 2013 annual incentives, made in 2014, the average share price was 1,288 pence. 3 DRIP dividend equivalents accumulate on these awards.
Save As You Earn (SAYE) schemes UK based executive directors are eligible to participate in the HM Revenue & Customs (HMRC) approved Prudential Savings-Related Share Option Scheme and Barry Stowe is invited to participate in the similar International Share Ownership Scheme. These schemes allow all eligible employees to save towards the exercise of options over Prudential plc shares with the option price set at the beginning of the savings period at a discount of up to 20 per cent of the market price.
In 2014 participants could elect to enter into savings contracts of up to £500 per month for a period of three or five years. At the end of this term, participants may exercise their options within six months and purchase shares. If an option is not exercised within six months, participants are entitled to a refund of their cash savings plus interest if applicable under the rules. Shares are issued to satisfy those options which are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and any other option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at the proposed date of grant.
Dilution Releases from the Prudential Long Term Incentive Plan, GPSP and BUPP are satisfied using new issue shares rather than by purchasing shares in the open market. Shares relating to options granted under all-employee share plans are also satisfied by new issue shares. The combined dilution from all outstanding shares and options at 31 December 2014 was 0.1 per cent of the total share capital at the time. Deferred shares will continue to be satisfied by the purchase of shares in the open market.
Their emoluments were within the following bands: Number of five highest paid employees 2014
Section 5 122 Index to Group IFRS financial statements 261 Balance sheet of the parent company 262 Notes on the parent company financial statements 270 Statement of directors’ responsibilities in respect of the annual report and the financial statements 271 Independent auditor’s report to the members of Prudential plc only
Section B: Earnings performance B1 Analysis of performance by segment 143 B1.1 Segment results – profit before tax 144 B1.2 Short-term fluctuations in investment returns on shareholder-backed business 146 B1.3 Determining operating segments and performance measure of operating segments 150 B1.4 Segmental income statement 152 B1.5 Revenue 153 B2 Profit before tax – asset management operations B3 Acquisition costs and other expenditure 154 B3.1 Staff and employment costs 155 B3.2 Share-based payment 157 B3.3 Key management remuneration 157 B3.4 Fees payable to the auditor 158 B4 Effect of changes and other accounting features on insurance assets and liabilities 159 B5 Tax charge 163 B6 Earnings per share 164 B7 Dividends
Section C: Balance sheet notes C1 Analysis of Group position by segment and business type 165 C1.1 Group statement of financial position –
analysis by business type C2 Analysis of segment position by business type 172 C2.1 Asia insurance operations 173 C2.2 US insurance operations 175 C2.3 UK insurance operations 177 C2.4 Asset management operations C3 Assets and liabilities – Classification and Measurement 178 C3.1 Group assets and liabilities – Classification 182 C3.2 Group assets and liabilities – Measurement 190 C3.3 Debt securities 197 C3.4 Loans portfolio C3.5 Financial instruments – additional information 199 C3.5(a) Market risk 201 C3.5(b) Derivatives and hedging 201 C3.5(c) Derecognition, collateral and offsetting 203 C3.5(d) Impairment of financial assets
– regulatory and other surplus 254 C12 Provisions 254 C13 Property, plant and equipment 255 C14 Investment properties
P rim ary statem en ts 123 Prudential plc Annual Report 2014
Earned premiums, net of reinsurance B1.5 32,033 29,844 Investment return B1.5 25,787 20,347 Other income B1.5 2,306 2,184
Profit for the year attributable to equity holders of the Company 2,216 1,346
Based on profit attributable to the equity holders of the Company: B6 * This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes of the Group include 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 profit before all taxes measure (which is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the PAC with-profits fund after adjusting for taxes borne by policyholders) is not representative of pre-tax profits attributable to shareholders.
