Prudential plc is an international fi nancial services group with signifi cant operations in Asia, the US and the UK. We serve around 24 million insurance customers and have £405 billion of assets under management. We are listed on stock exchanges in London, Hong Kong, Singapore and New York. The Group is structured around four main business units: Prudential Corporation Asia, Jackson National Life Insurance Company, Prudential UK and M&G.
Prudential is a leading international life insurer in Asia with operations in 13 markets1. We have built a highperforming platform with eff ective, multi-channel distribution, a product portfolio centred on regular savings and protection, award-winning customer services and a well respected brand.
Prudential’s Asia-based asset management division, Eastspring Investments, is one of the region’s leading fund managers and the largest retail asset manager2.
2 Source: survey conducted by Asia Asset Management Magazine as at 30 June 2012 (based on assets sourced from Asia ex-Japan).
3 Operating profi t from long-term operations excluding Eastspring Investments, development costs and Asia regional head offi ce costs.
Life assurance % of Group new business profit 52% Asia 35% US 13% UK
Asset management % of Group funds under management – investment products 84% M&G 16% Asia
Our expertise in areas such as longevity, risk management and multi-asset investment, together with our fi nancial strength and highly respected brand, means that the business is strongly positioned to continue pursuing a value-driven strategy built around our core strengths in with-profi ts and annuities.
M&G has been investing money for individual and institutional clients for over 80 years. Today it is one of Europe’s largest active investment managers.
AAAAAAAAAAAA Rated as a ‘World Class’ service provider for seven successive years by Service Quality Measurement Group
AAAAAAAAAAAA ‘Highest Customer Satisfaction by Industry’ award from Service Quality Measurement Group
AAAAAAAAAAAA Strength and investment performance of With-Profi ts Fund allowed Prudential to deliver strong annualised returns for policyholders
AAAAAAAAAAAAAA M&G’s retail business has been awarded the prestigious Outstanding Investment House of the Year 2012 Award for the third year running at the OBSR Awards
The quality of our products, the strength of our multi-channel distribution platform and our ability to innovate and develop creative solutions to meet our customers’ needs translate over time into profitable and sustainable growth. Our focus on capital and risk management has allowed us to deliver both growth and cash to shareholders, despite a challenging macroeconomic environment.
The directors’ report of Prudential plc for the year ended 31 December 2012 is set out on pages 1–110, 366–384 and 386–391 and includes the sections of the Annual Report referred to in these pages.
International Financial Reporting Standards operating pro t based on longer-term investment returns*
46 Financial review 68 Risk and capital management 79 Corporate responsibility review
Section 4: Directors’ remuneration report 114 Directors’ remuneration report 116 Remuneration policy report 122 2012 implementation of remuneration policy 136 Supplementary information
Annual Report and the fi nancial statements 325 Independent auditor’s report to the members of Prudential plc 326 EEV basis supplementary information 331 Notes on the EEV basis supplementary information 363 Statement of directors’ responsibilities in respect of the EEV basis supplementary information 364 Independent auditor’s report to Prudential plc on the EEV basis supplementary information 365 Additional unaudited fi nancial information
Corporate governance For information about our Board of directors page 88
Value for customers and real returns for shareholders 29.19p full-year dividend
The global economic outlook remains depressed and, although there were some signs of improvement in 2012, there is a debate about how sustainable the recovery may be. However, our ability to generate strong fi nancial performance despite adverse market conditions and the challenge of historically low long-term interest rates is testament to both the success of our strategy and the efforts of our management team led by Group Chief Executive Tidjane Thiam. The Group remains on track to deliver the 2013 ‘Growth and Cash’ objectives announced in December 2010. We have achieved two major ones regarding Asia – the IFRS operating profi t and cash remittance targets – one year ahead of schedule.
A key part of my role is to ensure appropriate governance around the execution of the Group’s strategy, and to engage with shareholders and other stakeholders on this matter. As Chairman, I need to make sure the Board is equipped with the right people to help me perform this role. We need directors with the appropriate skill sets to bring different perspectives to bear, as we face the complexities of a rapidly changing world.
In December 2012, we announced that Philip Remnant CBE would become Senior Independent Director from 1 January 2013, replacing myself in that position. He is currently a senior adviser at Credit Suisse, a Deputy Chairman of the Takeover Panel and a non-executive director of UK Financial Investments Limited. He has joined the Nomination, Audit and Remuneration Committees. Philip brings a wealth of experience of fi nancial services at the highest level, a deep understanding of the needs of shareholders and a strong record of public service.
Anthony replaces Keki Dadiseth who announced he would be retiring from the Board on 1 May 2013 after eight years of service. He joined the Board in April 2005 and is a member of the Remuneration Committee. Keki was also a member of the Audit Committee from 2005 to 2007. I would like to thank him for his hard work and trusted advice during his time at Prudential.
The diversity of our markets means that our programmes vary from region to region, but the shared focus for our community investment is education and life skills. These activities include fi nancial education, support to improve social mobility and employee volunteering. Last year more than 7,350 employees across the Group gave up their time to help others in their communities, using their skills and knowledge to benefi t those who most need our help.
Many volunteer as part of the Chairman’s Challenge, our fl agship volunteering programme. The Chairman’s Challenge encourages employees from across the Group to volunteer on projects initiated by our global charity partners. I am extremely proud that so many colleagues from across our business are so dedicated and enthusiastic in helping others.
Group performance The Group’s strategy is supported by three key Group-wide operating principles.
Second, we focus on allocating capital to the highest return and shortest payback opportunities across the Group, taking strong action where necessary, such as deliberately reducing sales in geographies, products or channels where our return and payback criteria are not met. Our insurance businesses in Asia, the US, and the UK have delivered a 14 per cent increase in new business profi t to £2,452 million (2011: £2,151 million) with a distinctive 18 per cent increase in Asia. APE sales for the Group have increased by 14 per cent to £4,195 million (2011: £3,681 million) in 2012 and included the Group’s best-ever fourth quarter. M&G has attracted strong net infl ows of £16.9 billion (2011: £4.4 billion), a record performance led by the return of investors’ risk appetite in Continental Europe, where M&G has built a strong position over the last few years, and marketleading sales in the UK retail market.
We continue to focus on promoting transparency by providing shareholders with relevant disclosures about our business and how we run it, to ensure that both our strategy and our operating principles are well understood. In addition to the disclosures that are provided with our quarterly fi nancial results, since 2010 we have organised an annual seminar to provide investors and analysts with a further opportunity to discuss the business in detail with the Group’s senior management.
Turning fi rst to our Asia objectives, I said in 2010 that we would aim to double our 2009 IFRS operating profi t to £930 million by 2013 or, in other words, that we would double our IFRS operating profi t in four years. In 2012, we have achieved IFRS operating profi t of £988 million (2011: £784 million2). We have, therefore, more than doubled profi ts in three years, rather than four. Asia has also exceeded its 2013 cash objective, remitting a total of £341 million to the Group against a 2013 objective of £300 million. Looking at the remaining Asia objective, by the end of 2013 we aim to double 2009 new business profi t to £1,426 million and we remain on target to reach this, with the business producing £1,266 million in 2012 (2011: £1,076 million). These results were achieved despite an unfavourable and volatile macroeconomic environment.
Notes 1 From March 2013, the basis of calculating Jackson’s contribution to the Group’s IGD surplus will change. Further detail can be found in the ‘Capital position, fi nancing and liquidity’ section of the Chief Financial Offi cer’s overview.
2 Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the IFRS fi nancial statements.
Our primary growth metric is new business profi t rather than sales. This focus on new business profi t has ensured we have delivered healthy and sustainable quality growth. In 2012, new business profi t was up 18 per cent in the region, led by Indonesia, Singapore and Malaysia, up 27 per cent collectively. While under-penetration of insurance in markets across the region offers signifi cant long-term growth opportunities, we retain our focus on value not volume. New business profi t grew more quickly than sales as we refocused our businesses in Taiwan, Korea and Malaysia, deliberately reducing sales of lower-margin products to ensure a consistent focus on higher-value lines. We are determined to continue taking management action across the region where and when required, to maintain our internal rates of return of more than 20 per cent across all businesses, with a payback period in Asia of three years, despite the low interest rate environment.
Our multi-channel distribution model is at the heart of our success and we have continued to grow and strengthen our distribution further in 2012. In both the agency and the bank channels – bancassurance – the returns comfortably cover the cost of capital, so we have a strong appetite for growth in both. These channels grew their respective contribution to new business profi t at similar rates in 2012. Agency is the largest channel and we continue to increase both the scale and, importantly, the quality and productivity of our agency force. In the bank channel, where we are the regional leader, our partnerships with Standard Chartered Bank (SCB) and United Overseas Bank (UOB) have seen considerable sales growth, up 42 per cent and 65 per cent respectively. Regular premium products make up the bulk of our new business – in excess of 90 per cent of total APE sales – with higher-margin protection products making up almost one-third of new business APE.
Jackson National Life Insurance Company (Jackson) The US is the world’s largest retirement savings market, with large cohorts of the 78 million baby-boomers2 reaching retirement age each year, creating signifi cant demand for retirement income products. Our strategy in the US is to take advantage of this profi table growth opportunity. We approach this with a long-term perspective, proactively managing sales through the economic cycle as our experience has shown us how important it is to put value ahead of volume in the variable annuity market. We take at all times a conservative approach to pricing, even when that means losing market share to other players, while hedging our fi nancial risks and managing our balance sheet.
Notes 1 Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs, as discussed in note A5 of the IFRS fi nancial statements.
There is always a degree of tactical management in the variable annuity market as sales are impacted by a number of factors, including but not limited to equity market levels, interest rates and the actions of Jackson’s competitors. During the second half of 2012, as equity markets recovered, we saw stronger sales growth in variable annuities despite pricing actions taken earlier in the year to mitigate the impact of lower investment returns as bond yields remained low. Therefore, in November and December Jackson worked closely with distributors to proactively manage volumes and to ensure that the level of sales for 2012 would remain within the Group’s quantitative risk appetite. We will continue to proactively balance value, volume, capital and balance sheet strength in this market.
In March 2012 we launched Elite Access, a variable annuity without guarantees, which offers access to alternative investments. It taps into an unmet demand from customers and has been particularly well received by distributors. The launch of Elite Access helps Jackson to continue growing within the Group’s risk appetite for products with guarantees. The acquisition of REALIC, a traditional US life business, has helped to diversify Jackson’s earnings and make the business more resilient.