Related change in amortisation of deferred acquisition costs C5.1(b) (87) 498 Related tax (304) 557
Items that will not be reclassified to profit or loss Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes: Related tax 2 14
Other comprehensive income (loss) for the year, net of related tax 775 (1,337)
Reserves Profit for the year – – 2,216 – – 2,216 – 2,216 Other comprehensive income (loss): Exchange movements on foreign operations and net investment hedges, net of related tax – – – 220 – 220 – 220 Net unrealised valuation movements, net of related change in amortisation of deferred acquisition costs and related tax – – – – 565 565 – 565 Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes, net of tax – – (10) – – (10) – (10)
Reserve movements in respect of share-based payments – – 106 – – 106 – 106 Change in non-controlling interests – – – – – – – –
Treasury shares Movement in own shares in respect of share-based payment plans – – (48) – – (48) – (48) Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS – – (6) – – (6) – (6)
Reserves Profit for the year – – 1,346 – – 1,346 – 1,346 Other comprehensive loss: Exchange movements on foreign operations and net investment hedges, net of related tax – – – (255) – (255) – (255) Net unrealised valuation movements, net of related change in amortisation of deferred acquisition costs and related tax – – – – (1,034) (1,034) – (1,034) Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes, net of tax – – (48) – – (48) – (48)
P rim ary statem en ts 127 Prudential plc Annual Report 2014
Intangible assets attributable to shareholders: Deferred acquisition costs and other intangible assets C5.1(b) 7,261 5,295
Intangible assets attributable to with-profits funds: Goodwill in respect of acquired subsidiaries for venture fund and other investment purposes C5.2(a) 186 177 Deferred acquisition costs and other intangible assets C5.2(b) 61 72
Other borrowings: Operational borrowings attributable to shareholder-financed operations C6.2 2,263 2,152 Borrowings attributable to with-profits operations C6.2 1,093 895
Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements 2,347 2,074 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 7,357 5,278 Deferred tax liabilities C8.1 4,291 3,778 Current tax liabilities C8.2 617 395 Accruals and deferred income 947 824 Other creditors 4,262 3,307
Cash flows from investing activities Purchases of property, plant and equipment C13 (172) (221) Proceeds from disposal of property, plant and equipment 10 42 Acquisition of subsidiaries and distribution rights, net of cash balance D1 (535) (405) Sale of PruHealth and PruProtect businessesnote (iii) D1 152 –
Notes (i) This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. (ii) Other non-cash items consist of the adjustment of non-cash items to profit before tax together with other net items, net purchases of treasury shares and other net movements in equity.
Prudential plc (the Company) together with its subsidiaries (collectively, the Group or Prudential) is an international financial services group with its principal operations in Asia, the US and the UK. Prudential offers a wide range of retail financial products and services and asset management services throughout these territories. The retail financial products and services principally include life insurance, pensions and annuities, as well as collective investment schemes.
Certain notes to the financial statements present 2013 comparative information at Constant Exchange Rates (CER), in addition to the reporting at Actual Exchange Rates (AER) used throughout the consolidated financial statements. AER are actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates for the balance sheet at the balance sheet date. CER results are calculated by translating prior period results using the current period foreign exchange rate ie current period average rates for the income statement and current period closing rates for the balance sheet.
The Group has adopted the following accounting pronouncements in 2014 but their adoption has had no material impact on the results and financial position of the Group: — Amendments to IAS 32 ‘Offsetting financial assets and financial liabilities’; and — IFRIC 21 ‘Levies’.
This is not intended to be a complete list as only those accounting pronouncements that could have an impact upon the Group’s financial statements are described.
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A3.1 Accounting policies and use of estimates and judgements This note provides detailed accounting policies adopted by the Group to prepare the consolidated financial statements. These accounting policies are applied consistently for all years presented and normally are not subject to changes unless new accounting standards, interpretations or amendments are introduced by the IASB.
Classification of insurance and investment contracts A3.1(c) Measurement of policyholder liabilities and unallocated surplus of with-profits fund A3.1(d) Measurement and presentation of derivatives and debt securities of US insurance operations A3.1(j)(v) Presentation of results before tax A3.1(k) Segmental analysis of results and earnings distributable to shareholders A3.1(m)
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 including venture capital business or mutual funds or unit trusts, which as allowed by IAS 28 ‘Investments in Associates and Joint Ventures’, are carried at fair value through profit or loss.
iii Structured entities Structured entities are those which have been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. In addition to the entities discussed above in A3.1b(i), the Group, as part of its business strategy, invests in structured entities such as Open-Ended Investment Companies (OEICs), Unit Trusts (UTs), variable interest entities, investment vehicles within separate accounts offered through variable annuities, collateral debt obligations, mortgage-backed securities, and similar asset-backed securities.