In the context of industry debates about the advantages and disadvantages of various accounting methods, we believe that cash generation is ultimately a very tangible metric of the quality and value of a strategy. Therefore we set Jackson a net cash remittance objective for 2013 which, following the acquisition of REALIC, was increased from £200 million to £260 million. In 2012, Jackson delivered net cash remittances of £249 million in the year (2011: £322 million including an exceptional release of surplus) and is on track to meet this objective.
Prudential UK and Europe In the UK, Prudential has adopted a focused strategy and competes selectively to help Britain’s ageing population convert their accumulated wealth into retirement income. We have a clear focus on writing profi table new business while generating cash sustainably and preserving our capital. We concentrate on areas in which we have a clear competitive advantage, namely individual annuities and with-profi ts products, where we continue to be market leaders.
Over the last decade, Prudential has been widely recognised as the UK’s leading with-profi ts manager. Our long-term approach to the management of the with-profi ts fund has continued to benefi t customers during 2012 as it helps to provide protection from the full impact of volatile market conditions. The fund has consistently outperformed the FTSE All-Share Index. Over the last 15 years, the fund has delivered a cumulative investment return of 184.3 per cent on investments covering policyholder liabilities. This compares favourably with the FTSE All-Share Index total return of 106.5 per cent over the same period. Total bonus payments are expected to top £2 billion in 2013 and our policyholders will typically see year-on-year increases of between 3.5 per cent and 6.5 per cent in accumulating with-profi ts policy values. Since 2003 an estimated £22 billion has been added to policy values. Our UK business is also one of the largest providers of annuities in the UK and in 2012 paid out £2.9 billion in income to UK annuitants.
Where we see opportunities for future profi table growth we will seek to capitalise on them but only if they meet our payback criteria. In 2013 we have commenced sales operations in Poland, one of Europe’s fastest-growing economies, which has an expanding middle class and high savings rates.
Net cash remittances were £313 million, up 5 per cent (2011: £297 million). Our inherited estate, which is estimated at £7.0 billion (31 December 2011: £6.1 billion), is a key source of capital strength.
Note 1 Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs, as discussed in note A5 of the IFRS fi nancial statements.
Asset management Our asset management business, M&G, has continued to focus on delivering superior investment performance for our customers while maximising the strength of its distribution capabilities. It has pursued business diversifi cation across both geographies and asset classes. Its retail funds are now registered for sale in 20 jurisdictions, with offi ces in 15 countries. During 2012, the business has seen record net sales, funds under management and IFRS operating profi t. The growth in sales has been driven by M&G’s business in Continental Europe as investor risk appetite returned.
M&G continued to attract signifi cant new asset fl ows during the recent years of global market volatility, testament to the strength of its reputation and focus on investment performance. It has seen record total retail and institutional net infl ows of £16.9 billion in 2012, signifi cantly higher than 2011 and the previous high of £13.5 billion in 2009.
Total net sales in the UK were lower than 2011, refl ecting the maturity of the UK business and management decisions to slow the infl ow of new money into two market-leading UK corporate bond funds to safeguard investment performance. We expect these trends to persist in 2013. Despite the deliberate slowing of sales in the UK, M&G was the UK’s top-selling investment management house in 2012 and has ranked number one for both net and gross fund sales for an unprecedented four consecutive calendar years. Net fund sales in Continental Europe have increased, generating a record £5.2 billion of net sales in 2012. Assets sourced from outside the UK account for 29 per cent of total retail funds under management, up from 25 per cent in 2011.
Underlying profi ts for the full year rose by 14 per cent to a new record level of £298 million. Following the addition of performance-related fees and profi t from our associate investment in South Africa, total operating profi t for 2012 was £320 million. M&G’s funds under management also grew to a record £228 billion (2011: £201 billion).
Looking ahead, the diversifi cation of our business by asset class and geography positions us well to manage the expected shifts in consumer asset allocation going forward.
Eastspring Investments, our rebranded Asia asset management business, increased funds under management to £58.1 billion, up 16 per cent (2011: £50.3 billion). IFRS operating profi t was marginally lower, refl ecting a change in product mix towards bond funds that attract lower fees. Also costs were higher as we continued to invest in people and infrastructure, as we build out our offshore capabilities following the launch of the new brand. This included opening a US distribution offi ce, starting an operation in Indonesia and launching new funds in Taiwan, China and India.
Capital and risk management We take a disciplined approach to capital management and continue to take action to ensure our capital works effi ciently and effectively for the Group. Using the regulatory measure of the Insurance Groups Directive (IGD), our Group capital surplus position at 31 December 2012 was estimated at £5.1 billion (31 December 2011: £4.0 billion), before allowing for the fi nal dividend. The Group’s required capital cover was three times. The structure of the Group, and the approach we have taken to managing our risks, with a sizeable credit reserve in the UK annuity book, a strong inherited estate in UK with-profi ts and the relatively low-risk nature of our asset management and Asia operations, together with a high level of IGD surplus, means we have positioned ourselves well for future regulatory developments and stresses to our business.
In early March 2013, we agreed with the FSA to revise the calculation of the contribution Jackson makes to the Group’s IGD surplus. We consider the revised basis to be an improvement as it is more closely aligned to the one we use to assess and report free surplus. In the absence of an agreed Solvency II approach, we believe that this change makes the IGD surplus a more meaningful measure and one that is more closely aligned with economic reality. The revised IGD surplus calculation has no impact on the way that the US business is managed or regulated locally. On this revised basis, the IGD surplus at 28 February 2013 is estimated at £4.4 billion1, before allowing for the fi nal dividend, equivalent to a capital cover of 2.5 times.
Dividend The Board has decided to rebase the full-year dividend upwards by 4 pence, refl ecting the strong progress made in both the earnings and free surplus generation of the business and in the delivery of our fi nancial objectives. In line with this, the directors recommend a fi nal dividend of 20.79 pence per share (2011: 17.24 pence), which brings the total dividend for the year to 29.19 pence (2011: 25.19 pence), representing an increase of 15.9 per cent over 2011.
Outlook In 2012, we have delivered a strong performance. In spite of tough macroeconomic conditions and the negative effect of persistently low long-term interest rates, our Group has achieved signifi cant and profi table growth and produced increased levels of cash, which allowed us to provide our shareholders with a growing dividend.
Our strategy and operating principles remain clear and unchanged. Asia is the key driver of sustainable and profi table growth, building on the signifi cant opportunity that the emergence of the growing and increasingly wealthy middle class in this region represents. Our best opportunities lie in South-east Asia, where the depth and breadth of Prudential’s franchise is a source of strength. Our business units in the US and in the UK will continue to focus on delivering strong earnings and cash. We will achieve this by continuing to execute with discipline, by maintaining a robust balance sheet and with proactive risk management.
Our Group is set to continue to provide a distinctive combination of profi table growth and cash by meeting the needs of our customers across the world. Our confi dence is refl ected in the decision to rebase the dividend upwards, the second time in three years, as we remain focused on creating long-term, sustainable value for our shareholders.
Life APE new business sales, profi ts and investment in new business Balancing capital consumption and value optimisation
Asset management, profi tability, external funds under management and net infl ows
Dividend per share relating to the reporting year 62.8p 115.7p 125.0p 76.8p
Notes 1 Defi ned as movements in shareholder-backed policyholder liabilities arising from premiums (net of charges), surrenders, maturities and deaths. 2 2012 includes M&G’s 49.99 per cent proportionate share in the metrics above of PPM South Africa aft er the divestment transaction. 100 per cent of these metrics were included in 2011.
IGD surplus will change, further detail can be found in the ‘Capital position, fi nancing and liquidity’ section of the Chief Financial Offi cer’s Overview.
10 IFRS operating profi t aft er tax and non-controlling interests as percentage of opening IFRS shareholders’ funds. Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of IFRS fi nancial statements.
11 EEV operating profi t aft er tax and non-controlling interests as percentage of opening EEV shareholders’ funds.
‘ Over the last few years, our success has been founded on attracting new customers and on retaining those who have chosen Prudential for their savings and protection needs. We operate in markets where consumer demand for the products that we provide is strong and we have achieved success by providing both value and service to our customers while generating attractive returns for shareholders.’
2012 has seen Prudential continue to build on the positive momentum of recent years, with a strong fi nancial performance that included two of our 2013 ‘Growth and Cash’ fi nancial objectives being exceeded and continued progress towards the rest. This performance refl ects good contributions across our key fi nancial measures from each of our business operations, despite the challenge of low long-term interest rates and weak growth in the global economy. It is particularly pleasing to note that Asia became the largest contributor of cash to the Group in 2012, remitting over £300 million for the fi rst time in its history and exceeding its 2013 cash objective. With IFRS operating profi t, after development expenses, of £988 million in 2012, Asia has also exceeded its 2013 IFRS operating profi t objective.
Profi tability Over the last few years, our success has been founded on attracting new customers and on retaining those who have chosen Prudential for their saving and protection needs. We operate in markets where consumer demand for the products that we provide is strong and we have achieved success by providing both value and service to our customers while generating attractive returns for shareholders. In 2012 this approach produced £10.5 billion of life business net infl ows on shareholder-backed business, which together with investment-related and other movements, drove an increase in the overall size of our life insurance book of business by 22 per cent to £163 billion (2011: £133.5 billion). At the same time, our combined asset management operations attracted £18.3 billion of retail and institutional net fl ows, surpassing the previous highs in 2009 and 2010, driving an increase in the third party managed funds by 20 per cent to £133 billion (2011: £111 billion). By attracting, retaining and growing our customers’ savings and our obligations towards them, we are able to generate higher revenues, which in 2012 have once again increased at a faster rate than our expenses, culminating in greater overall profi ts.
Group IFRS operating profi t increased by 25 per cent in 2012 to £2,533 million (2011: £2,027 million)1, driven by strong growth in total contributions2 from Asia and the US, which were up 26 per cent and 49 per cent respectively. Group EEV operating profi t based on longer-term investment returns (‘EEV operating profi t’) increased by 9 per cent to £4,321 million (2011: £3,978 million), with growth in all regions. Non-UK operations now account for a larger proportion of both total IFRS and EEV operating profi t than ever before, while the contribution to these metrics from each business operation and each earnings source remains well balanced, preserving both the quality and the resilience of the Group’s earnings.