Open-ended investment companies and unit trusts The Group invests in OEICs and UTs, which invest mainly in equities, bonds, cash and cash equivalents, and properties. The Group’s percentage ownership in these entities can fluctuate on a daily basis according to the participation of the Group and other investors in them. For these entities, the following circumstances may indicate, in substance, the Group has power over an entity: — The entity is managed by the Group’s asset manager and the Group holds a significant investment in the entity; and — Where the entity is managed by asset managers outside the Group, Prudential has existing rights that gives it the ability to direct the current activities of the entity. In assessing the Group’s ability to direct an entity, the Group considers its ability relative to other investors. The Group has a limited number of OEICs and UTs where it considers it has such ability.
For the entity managed by asset managers outside the Group with no current ability to direct its activities, the Group is deemed to have no power over such an entity.
Where the Group is deemed to control these entities they are treated as a subsidiary and are consolidated, with the interests of investors other than the Group being classified as liabilities and appear as net asset value attributable to unit holders of consolidated unit trusts and similar funds.
IFRS 4 permits the continued usage of previously applied Generally Accepted Accounting Practices (GAAP) for insurance contracts and investment contracts with discretionary participating features. Accordingly, except for UK regulated with-profits funds as discussed below, the modified statutory basis of reporting as set in the Statement of Recommended Practice issued by Association of British Insurers (ABI) was adopted by the Group on first time adoption of IFRS in 2005.
For investment contracts that do not contain discretionary participating features, IAS 39 and, where the contract includes an investment management element, IAS 18 ’Revenue’, apply measurement principles to assets and liabilities attaching to the contract.
A3: Accounting policies continued i Insurance contracts Asia insurance operations The policyholder liabilities for businesses in Asia are determined in accordance with methods prescribed by local GAAP adjusted to comply, where necessary, with the modified statutory basis. Refinements to the local reserving methodology are generally treated as changes in estimates, dependent on their nature.
US insurance operations In accordance with the modified statutory basis, the policyholder liabilities for Jackson’s conventional protection-type policies are determined under US GAAP principles with locked in assumptions for mortality, interest, policy lapses and expenses along with provisions for adverse deviations. For non-conventional protection-type policies, the policyholder liabilities includes the policyholder account balance. Acquisition costs are accounted for as explained in note A3.1(f) below.
The future policy related liabilities must include a market consistent valuation of costs of guarantees, options and smoothing, less any related charges, and this amount is determined using either a stochastic approach, hedging costs or a series of deterministic projections with attributed probabilities.
The Peak 2 basis realistic liabilities for with-profits business included in the PRA regulatory returns include the element for the shareholders’ share of the future cost of bonuses consistent with the contract asset shares. For accounting purposes under FRS 27, this latter item is not shown as part of contract liabilities. This is because, consistent with the current basis of financial reporting, shareholder transfers are recognised only on declaration. Instead the shareholders’ share of future costs of bonuses is included within the liabilities for unallocated surplus.
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US insurance operations Under IFRS 4, the Group applies grandfathered US GAAP for measuring the insurance assets and liabilities of US insurance operations. The Group adopted FAS ASU 2010-26 on ‘Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts’ from 1 January 2012 and capitalises only those incremental costs directly relating to successfully acquiring a contract.
For term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity and interest-sensitive life business, acquisition costs are deferred and amortised in line with expected gross profits on the relevant contracts. For interest-sensitive business, the key assumption is the long-term spread between the earned rate on investments and the rate credited to policyholders, which is based on an annual spread analysis. In addition, expected gross profits depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related charges), all of which are based on a combination of Jackson’s actual industry experience and future expectations. A detailed analysis of actual mortality, lapse and expenses experience is performed using internally developed experience studies.
For US variable annuity business, a key assumption is the investment return from the separate accounts, which is determined using a mean reversion methodology. Under the mean reversion methodology, projected returns over the next five years are flexed (subject to capping) so that, combined with the actual rates of return for the current and the previous two years is maintained. The projected rates of return are capped at no more than 15 per cent for each of the next five years. These returns affect the level of future expected profits through their effects on the fee income with consequential impact on the amortisation of deferred acquisition costs. The level of acquisition costs carried in the statement of financial position is also sensitive to unrealised valuation movements on debt securities held to back the liabilities and solvency capital. Further details are discussed in note C5.1(b).
UK insurance operations For UK regulated with-profits funds where the realistic FSA regime is applied, the basis of setting liabilities is such that it would be inappropriate for acquisition costs to be deferred, therefore these costs are expensed as incurred. The majority of the UK shareholderbacked business is individual and group annuity business where the incidence of acquisition costs is negligible.
j Financial investments other than instruments classified as long-term business contracts i Investment classification 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. These investments 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. For available-for-sale debt securities, the difference between their cost and par value is amortised to the income statement using the effective interest rate. 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; — Available-for-sale assets are subsequently measured at fair value. Interest income is recognised on an effective interest basis in the income statement. Except for foreign exchange gains and losses on debt securities, not in functional currency, 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
Determining the fair value of financial investments when the markets are not active The Group holds certain financial investments for which the markets are not active. These can include financial investments which are not quoted on active markets and financial investments for which markets are no longer active as a result of market conditions eg market illiquidity. When the markets are not active, there is generally no or limited observable market data to account for financial investments at fair value. The determination of whether an active market exists for a financial investment requires management’s judgement.
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The duration of a security to maturity helps to inform whether assessments of estimated future cash flows that are higher than market value are reasonable.
This factor provides an indication of how the contractual cash flows and effective interest rate of a financial asset compares with the implicit market estimate of cash flows and the risk attaching to a ‘fair value’ measurement. The length of time for which that level of difference has been in place may also provide further evidence as to whether the market assessment implies an impairment loss has arisen.
Certain mortgage loans of the UK insurance operations and, consequent upon the purchase of REALIC in 2012 by Jackson, policy loans held to back funds withheld under reinsurance arrangements have been designated at fair value through profit or loss, as these loan portfolios are managed and evaluated on a fair value basis.
Assets carried at cost or amortised cost are subject to impairment testing where appropriate under IFRS requirements.
vii Securities lending including repurchase agreements The Group is party to various securities lending agreements under which securities are loaned to third parties on a short-term basis. The loaned securities are not derecognised; rather, they continue to be recognised within the appropriate investment classification. The Group’s policy is that collateral in excess of 100 per cent of the fair value of securities loaned is required from all securities’ borrowers and typically consists of cash, debt securities, equity securities or letters of credit.
l Segments Under IFRS 8 ‘Operating Segments’, the Group determines and presents operating segments based on the information that is internally provided to the Group Executive Committee which is the Group’s chief operating decision maker.
The operating segments identified by the Group reflect the Group’s organisational structure, which is by both geography (Asia, US and UK) and by product line (insurance operations and asset management).
Leases of investment property where the Group has substantially all the risks and rewards of ownership are classified as finance leases (leasehold property). Finance leases are capitalised at the lease’s inception at the lower of the fair value of the leased property and the present value of the minimum lease payments.
p Pension schemes For the Group’s defined benefit schemes, if the present value of the defined benefit obligation exceeds the fair value of the scheme assets, then a liability is recorded in the Group’s statement of financial position. By contrast, if the fair value of the assets exceeds the present value of the defined benefit obligation then the surplus will only be recognised if the nature of the arrangements under the trust deed, and funding arrangements between the Trustee and the Company, support the availability of refunds or recoverability through agreed reductions in future contributions. In addition, if there is a constructive obligation for the Company to pay deficit funding, this is also recognised such that the financial position recorded for the scheme reflects the higher of any underlying IAS 19 deficit and the obligation for deficit funding.
The Group utilises the projected unit credit method to calculate the defined benefit obligation. This method sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. Estimated future cash flows are then discounted at a high-quality corporate bond rate, adjusted to allow for the difference in duration between the bond index and the pension liabilities where appropriate, to determine its present value. These calculations are performed by independent actuaries.
q Share-based payment and related movements in own shares The Group offers share award and option plans for certain key employees and a Save As You Earn plan for all UK and certain overseas employees. Shares held in trust relating to these plans are conditionally gifted to employees.