UK long-term business IFRS operating profi t was 3 per cent higher at £703 million (2011: £683 million) including £431 million from the shareholder-backed business. The strength of the with-profi ts fund, which currently has a surplus estate of £7.0 billion, offers strong policyholder protection and assists in generating positive returns for both policyholders and shareholders. EEV long-term operating earnings increased by 2 per cent in 2012 to £866 million (2011: £853 million), representing higher new business profi ts offset by the impact of lower interest rates on the recognition of in-force profi ts.
Our asset management businesses generated IFRS operating profi t of £485 million in 2012 (2011: £461 million), with M&G’s contribution higher at £371 million (including Prudential Capital). M&G continues to benefi t from the delivery of strong infl ows, with underlying profi ts (excluding performance-related payments and earnings from associates) up 14 per cent in 2012. This progress refl ects higher revenues, up 10 per cent in 2012, as the scale and proportion of external funds continues to grow, and improvements in the cost-income ratio, to 59 per cent in 2012 (2011: 61 per cent). IFRS operating profi t from Eastspring Investments of £75 million (2011: £80 million) was impacted by lower average margins on funds under management following a consumer-led shift in business mix away from equities to fi xed income funds, as well as increased costs as the business continues to invest in growth opportunities. This included the opening of its fi rst US offi ce, in Chicago, in June 2012 and starting operations in Indonesia.
Capital generation We continue to promote disciplined use of our capital resources across the Group, and focus on allocating capital to the growth opportunities that offer the most attractive returns with the shortest payback periods. We have taken several important steps over the last few years to improve the effi ciency and effectiveness of the capital allocation process, which has improved not only our returns on capital invested but also our overall fi nancial fl exibility. In 2012 we have continued to produce signifi cant amounts of free capital, which we measure as free surplus generated.
In 2012, we generated £2,700 million of underlying free surplus (before reinvestment in new business) from our life in-force and asset management businesses. This is 6 per cent higher than the £2,536 million generated in 2011, refl ecting increases from Asia and the US. We reinvested £618 million of the free surplus generated in the period into writing new business (2011: £553 million).
Asia continues to be our preferred destination for new capital and accounted for £292 million of this reinvestment (2011: £297 million), falling despite the growth in new business as we continue to focus on more capital-effi cient products. We have not sought to invest in spread-based products in the region that carry more onerous capital charges and produce insuffi cient returns. In the US, new business investment has increased to £281 million from £202 million in 2011, which primarily refl ects the higher level of new business written, changes in business mix, and the impact on regulatory reserving requirements for new business from the low interest rate environment. In the UK, our capital-effi cient product focus on annuities and with-profi ts bonds means we invested just £45 million, yet delivered more new business profi t. The IRRs on invested capital were more than 20 per cent in Asia, the US, and the UK; with payback periods of three years, two years and three years respectively.
At our 2010 investor conference, entitled ‘Growth and Cash’, we announced new fi nancial objectives demonstrating our confi dence in continued rapid growth in Asia, and increasing levels of cash remittances from all of our businesses. These objectives have been defi ned as follows: (i) Asia growth and profi tability objectives1: To double the 2009 value of IFRS life and asset management pre-tax operating profi t in 2013 (2009: £465 million); and
To double the 2009 value of new business profi ts in 2013 (2009: £713 million).
(ii) Business unit cash remittance objectives1: Asia to deliver £300 million of net cash remittance to the Group in 2013 (2009: £40 million); Jackson to deliver £260 million2 of net cash remittance to the Group in 2013 (2009: £39 million); and
Value of new business 713 901 1,076 1,266 18 78 1,426 IFRS operating profi t(note 1) 465 604 784 988 26 112 930
Business unit net cash remittance objectives Actual Objective 2009 £m 2010 £m 2011 £m 2012 £m £m
Objectives for cumulative period 1 January 2010 to 31 December 2013
Notes 1 Total Asia operating profi t from long-term business and Eastspring
Investments aft er development costs. 2012 operating profi t includes a one-off gain of £51 million arising on sale of Group’s interest in China Life Insurance Company of Taiwan. The comparatives represent results as reported in the respective periods and excludes adjustment for altered US GAAP requirements for deferred acquisition costs as described in note A5 to the IFRS fi nancial statements.
4 In 2009, the net remittances from the UK included the £150 million arising from the proactive fi nancing techniques used to bring forward cash emergence of the in-force book during the fi nancial crisis. The 2010 net remittances included an amount of £120 million representing the releases of surplus and net fi nancing payments.
Capital position, fi nancing and liquidity Despite the challenging macroeconomic conditions, we continue to operate with a strong solvency position, while maintaining high levels of liquidity and capital generation. This is testament to our capital discipline, the effectiveness of our hedging activities, our low direct Eurozone exposure, the minimal level of credit impairments and our comparatively low interest rate sensitivity.
The Group has maintained a strong capital position. At 31 December 2012, our IGD surplus before fi nal dividend is estimated at £5.1 billion (31 December 2011: £4.0 billion), generating very strong coverage of three times the requirement.
All of our subsidiaries continue to hold strong capital positions on a local regulatory basis. In particular, at 31 December 2012, the value of the estate of our UK with-profi ts funds is estimated at £7.0 billion (31 December 2011: £6.1 billion), while Jackson’s risk-based capital (RBC)1 ratio was 423 per cent at 31 December 2012, excluding the gains on interest rate swaps under permitted practice, which if included would increase the RBC ratio to 478 per cent.
Furthermore, on a statutory (Pillar 1) basis the total credit default reserve for the UK shareholder annuity funds also contributes to protecting our capital position in excess of the IGD surplus. Notwithstanding the absence of defaults in the period, at 31 December 2012 we have maintained our credit default reserves at £2.1 billion, representing 40 per cent of the portfolio spread over swaps, compared with 33 per cent at 31 December 2011.
The delays in fi nalising the implementation measures for Solvency II prolong the uncertainty of the effective date of the capital adequacy regime, a major overhaul for European insurers. We are supportive in principle of the development of a more risk-based approach to capital, but we have concerns as to the potential consequences of some aspects of the Solvency II regime under consideration. With the continued delays to policy development, the fi nal outcome of Solvency II remains uncertain. Despite this uncertainty we remain focused on preparing for implementation of the new regime.
On the new basis, the IGD surplus at 28 February 2013 is estimated at £4.4 billion1 (equivalent to a capital cover of 2.5 times), which includes the proceeds of £0.4 billion of subordinated debt, raised in January 2013, and is after deducting £1.3 billion in respect of the Jackson change from 75 per cent to 250 per cent of CAL. The intended change to free surplus will have a negligible effect on EEV and is estimated to reduce total free surplus by around £100 million.
The increases in shareholders’ funds on both reporting bases are the result of the Group’s strong operating performance, while our balance sheet continues to benefi t from both the quality of the asset portfolio and the effectiveness of our proactive approach to risk management.
Notes 1 The estimated position at 28 February 2013 allows for economic conditions and surplus generation since 31 December 2012 and is stated before the fi nal dividend and the eff ect of the Thanachart acquisition, and aft er allowing for a reduction in Jackson’s contribution to IGD surplus of £1.3 billion.
Our strategy in Asia is focused on meeting the needs of the emerging middle class for savings and protection. The region’s positive demographics, strong economic growth, sound public fi nances and favourable public policy environment with a clear preference for private provision of protection, have all led to a rapidly expanding middle class, with a strong and growing demand for our savings and protection products.
‘ Prudential’s strategy in Asia is well established and continues to be highly eff ective. We are focused on building high-quality, multi-channel distribution that provides customers with access to products that are appropriate for their fi nancial planning needs. Typically this involves a high proportion of regular premium policies that combine savings and protection.’
Investments, development costs and Asia regional head offi ce costs. (ii) Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the IFRS fi nancial statements.
APE sales 1,897 1,660 14 1,642 16 New business profi t 1,266 1,076 18 1,065 19 Total IFRS operating profi tnotes (i)(ii) 920 709 30 697 32 Total EEV operating profi tnote (i) 1,960 1,764 11 1,747 12
Business performance Prudential’s strategy in Asia is well established and continues to be highly effective. The customer is at the heart of our strategy and Asian customers fi nd our offering of regular premium savings and protection products distributed principally through high-quality face to face distribution channels particularly attractive. The quality of our brand, our products, and of our distribution allows us to translate our sales into strong returns to our shareholders.
Bancassurance has been growing rapidly in the region in recent years and Prudential remains a regional leader in this channel with APE growth of 29 per cent, led by highly productive relationships including SCB, where APE sales were up 42 per cent this year and UOB, where APE sales grew at an even faster rate of 65 per cent year-on-year. In November, Prudential announced a new and strategically signifi cant, exclusive long-term partnership with Thailand’s Thanachart Bank as part of a deal that will see Thanachart Life merged with our existing life operation in the country immediately doubling our market share. The deal is expected to complete during the fi rst half of 2013.
APE sales (Prudential’s 50 per cent share) 56 59 (5) 61 (8)
Prudential Hong Kong delivered strong new business APE growth with an increase of 20 per cent over the prior year to £396 million. Prudential remains the only leading player in Hong Kong to have a material presence in both agency and bank distribution, enabling it to reach the widest range of customers. Both channels performed well in 2012.
Managing the in-force book is always a high priority as this ensures that the shareholder value that we expect to capture over the life of the product does emerge over time as distributable shareholder profi ts. For 2012 we reported small net positive experience and assumptions change of £95 million up from £75 million in 2011.
Financial performance Prudential Asia has delivered in 2012 IFRS operating profi t and cash remittance ahead of the 2013 objectives with strong operational performances enhanced by some non-recurring items. We remain on track to meet our third objective in the region of doubling the 2009 new business profi t by 2013.
Operating profi t on an IFRS basis from Asia’s life businesses, continues to grow strongly at £920 million, 30 per cent higher than in 2011. This includes £51 million of one-off profi t from the sale of the Group’s interest in China Life Insurance Company of Taiwan. Excluding this amount, IFRS operating profi t was £869 million, 23 per cent higher than last year. This is principally driven by improved in-force profi ts, which grew by 18 per cent in the year, refl ecting the increasing scale of the business.