Deferred taxes are provided under the liability method for all relevant temporary differences. IAS 12 ‘Income Taxes’ does not require all temporary differences to be provided for, in particular, the Group does not provide for deferred tax on undistributed earnings of subsidiaries where the Group is able to control the timing of the distribution and the temporary difference created is not expected to reverse in the foreseeable future. Deferred tax assets are only recognised when it is more likely than not that future taxable profits will be available against which these losses can be utilised.
The tax charge for long-term business includes tax expense attributable to both policyholders and shareholders. In the UK, life insurance companies are taxed on both their shareholders’ profits and on their policyholders’ insurance and investment returns on certain insurance and investment products. Tax on shareholders’ profits is calculated at the standard corporation tax rate, and tax on policyholders’ investment returns is calculated at the basic rate of income tax. 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 income statement to provide the most relevant information about tax that the Group pays on its profits.
u Intangible assets Intangible assets acquired on the purchase of a subsidiary or portfolio of contracts are measured at fair value on acquisition. Deferred acquisition costs are accounted for as described in notes A3.1(d) and A3.1(f) above. Other intangible assets, such as distribution rights and software, are valued initially at the price paid to acquire them and are subsequently carried at cost less amortisation and any accumulated impairment losses. Distribution rights relate to fees paid under bancassurance partnership arrangements for bank distribution of products for the term of the contract. Amounts for distribution rights 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 levels. The same principles apply to determining the amortisation method for other intangible assets unless the pattern cannot be determined reliably, in which case a straight line method is applied. Amortisation of intangible assets is charged to the ‘acquisition costs’ and other expenditure line in the income statement.
v Cash and cash equivalents Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments with less than 90 day’s maturity from the date of acquisition.
x Share capital Where there is no obligation to transfer assets, shares are classified as equity. 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.
A3.2 New accounting pronouncements not yet effective The following standards, interpretations and amendments have been issued but are not yet effective in 2014, including those which have not yet been adopted in the EU. This is not intended to be a complete list as only those standards, interpretations and amendments that could have an impact upon the Group’s financial statements are discussed.
b Accounting pronouncements not yet endorsed by the EU Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) The amendments published in May 2014 provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated. They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted. The Group does not expect these amendments to have a significant impact on the Group’s financial statements.
IFRS 9 ‘Financial Instruments: Classification and measurement’ In July 2014, the IASB published a complete version of IFRS 9 with the exception of macro hedge accounting. The standard becomes mandatorily effective for the annual periods beginning on or after 1 January 2018, with early application permitted and transitional rules apply. This standard replaces the existing IAS 39 ’Financial Instruments: Recognition and measurement’, and will affect: — The classification and the measurement of financial assets and liabilities. Under IFRS 9, financial assets are classified under one of the following categories: amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL) based on their contractual cash flow characteristics and/or the business model in which they are held. The existing amortised cost measurement for financial liabilities is largely maintained under IFRS 9, but for financial liabilities designated at FVTPL, changes in fair value due to changes in entity’s own credit risk are to be recognised in other comprehensive income; — 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; and
The Group is assessing the impact of this standard in conjunction with the requirements of the IASB’s proposals for insurance contracts accounting as they are developed to a final standard. The adoption of the requirements of IFRS 9 may result in reclassification of certain of the Group’s financial assets and hence lead to a change in the measurement of these instruments or the performance reporting of value movements. In addition, for the Group’s investments classified as FVOCI, as noted above, the impairment provisioning approach is altered. The Group does not currently apply hedge accounting for most of its derivative programmes but will reconsider its approach in light of new requirements under the standard on adoption.