APE sales (Prudential’s 26 per cent share) 102 101 1 90 13
The Indian life insurance market has been going through a signifi cant period of change, however there are signs it has begun to grow again following the regulator-driven refocus on savings and protection products, which came into effect in 2010. During the second half the economy faltered, impacted by domestic imbalances and a challenging political environment. Although we remain optimistic about the long-term potential of the market, we expect it will be some time before private sector sales volumes return to pre-2010 levels.
The Indonesian economy continues to outperform and this is underpinned by the scale and resilience of its domestic demand. Indonesia has one of the region’s largest populations and lowest rates of insurance penetration.
Prudential has a strong market leading position with over 60 per cent of the industry’s registered tied-agents and has successfully been building its business outside of Jakarta; now around 45 per cent of APE is from outside the capital. New business APE growth of 23 per cent to £446 million has been primarily driven by the continued expansion of the agency force. Growth in the agency force is now being supplemented by the smaller but fast growing bancassurance channel which includes partnerships with UOB, BII, Citibank and Permata.
The Singapore market continues to perform strongly with the Life Insurance Association having announced that industry APE grew by 8 per cent during 2012 with regular premiums growing even more strongly at 18 per cent.
Prudential’s APE was £301 million up 28 per cent on prior year. Bancassurance was an important driver of growth where we now have a number of partners including UOB, SCB, Maybank and Singpost, enabling us to access a broad range of customers. Our agency channel continues to be one of Singapore’s most productive, and according to the latest available market statistics, we lead the market in terms of regular premium new business generated per agent1.
Note Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the IFRS fi nancial statements.
* The net remittance objective for Jackson was increased from £200 million to £260 million to refl ect the positive impact of the acquisition of REALIC.
‘ 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 signifi cant macroeconomic and fi nancial market challenges of the last fi ve years and ensured a continuation of our strong performance in 2012.’
AAAAAAAAAAAA Deliver £260 million of net cash remittance to the Group*
This demographic transition constitutes a signifi cant opportunity for those companies that are able to provide the ‘baby-boomers’ with long-term retirement solutions. Jackson takes a selective approach to this opportunity by leveraging its distinctive distribution capabilities and asset liability management expertise to offer prudently priced annuity products.
Despite the challenges faced by the global economy, US equity markets delivered strong gains in 2012. The S&P 500 index increased by 13.4 per cent over the course of the year and market volatility declined notably from the levels experienced in 2011. Interest rates remained historically low with the 10-year treasury rate ending below 180 basis points at year end, while corporate spreads tightened considerably from 2011 year end levels.
The competitive environment continues to favour companies with good fi nancial strength ratings and a track record of fi nancial discipline. Companies that were hardest hit by the market disruptions over the last few years still have to work to regain market share as customers and distributors seek product providers that offer consistency, stability and fi nancial strength. Jackson continues to benefi t from this fl ight to quality and heightened risk aversion.
In March 2012, we launched a new variable annuity product, Elite Access, which has no guaranteed benefi ts and provides tax effi cient access to alternative investments. The rollout of this new product has received a positive reaction from distributors, with close to 100 per cent of them signing up to distribute this product. Single premium sales in the period since launch were £849 million. We are optimistic about the future of Elite Access and will continue to drive product innovation as a way of both meeting the needs of our customers and driving shareholder value.
Sales Report© and Fourth Quarter 2011 Sales Report©. © Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
Jackson continues to be one of the most effi cient operators within the US life insurance market. The ratio of statutory general expenses to average assets improved slightly to 41 basis points in 2012 versus 42 basis points in 2011. This effi ciency has been delivered while maintaining world class standards of customer service for our customers. In 2012, Jackson was rated as a ‘World Class’ service provider by the Service Quality Measurement Group for the seventh consecutive year.
Financial performance Jackson’s IFRS pre-tax operating profi t in 2012 was 48 per cent higher at £964 million (2011: £651 million)1. This result refl ects the strong underlying growth in fee income, and lower deferred acquisition cost (DAC) amortisation. The result also includes four months of REALIC operating profi t.
With corporate spreads tightening during 2012 and continued low levels of absolute interest rates, total spread income, including the expected return on shareholders’ assets, was lower at £757 million, compared to £813 million in the previous year.
DAC amortisation of £356 million decreased in 2012, compared to £506 million in 2011. This decrease is primarily a result of the negative prior year impact of the reversal of the benefi t received in 2008 from the mean reversion formula. Partially offsetting this decrease was higher amortisation due to the higher earnings base in 2012.
Administration expenses increased to £537 million in 2012 compared to £412 million in 2011, with the increase due primarily to higher asset-based commissions paid on the larger 2012 separate account balance, which is classifi ed as an administration expense. This increase was also attributable to larger home offi ce staff due to the growing in-force book, the acquisition of REALIC, and certain non-recurring expenditures.
Jackson’s RBC level at the end of 2012 was 423 per cent which compares to 429 per cent at the end of 2011. In 2012, capital formation was strong refl ecting both the good operating performance, the modest level of impairments and other market value related net gains. This strong capital formation enabled Jackson to remit £249 million to Group and complete the acquisition of REALIC, while supporting its balance sheet growth and growing total adjusted capital from year end 2011 levels.
Variable annuity APE sales of £1,245 million were 14 per cent higher than in 2011. Expressed in local currency most of the increase was accounted for by APE sales of Elite Access, which totalled US$135 million. Excluding the contribution of Elite Access variable annuity APE sales of US$1,837 million were 5 per cent higher than those achieved in 2011 of US$1,749 million. In the course of the year and particularly in the second half of 2012, Jackson implemented various product initiatives to continue to balance value, volume, capital and balance sheet strength.
Total EEV basis operating profi t for the long-term business in 2012 was £1,610 million, compared to £1,431 million in 2011 refl ecting increases in both new and in-force business profi ts. Jackson’s new business profi t increased by 7 per cent to £873 million, refl ecting active management of sales volumes and mix, higher charges and lower levels of guarantees offered. These actions counteracted the adverse effect of lower long-term yields and tighter spreads. Higher in-force profi t was driven largely by higher unwind of discount, due to growth in the underlying book, and larger positive contributions from operating experience variances and assumption changes.
Notes 1 Sources: LIMRA U.S. Individual Annuities Sales Survey. Third Quarter 2012 and Fourth Quarter 2011.
In the UK, Prudential has adopted a focused strategy and competes selectively to help Britain’s ageing population convert their accumulated wealth into retirement income. We have a clear focus on writing profi table new business while generating cash sustainably and preserving our capital. We concentrate on areas in which we have a clear competitive advantage, namely individual annuities and with-profi ts products, where we continue to be market leaders.
APE sales 836 746 12 746 12 New business profi t 313 260 20 260 20 Total IFRS operating profi t 736 723 2 723 2 Total EEV operating profi t 899 893 1 893 1
‘ Our ability to deliver value to our customers and the resulting market franchise allowed us to achieve higher new business profi tability in 2012, as well as increasing cash generation and preserving our strong capital position, despite the challenging economic environment and competitive conditions that prevailed in the UK marketplace.’
Market overview The life and pensions market in the UK is mature and highly regulated. Signifi cant regulatory change occurred in 2012 with the implementation of the conclusions of the Retail Distribution Review (RDR), auto-enrolment for company pension schemes and gender neutral pricing.
We do so by focusing on those areas of the market where we are able to bring superior value to our customers and where we enjoy a competitive advantage. The performance of our with-profi ts fund in 2012 has allowed us to declare bonuses which mean that our policyholders should see year-on-year increases of between 3.5 per cent and 6.5 per cent in accumulating with-profi ts policy values and our total bonus payments are expected to top £2.0 billion in 2013.
Retention and management of our customer base of approximately seven million remains a key focus for the business. We aim to maintain loyalty by continuing to improve our service year-on-year for both customers and intermediaries. Prudential UK’s focus on continuing to deliver excellent customer service was recognised at the 2012 Financial Adviser Service Awards, where we retained our two 5-Star ratings in the Life & Pensions and Investment categories.
The RDR, one of a number of current reforms to the UK regulatory framework, was implemented on 31 December 2012. It means that fi nancial advisers can no longer be paid commissions for recommending investment products. This is likely to lead to some short-term disruption in the market as consumers adjust to paying fees for advice and adviser fi rms adapt their business models for the new rules. We have seen an increase in sales of with-profi t bonds in 2012 and, while we have prepared our business for the post-RDR regulatory environment, we expect this transition phase to have a negative impact on our sales of investment bonds in 2013.
Sales of other products, principally individual pensions, PruProtect, PruHealth and offshore bonds of £137 million were 12 per cent higher than in 2011. Individual pensions APE sales (including income drawdown) of £80 million were 11 per cent higher, refl ecting increased demand for our Flexible Retirement Plan among advisers and their clients.
Prudential UK writes with-profi ts annuity, with-profi ts bond and with-profi ts corporate and individual pensions business in its Life Fund, with other products backed by shareholder capital. For shareholder-backed business written in 2012, the weighted average post-tax internal rate of return (IRR) on the shareholder capital allocated to new business was in excess of 20 per cent and the undiscounted payback period on that new business was three years.
IFRS life operating profi t was higher than in 2011 at £736 million (2011: £723 million), with £272 million (2011: £293 million) from with-profi ts and the balance from shareholder-backed business. Commission received on Prudential-branded General Insurance products contributed £33 million to IFRS operating profi t in 2012, £7 million lower than in 2011 as the book of business originally transferred to Churchill in 2002 is, as expected, decreasing in size.
EEV total operating profi t of £899 million was 1 per cent higher than in 2011, refl ecting higher new business profi ts, partly offset by lower in-force profi ts which were impacted by the lower level of interest rates in the period. EEV profi t also included a contribution of £87 million from a change in the long-term tax rate assumption (including future tax rate changes which take effect in April 2013) from 25 per cent to 23 per cent, compared with £79 million from the 2 per cent tax rate reduction in 2011.
M&G has continued to focus on delivering superior investment performance for our customers while maximising the strength of its distribution capabilities. It has pursued business diversifi cation both across geographies and asset classes.
Eastspring Investments recently became the largest retail asset manager in Asia1, and continues to build a cohesive regional presence, penetrating the off shore segment more eff ectively.
Management Magazine as at 30 June 2012 (based on assets sourced from Asia ex-Japan).
Revenue 728 662 10 662 10 Other income 6 4 50 4 50 Staff costs (289) (270) (7) (270) (7)
Market overview M&G is the UK and European fund manager of the Prudential Group with responsibility for investments on behalf of both internal and external clients. It is an investment-led business with a clear focus on generating superior long-term returns for investors, whether they are third-party clients or the funds of Prudential’s insurance operations. This is achieved by creating an environment that is attractive to talented investment professionals.
Against a backdrop of continued political and macroeconomic uncertainty, M&G continues to deliver strong investment performance. Over the three years to 31 December 2012, 20 funds representing approximately 61 per cent of retail funds under management (FUM) produced fi rst or second quartile investment returns. The performance of funds managed on behalf of institutional fi xed income clients also remains extremely strong with all actively-managed mandates meeting or outperforming their benchmarks over this period.
Total net sales for the 12 months to the end of December 2012 were £16.9 billion, 25 per cent higher than the previous full year peak of £13.5 billion in 2009 and 285 per cent higher than net sales of £4.4 billion in 2011.
The strength of net fl ows, together with increases in equities and bond values in the year, have led to an increase of 13 per cent in total funds under management, to an all-time high of £228 billion. The FTSE All Share Index has increased by 8 per cent over the year and the sterling corporate bond index has increased by 15 per cent. Building on the strength of the net fl ows generated by the business over recent years, M&G was the largest retail fund manager in the UK1, measured by funds under management. M&G’s total UK retail FUM is £41.2 billion, as noted by the Investment Management Association at the end of December 2012.
This caps a decade of extremely strong growth for M&G. Since 2003 net fund sales have increased at an annual compound rate of 32 per cent and external client assets have grown at an annual compound rate of 19 per cent. Over this period underlying profi t has grown at an annual rate of 22 per cent.
Retail In the retail market, M&G operates a single fund range from the UK, which it distributes both locally and internationally through increasingly diverse channels. Assets sourced from investors outside the UK now account for 29 per cent of M&G’s total retail FUM.
Its reputation for delivering superior long-term investment returns and a high standard of client service enabled M&G to attract a record level of net fund sales in the retail market in 2012. Excluding the results of our South African associate company, where our shareholding reduced from 75 per cent to 49.99 per cent during 2012, total net sales were £8.2 billion. This is 15 per cent higher than their previous high of £7.2 billion in 2010.
A core pillar of M&G’s retail business is to offer a diversifi ed range of investment funds and so be well-placed for changes in investor trends. The demand for conservatively managed portfolios for most of 2012 saw strong infl ows into the M&G Optimal Income Fund, a highly fl exible international fi xed income fund, and into the M&G Global Dividend Fund. In Europe, Optimal Income was the fourth best-selling fund, while Global Dividend ranked ninth over the year to end of December 2012 and was the top selling cross border Equity fund in 20122.
No fewer than 10 of M&G’s retail funds, across the major asset classes of fi xed income, equities and real estate, each attracted net sales of at least £100 million during the 12 month period.
The £8.2 billion of net retail infl ows in the UK and Europe were partially off-set by a £0.4 billion net outfl ow from funds managed by M&G’s associate entity in South Africa. These redemptions were entirely from the PPM South Africa Dividend Income Fund, which was closed on 31 March 2012 ahead of the implementation of new tax legislation on 1 April 2012, which would have had a materially adverse impact on the treatment of the distribution made by the fund to its investors. Fund fl ows into other retail funds of the South African business have been positive.
Institutional In the institutional marketplace, M&G’s approach is to leverage investment strategies developed primarily for Prudential’s internal funds to create higher margin external business opportunities. M&G offers third-party clients, such as pension funds and sovereign wealth funds, an innovative range of specialist fi xed income and real estate strategies, including private debt opportunities and infrastructure investment.
Given the ongoing strength of its fi nancial performance, M&G continues to provide capital-effi cient profi ts and cash generation for the Prudential Group. This is in addition to the strong investment returns generated on the internally managed funds. M&G remits a substantial proportion of its post-tax profi ts to the shareholder. During 2012 cash totalling £206 million (2011: £213 million) was remitted to Group.
Prudential Capital manages the Group’s balance sheet for profi t by leveraging Prudential’s market position. This business has three strategic objectives: (i) to provide professional treasury services to the Prudential Group; (ii) to operate a fi rst-class wholesale and capital markets interface; and (iii) to realise profi table opportunities within a tightly controlled risk framework. Prudential Capital generates revenue by providing bridging fi nance, managing investments and operating a securities lending and cash management business for the Prudential Group and its clients.
Prudential Capital has a diversifi ed earnings base derived from its portfolio of secured loans, debt investments and the provision of wholesale markets services. IFRS operating profi t was £51 million in 2012 (2011: £56 million). In 2012 a total of £91 million (2011: £67 million) cash was remitted to Group.
M&G continues to grow its business with external institutional clients, including the provision of alternatives to bank lending. The M&G UK Companies Financing Fund, a loan facility for medium-sized companies launched in the wake of the 2008 credit crisis, has increased its total commitments to £930 million across 11 individual loans. During the year, loans were made to three new clients, while a fourth advance went to an existing borrower.
In infrastructure, Infracapital, M&G’s unlisted infrastructure equity division, led a consortium (comprising Infracapital and other parties independent of Prudential) in the acquisition of a 90 per cent interest in Veolia Environnement S.A.’s (Veolia) UK regulated water business (now renamed Affi nity Water). Affi nity Water is the largest regulated water-only company in the UK by turnover. The acquisition is the fi rst investment for Infracapital Partners II LP, which has current commitments of £358 million.
Financial performance M&G continues to execute against its strategy and deliver strong performance for both clients and its shareholder, the Prudential Group. M&G’s 2012 fi nancial performance continues the momentum from the strong full year results recorded in both 2011 and 2010, with further growth in profi ts and improvement in operating margins.
Total revenues, including other income, were £734 million, an increase of 10 per cent on the 2011 position. The increased scale of the business following the strong growth in FUM over recent periods has generated operational effi ciencies. Combined with a focus on cost discipline across the business, this has resulted in the cost/income ratio1 improving from 61 per cent in 2011 to 59 per cent for 2012. Underlying profi t for the full year rose by 14 per cent to a new record level of £298 million. Following the addition of performance-related fees and profi t from our associate investment in South Africa, total operating profi t for 2012 was at a record level of £320 million. Although affected by the reduction in our holding in our South African business, this is an increase of 6 per cent on the 2011 position of £301 million, which had been the previous record year.
Note Gross and net investment fl ows exclude Eastspring Money Market Funds, that had net outfl ows of £226 million in 2012 (2011: net outfl ows £512 million).
Markets remained challenging in 2012. Equity funds struggled to gain traction, due to poor investor sentiment in the face of weak macroeconomic signals. Fixed income and regular yield products remained in favour.
In November 2011, Prudential announced that its Asia Asset Management operations would be rebranded Eastspring Investments. The new brand, which was offi cially launched in February 2012, is enabling the business to establish a cohesive regional presence, thereby penetrating the offshore segment more effectively. It also supports distribution to new markets outside Asia and we have recently opened a distribution offi ce in the US.
Eastspring Investment’s leading presence in Asia was acknowledged when it was ranked the largest retail asset manager in Asia (based on assets sourced from Asia ex-Japan), as at 30 June 2012, in a survey conducted by Asia Asset Management magazine. Eastspring Investments also received multiple accolades for its investment capabilities, including four fund managers from Singapore, Malaysia and Indonesia being named ‘2012 Most Astute Investors in Asian currency bonds’ by The Asset Benchmark Research and the joint venture business in India being recognised as the ‘Best Debt Fund House of the year’ in the Morningstar Awards 2012.
During 2012 Eastspring Investments delivered excellent investment performance with 65 per cent of funds exceeding their benchmarks or were peer-ranked within the top two quartiles over a three year period.
Total funds under management (FUM) reached a record £58.1 billion and represent a 16 per cent increase from a year ago on the back of strong net infl ows and positive market movements.
Financial performance Fee income rose by a more modest 3 per cent, refl ecting a change in FUM mix, with a higher proportion of internal, institutional and retail bond funds, all of which attract lower average annual charges. At the same time costs have increased as we continue to invest in the development of the Eastspring Investments platform and expand into new markets. IFRS operating profi t was, therefore, 6 per cent lower than the prior year at £75 million.
Market overview PPM America (PPMA) manages assets for Prudential’s US, UK and Asia affi liates. PPMA also provides other affi liated and unaffi liated institutional clients with investment services including collateralised debt obligations (CDOs), private equity funds, institutional accounts, and mutual funds. PPMA’s strategy is focused on managing existing assets effectively, maximising the benefi ts derived from synergies with our international asset management affi liates, and leveraging investment management capabilities across the Prudential Group. PPMA also pursues third-party mandates on an opportunistic basis.
At 31 December 2012, funds under management of £64 billion were as follows: AER
Business performance At 31 December 2012, Curian had total assets under management of £7.1 billion, compared to £4.7 billion at the end of 2011. Curian generated deposits of £1,550 million in 2012, down 8 per cent from 2011. Curian’s asset growth continues to benefi t from its prior investment platform expansions and its signifi cant expansion in 2012 of the fi rm’s wholesaling team and new distribution territories.
Operating profi t based on longer-term investment returns* 2,533 2,027 Short-term fl uctuations in investment returns on shareholder-backed business 204 (220) Shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes 50 21 Gain on dilution of Group holdings 42 – Amortisation of acquisition accounting adjustments arising on the purchase of REALIC (19) –
Operating profi t based on longer-term investment returns* 4,321 3,978 Short-term fl uctuations in investment returns 538 (907) Mark to market value movements on core borrowings (380) (14) Shareholders' share of actuarial and other gains and losses on defi ned benefi t pension schemes 62 23 Effect of changes in economic assumptions (16) (158) Gain on dilution of Group holdings 42 – Gain on acquisition of REALIC 453 –
Dividends per share declared and paid in reporting period 25.64p 25.19p Dividends per share relating to reporting period 29.19p 25.19p Funds under management £405bn £351bn Insurance Groups Directive capital surplus (as adjusted)notes (ii) and (iii) £5.1bn £4.0bn
IFRS fi nancial statements. (ii) The surpluses shown for 2012, which is estimated, and 2011 are before allowing for the fi nal dividends for 2012 and 2011 respectively. (iii) From March 2013, the basis of calculating Jackson’s contribution to the Group’s IGD surplus will change, further detail can be found in the ‘Capital position, fi nancing and liquidity’ section of the Chief Financial Offi cer’s overview.