arn in gs p erfo rm an ce 143 Prudential plc Annual Report 2014
Total Asia insurance operations after development expenses 1,050 1,001 905 5% 16%
Other income and expenditure Investment return and other income 15 10 10 50% 50% Interest payable on core structural borrowings (341) (305) (305) (12)% (12)%
Operating profit based on longer-term investment returns 3,186 2,954 2,787 8% 14% Short-term fluctuations in investment returns on shareholder-
Profit before tax attributable to shareholders 2,614 1,635 1,532 60% 71%
Based on operating profit based on longer-term investment returns 96.6p 90.9p 85.9p 6% 12% Based on profit for the year 86.9p 52.8p 49.8p 65% 74%
Notes (i) The Group’s UK insurance operations transferred its general insurance business to Churchill in 2002. General insurance commission represents the commission receivable net of expenses for Prudential-branded general insurance products as part of this arrangement, which terminates at the end of 2016. (ii) Corporate expenditure, as shown above, is for Group Head Office and Asia Regional Head Office. (iii) Restructuring costs are incurred in the UK and represent one-off business development expenses. (iv) In November 2014, PAC completed the sale of its 25 per cent equity stake in the PruHealth and PruProtect businesses to Discovery Group Europe Limited. (v) For definitions of AER and CER refer to note A1. (vi) Amortisation of acquisition accounting adjustments principally relate to the acquired REALIC business of Jackson.
This result comprises the net effect of: – The accounting value movements on the variable and fixed index annuity guarantee liabilities; – Fair value movements on free-standing equity derivatives; – Fee assessments and claim payments in respect of guarantee liabilities; and – Related changes to DAC amortisation. Movements in the accounting values of the variable and fixed index annuity guarantee liabilities comprise those for: – The Guaranteed Minimum Death Benefit (GMDB) and Guaranteed Minimum Withdrawal Benefit (GMWB) ‘for life’ guarantees which are valued under the
The free-standing equity derivatives are held to manage equity exposures of the variable annuity and fixed index annuity guarantees. The net equity hedge result therefore includes significant accounting mismatches and other factors that detract from the presentation of an economic result caused by: – The variable annuity and fixed annuity business guarantees being only partially fair valued under grandfathered GAAP; – The interest rate exposure being managed through the other than equity-related derivative programme explained in note (b) below; and – Jackson’s management of its economic exposures for a number of other factors that are treated differently in the accounting frameworks, such as future fees and assumed volatility levels.
The free-standing, other than equity-related derivatives, are held to manage interest rate exposures and durations within the general account and the variable annuity and fixed index annuity guarantees described in note (a) above. The GMIB liability is valued using the US GAAP measurement basis applied for IFRS reporting in a way that substantially does not recognise the effects of market movements. Reinsurance arrangements are in place so as to essentially fully insulate Jackson from the GMIB exposure. Notwithstanding that the liability is essentially fully reinsured, as the reinsurance asset is net settled it is deemed a derivative under IAS 39 which requires fair valuation.
Short-term fluctuations relating to debt securities Credits (charges) in the year: Losses on sales of impaired and deteriorating bonds (5) (5) Bond write downs (4) (8) Recoveries/reversals 19 10
Total credits (charges) in the year 10 (3) Less: Risk margin allowance deducted from operating profit based on longer-term investment returnsnote 78 85
Interest-related realised gains: Arising in the year 63 64 Less: Amortisation of gains and losses arising in current and prior years to operating profit based on longer-term investment returns (87) (89)
In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement of other comprehensive income is a pre-tax credit for unrealised gains on debt securities classified as available-for-sale net of related change in amortisation of deferred acquisition costs of £869 million (2013: net unrealised losses of £(1,591) million). Temporary market value movements do not reflect defaults or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C3.3(b).
(iii) UK insurance operations The positive short-term fluctuations in investment returns for UK insurance operations of £464 million (2013: negative £(254) million) include net unrealised movements on fixed income assets supporting the capital of the shareholder-backed annuity business, reflecting the fall in bond yields since the end of 2013. (iv) Other Short-term fluctuations in investment returns of other operations, were negative £(113) million (2013: negative £(27) million) representing unrealised value movements on investments and foreign exchange items.
(v) Default losses The Group did not experience any default losses on its shareholder-backed debt securities portfolio in 2014 or 2013.
B1.3 Determining operating segments and performance measure of operating segments Operating segments The Group’s operating segments, determined in accordance with IFRS 8 ‘Operating Segments’, are as follows: Insurance operations — Asia — US (Jackson) — UK
Asset management operations — Eastspring Investments — US broker-dealer and asset management (including Curian) — M&G (including Prudential Capital)
(ii) Unit-linked business The policyholder unit liabilities are directly reflective of the asset value movements. Accordingly, the operating results based on longer-term investment returns reflect the current period value movements in both the unit liabilities and the backing assets.