B u sin ess rev iew Financial review * Basis of preparation
Results bases The IFRS basis results have been prepared in accordance with the accounting policies discussed in notes A2 to A4 of the IFRS fi nancial statements.
Life insurance products are, by their nature, long-term and the profi t on this business is generated over a signifi cant number of years. Accounting under IFRS alone does not, in Prudential’s opinion, fully refl ect the value of future profi t streams. Prudential considers that embedded value reporting provides investors with a measure of the future profi t streams of the Group’s in-force long-term businesses and is a valuable supplement to statutory accounts. The EEV basis results have been prepared in accordance with the EEV principles discussed in note 1 of EEV basis supplementary information.
Exchange translation – Actual Exchange Rate (AER) and Constant Exchange Rate (CER) The comparative results have been prepared using previously reported exchange rates (AER basis) except where otherwise stated. Results on a CER basis are also shown for the analysis of IFRS and EEV operating profi t based on longer-term investment returns.
Insurance business Long-term business: Asia 920 709 30 697 32 US 964 651 48 659 46 UK 703 683 3 683 3 Development expenses (7) (5) (40) (5) (40)
The US long-term business operating profi t increased by 48 per cent from £651 million1 in 2011 to £964 million in 2012. The 2011 result included an accelerated deferred acquisition cost (DAC) amortisation of £190 million that did not recur. Excluding this item the underlying increase refl ects the continued growth in fee income on the separate account business offset by lower earnings from fi xed annuities in line with the compression in corporate spreads experienced in the course of the year. The result also includes a £67 million contribution from REALIC which was acquired in September 2012 and is performing in line with our expectations.
Prudential’s UK business has sustained its performance at similar levels to the previous year, with total IFRS operating profi t of £736 million (2011: £723 million). Long-term business generated £703 million (2011: £683 million) driven by an increase in profi ts from individual annuities and bulk annuity transactions, the latter contributing £31 million (2011: £23 million) to the total. Shareholders with-profi ts business transfers amounted to £272 million, compared with £293 million in 2011, in line with reductions in policy bonus rates. Profi t from UK general insurance commission continued to decline as expected to £33 million (2011: £40 million) as the business matures and in-force policy numbers fall.
Note 1 Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the IFRS fi nancial statements.
Fee income has increased by 24 per cent to £1,077 million driven by the 15 per cent increase in the Group’s average unit-linked liabilities, which principally refl ects the £8 billion net infl ows into Jackson’s separate accounts as well as positive net fl ows in Asia’s linked business in 2012. The fee income margin has increased from 127 basis points in 2011 to 137 basis points in 2012 as Jackson, where the fee margin is higher, contributes a greater proportion to the Group total fee income.
With-profi ts income has fallen from £331 million in 2011 to £311 million in 2012 in line with reductions in annual bonus rates on UK with-profi ts policies.
Insurance margin has increased by 40 per cent from £736 million in 2011 to £1,032 million in 2012 mainly due to the continued success of the health and protection strategy in Asia and an increase in guarantee fees in the US. 2012 also includes four months of revenue from REALIC amounting to £87 million following its acquisition by Jackson in September 2012.
Margin on revenues principally comprises amounts deducted from premiums to cover acquisition costs and administration expenses. The margin has increased by 17 per cent from £1,425 million in 2011 to £1,669 million in 2012. This increase is driven by Asia and primarily refl ects higher premium income levels in the year.
DAC adjustments are a net benefi t to the result as the deferral of current year's acquisition costs exceeds the amortisation of previously deferred costs. This net benefi t increased from £237 million in 2011 to £406 million in 2012. This increase arises in the US (where DAC adjustments were £442 million in 2012 compared with £228 million in 2011), refl ecting a return to more normal levels of DAC amortisation in 2012. 2011 included a £190 million charge for accelerated DAC amortisation, representing the reversal of the benefi t received in 2008 from the use of the mean reversion formula.
Notes (i) Margin represents the operating return earned in the year as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. (ii) For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the year, as this is seen as a good proxy for average balances throughout the year. The calculation of average liabilities for Jackson is derived from month-end balances throughout the year as opposed to opening and closing balances only. Liabilities held in the general account for variable annuity living and death guaranteed benefi ts together with other amounts on which no spread income is earned (eg REALIC liabilities), are excluded from the calculation of the average. In addition for REALIC, which are included in the average liability to calculate the administration expense margin, the calculation excludes the liabilities reinsured to (and in essence retained by) Swiss Re immediately prior to the acquisition by Jackson.
(iii) Acquisition cost ratio represents shareholder acquisition costs as a percentage of total APE including with-profi ts sales. Acquisition costs include only those relating to shareholders.
IFRS basis results – Margin analysis of asset management pre-tax IFRS operating profi t based on longer-term investment returns by driver 2012 £m
Operating incomenote (i) 666 196 122 249 1,233 Operating profi t based on longer-term investment returns 301 80 56 24 461
Notes (i) Operating income is presented net of commissions and excludes performance related fees, and for M&G carried interest on private equity investments.
M&G’s recent growth has seen average funds under management, excluding PPM South Africa, increase from £190.9 billion during 2011 to £205.1 billion in 2012. This has led to a 10 per cent increase in operating income to £734 million, equivalent to a margin of 36 basis points, an increase from 35 basis points in 2011. M&G continues to focus on cost control and the effi ciencies created as the scale of the business grows. The benefi t of this operational leverage is evident in an improvement in the cost to income ratio from 61 per cent in 2011 to 59 per cent in 2012.
IFRS basis profi t aft er tax The 2012 total profi t before tax attributable to shareholders was 54 per cent higher at £2,810 million in 2012 (2011: £1,828 million)1. The improvement predominantly refl ects the increase in operating profi t based on longer-term investment returns, and the positive investment market returns earned in the year.
IFRS operating profi t is based on longer-term investment return assumptions rather than actual investment returns arising in the year. The difference between actual investment returns recorded in the income statement and longer-term returns is shown in the analysis of profi ts as short-term fl uctuations in investment returns.
The positive short-term fl uctuations of £136 million for our UK operations primarily refl ect net valuation gains on fi xed income assets supporting the capital of the shareholder-backed annuity business.
Long-term business operating profi t generated by the Group was £4,429 million (2011: £4,043 million). This profi t comprises: AAAAAAAAAAAAA New business profi t of £2,452 million (2011: £2,151 million); AAAAAAAAAAAAA In-force profi t of £1,984 million (2011: £1,897 million); and
AAAAAAAAAAAAA Negative £7 million for development expenses (2011: negative £5 million).
Note During 2011 the Group altered its assumptions for future statutory increases to pension payments for its UK defi ned benefi t pension schemes. This refl ects the UK government’s decision to change the basis of indexation from RPI to CPI.
Asia continues to be the highest contributor to the Group’s life profi t, contributing £1,960 million in 2012 (2011: £1,764 million). Included in Asia’s result is £694 million of profi t from in-force business (2011: £688 million) which includes an overall positive contribution from operating experience and assumption changes of £95 million (2011: £75 million).
US life in-force profi t was higher at £737 million in 2012 compared to £616 million in 2011, with 2012 including £19 million of post-acquisition profi t from REALIC. Overall experience and operating assumption changes contributed positive £325 million towards in-force profi ts compared to £267 million in 2011. Within these amounts, swap transactions undertaken from 2010 to more closely match the overall asset and liability duration contributed enhanced profi ts with an overall spread gain of £205 million (2011: £152 million).
EEV basis profi t aft er tax The 2012 total profi ts before tax attributable to shareholders was 72 per cent higher at £5,020 million (2011: £2,922 million). The improvement predominantly refl ects the increase in operating profi t based on longer-term investment returns, improved markets and the gain posted on this reporting basis on the acquisition of REALIC.
EEV operating profi t is based on longer-term investment return assumptions rather than actual investment returns achieved. Short-term fl uctuations in investment returns represent the difference between the actual investment return and those assumed in arriving at the reported operating profi t.
EEV Short-term fl uctuations in investment returns Short-term fl uctuations in investment returns for insurance operations of positive £456 million comprised of positive £395 million for Asia, negative £254 million for our US operations and positive £315 million in the UK.
Shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes The shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes on the EEV basis comprises the IFRS charge attributable to shareholders, and the shareholders’ share of movements in the scheme assets and liabilities attributable to the PAC with-profi ts fund. On the EEV basis there was a gain of £62 million (2011: gain of £23 million) mainly refl ecting the partial recognition of actuarial surplus in the Prudential Staff Pension Scheme following the results of the triennial valuation, further details of which are given in note 7 of EEV basis results.
The adverse changes in economic assumptions for Asia of negative £149 million primarily refl ects the impact of lower interest rates and projected fund earned rates in Hong Kong, partially offset by the impact of a lower discount rate for Indonesia and Malaysia.
Gain on acquisition of REALIC On 4 September 2012, Jackson completed acquisition of 100 per cent issued share capital of SRLC America Holding Corp., and its primary operating subsidiary, REALIC. The embedded value of the acquired business at that date of £823 million was higher than the consideration of £370 million resulting in a gain on acquisition of £453 million. In line with fi nancial reporting guidelines this gain has been recognised in full as a profi t in the year.
Basic EPS based on operating profi t after tax and non-controlling interests
Basic EPS based on total profi t after tax and non-controlling interests
The Board will maintain its focus on delivering a growing dividend from this new higher base, which will continue to be determined after taking into account the Group’s fi nancial fl exibility and our assessment of opportunities to generate attractive returns by investing in specifi c areas of the business. The Board believes that in the medium term a dividend cover of around two times is appropriate.
Net increase in shareholders’ funds 1,795 1,043 2,806 1,430 Shareholders’ funds at beginning of the year 8,564 7,521 19,637 18,207
Notes (a) Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the
IFRS fi nancial statements. (b) Net of related changes to deferred acquisition costs and tax. (c) The £1,364 million free surplus generated by the long-term business (net of new business investment and market related movements and investment in
Note Including goodwill of £1,230 million for 31 December 2012 and 31 December 2011.
Overview The Group manages its internal cash fl ow by focusing on the free surplus generated by the life and asset management businesses. Remittances are, however, made as and when required by the holding company with excess surplus being left in the businesses where it can be redeployed most profi tably.
Free surplus generation Sources and uses of free surplus generation from the
Underlying free surplus generated in the year 2,082 1,983 Market-related items (79) (531) Gain on dilution of Group holdings 42 – Acquisition of REALIC (169) –
Free surplus generated in the year 1,876 1,452 Net cash remitted by the business units (1,200) (1,105) Other movements (including foreign exchange effects) and timing differences (408) (264)
The free surplus generation for the insurance business represents amounts maturing from the in-force operations during the year less the investment in new business. For asset management operations we have defi ned free surplus generation to be the total post-tax IFRS profi t for the year.
The Group’s free surplus generated also includes the general insurance commission earned during the year and excludes foreign exchange, capital movements, shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs.
Market-related movements of negative £79 million in 2012 includes negative £330 million from the US, principally refl ecting the valuation movements of derivatives, net of movements in reserves held for variable annuity guarantees refl ecting market movements in the year. Offsetting these amounts are positive £114 million in Asia, positive £53 million from the UK and positive £84 million from our asset management business primarily refl ecting in part the impact of lower bond yields on bond values in the year.
In contrast free surplus benefi ted by £42 million as a result of the divestment of M&G’s holding in PPM South Africa from 75 per cent to 49.99 per cent.
Net worth invested in new business (195) (10) 41 (164) Value of in-force created by new business 1,177 578 200 1,955
Net worth invested in new business (199) 30 23 (146) Value of in-force created by new business 1,003 506 172 1,681
New business sales (APE) 1,642 1,290 746 Internal rate of returnnote >20% >20% >20%
In Asia, we generated an 18 per cent increase in new business profi t despite investing 2 per cent less capital at £292 million (2011: £297 million). In other words, for each £1 million of free surplus invested we generated £3.4 million of post-tax new business profi t (2011: £2.7 million). This improved capital effi ciency refl ects the benefi t of pricing actions and a shift in mix towards those products and geographies with lower strain and higher return characteristics. The average free surplus undiscounted payback period for business written in 2012 was three years (2011: three years).
In the US, investment in new business was £281 million (2011: £202 million), an increase of 39 per cent, and compares to a 7 per cent increase in new business profi t in the year. Consequently, for each £1 million of free surplus invested we generated £2.0 million of post-tax new business contribution to embedded value (2011: £2.6 million). The higher capital consumption per unit of profi t refl ects a more punitive valuation interest rate being used to establish liabilities upon policy inception following recent falls in interest rates. Notwithstanding this effect, the internal rates of return achieved in the US remain attractive at above 20 per cent, and the fast payback nature of the business written means that the initial capital outlay is recouped quickly. The average free surplus undiscounted payback period for business written in 2012 was two years (2011: one year).
In the UK, we continue to manage capital with discipline and have achieved a 20 per cent increase in new business profi t, while investing 17 per cent less capital at £45 million (2011: £54 million). For each £1 million of free surplus invested, therefore, we generated £5.4 million of post-tax new business contribution to embedded value (2011: £3.6 million) benefi ting from favourable changes in business mix. These sustained levels of high capital effi ciency in the UK refl ect our strategy of participating selectively in the UK’s retirement savings and income market, focusing on those products and distribution mechanisms which meet our strict high return and short payback characteristics. The average free surplus undiscounted payback period for shareholder-backed business written in 2012 was three years (2011: four years).
UK Life fund paid to the Group 216 223 Shareholder-backed business: Other UK paid to the Group 101 116 Group invested in UK (4) (42) Total shareholder-backed business 97 74
Asia net remittances to the Group Asia paid to the Group: Long-term business 491 289 Other operations 60 55 551 344 Group invested in Asia: Long-term business (107) (50) Other operations (103) (88)
M&G remittances to the Group 206 213 PruCap remittances to the Group 91 67
Operating holding company cash fl ow before dividendnote 911 809 Dividend paid (655) (642)
Operating holding company cash fl ow aft er dividendnote 256 167 Issue of hybrid debt, net of costs – 340 Repayment of subordinated debt – (333) Hedge purchase cost (equity tail risks) (32) – Other net cash payments (43) (205)
Holding company cash fl ow continued We continue to manage cash fl ows across the Group with a view to achieving a balance between ensuring suffi cient net remittances from the businesses to cover the dividend (after corporate costs) and maximising value for shareholders through the retention of the free surplus generated at business unit level, so that it can be reinvested in the profi table opportunities available to the Group. On this basis, the holding company cash fl ow statement at an operating level should ordinarily balance close to zero before exceptional cash fl ows, but from time to time additional remittances from business operations will be made to provide the Group with greater fi nancial fl exibility at the corporate centre.
Asia became the largest contributor of cash, with net cash remittances to the Group in 2012 of £341 million (2011: £206 million) exceeding its 2013 cash objective. This includes non-recurring items of £27 million representing cash received from the sale of the Group’s holdings in China Life Insurance Company of Taiwan of £97 million offset by repayments of funding contingent on future profi ts of the Hong Kong Life insurance operations of £70 million. This fi nancing was taken out in 2009 and 2010 in order to increase the fi nancial fl exibility of the Group during the investment market crisis and has now been repaid.
Cash received from Jackson of £249 million for 2012 is lower than the £322 million remitted in 2011 as annual remittances return to a more sustainable level. This follows the exceptional release of excess surplus made in the prior year.
M&G and PruCap collectively remitted £297 million in 2012, as the asset management businesses continue to remit signifi cant portions of their annual post-tax earnings to the Group.
Net central outfl ows and other movements Net central outfl ows improved to £289 million in 2012 (2011: £296 million) with higher corporate costs offset by lower net interest payments, lower Solvency II costs, and higher tax receipts.
The overall holding company cash and short-term investment balances at 31 December 2012 was £180 million higher than the balance held at the end of 2011 at £1.4 billion. The company seeks to maintain a central cash balance in excess of £1 billion.
259,279 225,217 Core structural borrowings of shareholders’ fi nanced operations (IFRS book value basis) 3,554 3,611 Other liabilities including non-controlling interest 24,977 24,280
Share capital and premium 2,017 2,000 IFRS basis shareholders’ reserves 8,342 6,564
IFRS basis shareholders’ equity 10,359 8,564 Additional EEV basis retained profi t 12,084 11,073
The Group’s investments are discussed in further detail in the Risk and capital management section B.1.b ‘Credit risk’.
Net cash fl ows 1,982 9,597 (1,129) 10,450 9,006 Investment related items and other movements 1,539 4,241 4,586 10,366 1,988 Acquisition of REALIC – 12,912 – 12,912 – Foreign exchange translation differences (577) (3,678) – (4,255) 329 At 31 December 21,213 92,261 49,505 162,979 133,506
Total policyholder liabilities including unallocated surplus at 31 December 271,363 236,290
Other movements include negative foreign exchange effects of £4.3 billion (2011: positive £0.3 billion) together with investment related and other items of £10.4 billion. Investment related and other items increased from £2.0 billion in 2011 to £10.4 billion in 2012 principally following improvements in the bond and equity markets. The acquisition of REALIC refl ects the liabilities acquired at the date of acquisition.
Perpetual subordinated Capital securities (Innovative Tier 1) 1,746 120 1,866 1,823 (10) 1,813
Total 3,554 579 4,133 3,611 204 3,815 Less: Holding company cash and short-term
Shareholders’ net borrowings and ratings On an IFRS basis, the Group’s core structural borrowings at 31 December 2012 were broadly unchanged at £3.6 billion.
Prudential manages the Group’s core debt within a target level consistent with its current debt ratings. At 31 December 2012, the gearing ratio (debt, net of cash and short-term investments, as a proportion of EEV shareholders’ funds plus net debt) was 8.8 per cent, compared with 10.9 per cent at 31 December 2011. Prudential plc has strong debt ratings from Standard & Poor’s, Moody’s and Fitch. Prudential’s long-term senior debt is rated A+, A2 and A from Standard & Poor’s, Moody’s and Fitch, while short-term ratings are A-1, P-1 and F1 respectively. All ratings from Fitch and Moody’s are on stable outlook, and all ratings from Standard & Poor’s are on negative outlook.
Jackson National Life Insurance Company’s fi nancial strength is rated AA by Standard & Poor’s, A1 by Moody’s and AA by Fitch.
Financial strength of the UK Long-term Fund On a realistic valuation basis, with liabilities recorded on a market consistent basis, the free assets were valued at approximately £7.0 billion at 31 December 2012 (31 December 2011: £6.1 billion), before a deduction for the risk capital margin. The value of the shareholders’ interest in future transfers from the UK with-profi ts fund is estimated at £2.1 billion (31 December 2011: £2.0 billion).
Financial risks Market risk The risk of loss for the Group’s business, or of adverse change in the fi nancial situation, resulting, directly or indirectly, from fl uctuations in the level or volatility of market prices of assets and liabilities.
Insurance risk The risk of loss for the Group’s business or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of a number of insurance risk drivers. This includes adverse mortality, longevity, morbidity, persistency and expense experience.
Strategic risk Ineff ective, ineffi cient or inadequate senior management processes for the development and implementation of business strategy in relation to the business environment and the Group’s capabilities.
As a provider of fi nancial services, including insurance, the management of risk lies at the heart of Prudential’s business. As a result, eff ective risk management capabilities represent a key source of competitive advantage for the Group.
The Group’s risk framework includes the Group’s appetite for risk exposures as well as its approach to risk management. Under this approach, Prudential continuously assesses the Group’s top risks and monitors its risk profi le against approved limits. Prudential’s main strategies for managing and mitigating risk include asset liability management, using derivatives to hedge relevant market risks, and implementing reinsurance and corporate insurance programmes.
A. Group risk appetite (Audited) Prudential defi nes and monitors aggregate risk limits based on fi nancial and non-fi nancial stresses for its earnings volatility, liquidity and capital requirements.
Earnings volatility: the objectives of the limits are to ensure that: a the volatility of earnings is consistent with the expectations of stakeholders; b the Group has adequate earnings (and cash fl ows) to service debt, expected dividends and to withstand unexpected shocks; and c earnings (and cash fl ows) are managed properly across geographies and are consistent with funding strategies.