Examples of where such bifurcation is necessary are in Hong Kong and for UK shareholder-backed annuity business, as explained in sections b(i) and d(i), respectively.
In principle, for debt securities and loans, the longer-term capital returns comprise two elements: — Risk margin reserve based charge for the expected level of defaults for the period, which is determined by reference to the credit quality of the portfolio. The difference between impairment losses in the reporting period and the risk margin reserve charge to the operating result is reflected in short-term fluctuations in investment returns; and
Derivative value movements Generally, derivative value movements are excluded from operating results based on longer-term investment returns (unless those derivative value movements broadly offset changes in the accounting value of other assets and liabilities included in operating profit). The principal example of non-equity based derivatives (for example interest rate swaps and swaptions) whose value movements are excluded from operating profit arises in Jackson, as discussed below in section (c).
b Asia insurance operations (i) Business where policyholder liabilities are sensitive to market conditions For certain Asia non-participating business, for example in Hong Kong, the economic features are more akin to asset management products with policyholder liabilities reflecting asset shares over the contract term. For these products, the charge for policyholder benefits in the operating results should reflect the asset share feature, rather than volatile movements that would otherwise be reflected if the local regulatory basis (also applied for IFRS basis) was used.
(ii) Other Asia shareholder-financed business Debt securities For this business the realised gains and losses are principally interest related. Accordingly, all realised gains and losses to date for these operations are being amortised over the period to the date those securities would otherwise have matured, with no explicit risk margin reserve charge.
Equity-type securities For Asia insurance operations, excluding assets of the Japan life held for sale business, investments in equity securities held for nonlinked shareholder-financed operations amounted to £932 million as at 31 December 2014 (2013: £571 million). The rates of return applied in the years 2014 and 2013 ranged from 2.73 per cent to 13.75 per cent with the rates applied varying by territory. These rates are determined after consideration by the Group’s in-house economists of long-term expected real government bond returns, equity risk premium and long-term inflation. These rates are broadly stable from period to period but may be different between countries reflecting, for example, differing expectations of inflation in each territory. The assumptions are for returns expected to apply in equilibrium conditions. The assumed rates of return do not reflect any cyclical variability in economic performance and are not set by reference to prevailing asset valuations.
c US Insurance operations (i) Separate account business For such business, the policyholder unit liabilities are directly reflective of the asset value movements. Accordingly, the operating results based on longer-term investment returns reflect the current period value movements in unit liabilities and the backing assets.
(ii) US variable and fixed index annuity business The following value movements for Jackson’s variable and fixed index annuity business are excluded from operating profit based on longer-term investment returns. See note B1.2 note (ii): — Fair value movements for equity-based derivatives; — Fair value movements for embedded derivatives for Guaranteed Minimum Withdrawal Benefit ‘not for life’ and fixed index annuity business, and Guaranteed Minimum Income Benefit reinsurance (see below); — Movements in accounts carrying value of Guaranteed Minimum Death Benefit and Guaranteed Minimum Withdrawal Benefit ‘for life’ and Guaranteed Minimum Income Benefit liabilities, for which, under the ‘grandfathered’ US GAAP applied under IFRS for Jackson’s insurance assets and liabilities, the measurement basis gives rise to a muted impact of current period market movements; — Fee assessments and claim payments, in respect of guarantee liabilities; and — Related amortisation of deferred acquisition costs for each of the above items.
Embedded derivatives for variable annuity guarantee features The Guaranteed Minimum Income Benefit liability, which is essentially fully reinsured, subject to a deductible and annual claims limit, is accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 944-80 Financial Services – Insurance – Separate Accounts (formerly SOP 03-1) under IFRS using ‘grandfathered’ US GAAP. As the corresponding reinsurance asset is net settled, it is considered to be a derivative under IAS 39 ‘Financial Instruments: Recognition and measurement’, and the asset is therefore recognised at fair value. As the Guaranteed Minimum Income Benefit is economically reinsured the mark to market element of the reinsurance asset is included as a component of short-term fluctuations in investment returns.