Prudential’s risk appetite framework forms an integral part of its 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 diversifi cation effects between business units) relative to the limits contained within the risk appetite statements.
In the US, where we are a leading provider of variable annuities, there are risks associated with the guarantees embedded in our products. We provide guaranteed minimum death benefi ts (GMDB) on substantially all policies in this class, guaranteed minimum withdrawal benefi ts (GMWB) on a signifi cant proportion of the book, and guaranteed minimum income benefi ts (GMIB) on only 3 per cent. To protect the shareholders against the volatility introduced by these embedded options, we use both a comprehensive hedging programme and reinsurance. The GMIB is no longer offered, with existing coverage being reinsured.
The Jackson IFRS shareholders’ equity and US statutory capital are sensitive to the effects of policyholder behaviour on the valuation of GMWB guarantees, but to manageable levels.
We use a macro approach to hedging that covers the risks inherent across the US business. Within this macro approach we make use of the natural offsets that exist between the variable annuity guarantees and the fi xed index annuity book, and then use a combination of over-the-counter (OTC) options and exchange traded derivatives to hedge the remaining risk, considering signifi cant market shocks and limiting the amount of capital we are putting at risk. Internal positions are generally netted before any external hedge positions are considered. The hedging programme also covers the fees on variable annuity guarantees.
ii Interest rate risk (Audited) Interest rate risk arises from Prudential’s investments in long-term debt and fi xed income securities, and also exists in policies that carry investment guarantees on early surrender or at maturity, where claim values can become higher than the value of backing assets as a result of rises or falls in interest rates.
In Asia, the exposure to interest rate risk arises from the guarantees of some non-unit-linked investment products. This exposure arises because it may not be possible to hold assets which will provide cash fl ows to match exactly those relating to policyholder liabilities. This results in a mismatch due to the duration and uncertainty of the liability cash fl ows and the lack of suffi cient assets of a suitable duration. While this residual asset/ liability mismatch risk can be managed, it cannot be eliminated.
The Group’s balance sheet held the following total investments at 31 December 2012: Participating funds
Debt securities 62.0 9.5 68.6 140.1 124.5 Equity 25.1 73.9 1.0 100.0 87.3 Property investments 8.7 0.6 1.6 10.9 10.8 Mortgage loans 1.3 – 4.8 6.1 5.7 Other loans 1.4 – 4.3 5.7 4.0 Deposits 9.5 1.4 1.8 12.7 10.7 Other investments 4.7 – 3.2 7.9 7.6
The table below presents the balances of investments related to shareholder-backed operations at 31 December 2012.
Shareholder-backed investments: Asia life 8.7 7.1 UK life 31.3 28.5 US life 42.0 34.0 Other 3.3 3.8
Insurance operations: UK 50.5 6.3 27.1 83.9 78.0 Jackson National Life – – 33.0 33.0 27.0 Asia long-term business 11.5 3.2 6.7 21.4 17.7 * Jackson’s variable annuity separate account assets comprise equity securities and portfolio holdings in unit trusts (including mutual funds), the majority of which are equity based.
Total 27,367 21,642 Residential mortgage-backed securities (RMBS) 2,400 2,591 Commercial mortgage-backed securities (CMBS) 2,639 2,169 Other debt securities 587 620
Note A 1990 SEC rule that facilitates the resale of privately placed securities that are without SEC registration to qualifi ed institutional investors. The rule was designed to develop a more liquid and effi cient institutional resale market for unregistered securities.
Of the £23.2 billion of corporate debt, 95 per cent is investment grade. Concentration risk within the corporate debt portfolio is low, with the top ten holdings accounting for approximately 8 per cent of the portfolio. Our largest sector exposures in the investment grade corporate debt portfolio are Energy and Utilities at 15 per cent and 13 per cent, respectively. We actively manage the portfolio and will sell exposures as events dictate.
Jackson’s debt securities experienced total credit-related losses in 2012 of £47 million (2011: £52 million). This includes a loss net of recoveries of £10 million (2011: gains of £10 million) on credit-related sales of impaired bonds. IFRS write-downs on debt securities were £37 million (2011: £62 million). Of this amount of write-downs, £8 million (2011: £21 million) was in respect to RMBS securities. In addition to the amounts for debt securities, there were £5 million (2011: £28 million) of write-downs on Jackson’s commercial mortgage loan portfolio. In 2012 and 2011, Jackson did not experience any defaults on its debt securities.
The impairment process refl ects a review of every bond and security in our portfolio. Our accounting policy requires us to book full mark to market losses on impaired securities through our balance sheet. However, we would expect only a proportion of these losses eventually to turn into defaults, and some of the impaired securities to recover in price over time.
Asia Asia’s debt portfolio totalled £21.4 billion at 31 December 2012. Of this, approximately 69 per cent was in unit-linked and with-profi ts funds with minimal shareholders’ risk. The remaining 31 per cent is shareholder exposure and is invested predominantly (65 per cent) in investment grade bonds. The Asian portfolio has performed very well, and did not experience any default losses in 2012.
ii Group sovereign debt exposure (Audited) Sovereign debt represented 15 per cent or £10.4 billion of the debt portfolio backing shareholder business (excluding unit-linked business) at 31 December 2012 (2011: 16 per cent and £9.2 billion respectively). 38 per cent of this was rated AAA and 92 per cent investment grade (2011: 43 per cent and 94 per cent respectively). Of the Group’s holdings in Continental Europe of £564 million, 79 per cent was AAA rated (2011: £690 million and 87 per cent respectively). Shareholder exposure to the Eurozone sovereigns of Portugal, Italy, Ireland, Greece and Spain (PIIGS) is £52 million (2011: £44 million). The Group does not have any sovereign debt exposure to Greece, Portugal or Ireland.
Prudential actively mitigates the level of Group-wide credit risk (invested credit and counterparty) through a comprehensive system of hard limits, collateralisation agreements and centrally managed ‘watch lists’.
The exposure of the Group’s shareholder and with-profi ts funds to sovereign debt (including credit default swaps that are referenced to sovereign debt) at 31 December 2012 is as follows.
Continental Europe: 52 90 44 85 Germany 444 469 598 602 Other Europe (principally Belgium and Isle of Man) 68 41 48 62 564 600 690 749 United Kingdom 3,432 2,306 3,254 2,801 United States 3,585 1,169 2,448 2,615 Other, predominantly Asia 2,867 271 2,850 332
The Group held the following direct exposures to banks’ debt securities of shareholder-backed business at 31 December 2012.
Portugal – 37 37 – – – 37 24 Ireland – 16 16 – – – 16 13 Italy – 29 29 10 – 10 39 81 Greece – – – – – – – – Spain 130 11 141 24 3 27 168 210 130 93 223 34 3 37 260 328 Austria – – – 11 – 11 11 9 France 18 62 80 72 43 115 195 149 Germany – 33 33 18 – 18 51 29 Luxembourg – – – – – – – – Netherlands – 16 16 86 80 166 182 152 United Kingdom 486 181 667 700 99 799 1,466 1,083
In addition to the exposures held by the shareholder-backed business, the Group held the following banks’ securities at 31 December 2012 within its with-profi ts funds.
Portugal – 6 6 – – – 6 7 Ireland 6 – 6 – – – 6 – Italy – 71 71 4 – 4 75 96 Greece – – – – – – – 5 Spain 173 12 185 – 1 1 186 138 179 89 268 4 1 5 273 246 Austria – – – – – – – – France 16 78 94 56 7 63 157 144 Germany – – – – – – – 7 Luxembourg – – – – – – – 7 Netherlands – 136 136 2 – 2 138 122 United Kingdom 725 423 1,148 749 7 756 1,904 1,550
v Loans (Audited) Of the total Group loans of £11.8 billion at 31 December 2012, the following are held by shareholder-backed operations.
iv Other possible impacts of a Eurozone crisis (Audited) Other knock on impacts of a Eurozone crisis may represent some risk to the Group, both in terms of fi nancial market impact and potential operational issues. These third order exposures are intrinsically more diffi cult to quantify. However, as well as the monitoring routines noted above, Prudential has also developed tools to identify the Group’s exposure to counterparties at risk (including contingent credit exposures), and has in place Group-wide processes to facilitate the management of such risks should they materialise.
Asia insurance operationsnote (i) – 0.4 0.4 – 0.4 0.4 US insurance operationsnote (ii) 3.5 2.7 6.2 3.6 0.6 4.2 UK insurance operationsnote (iii) 1.3 – 1.3 1.1 – 1.1 Asset management operationsnote (iv) – 1.2 1.2 – 1.3 1.3
Total loans held by shareholder-backed operations 4.8 4.3 9.1 4.7 2.3 7.0
(iii) The majority of mortgage loans held by UK insurance operations are mortgage loans collateralised by properties. (iv) Relates to bridging loan fi nance managed by Prudential Capital.
The Group’s exposure to derivative counterparty and reinsurance counterparty credit risk is subject to the same framework of Group-wide operational limits and monitoring as its invested credit risk. Where appropriate, Prudential will reduce its exposure, purchase credit protection or make use of additional collateral arrangements to control its levels of counterparty credit risk.
(Audited) The processes of determining the price of Prudential’s products and reporting the results of its long-term business operations require Prudential to make a number of assumptions. In common with other industry players, the profi tability of Prudential’s 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.
Prudential continues to conduct research into longevity risk using data from its substantial annuity portfolio. The assumptions that Prudential makes about future expected levels of mortality are particularly relevant in its UK annuity business. The attractiveness of transferring longevity risk (via reinsurance and other external solutions) is regularly evaluated. These are used as risk management tools where it is appropriate and attractive to do so.
With regard to strategic risk, both business units and the Group Head Offi ce are required to adopt a forward-looking approach to risk management by performing risk assessments as part of the annual strategic planning process. This supports the identifi cation of potential threats and the initiatives needed to address them, as well as competitive opportunities. The impact on the underlying businesses and/or Group-wide risk profi le is also considered to ensure that strategic initiatives are within risk appetite.
Prudential’s persistency assumptions refl ect recent experience for each relevant line of business, and any expectations of future persistency. Persistency risk is mitigated by appropriate training and sales processes and managed proactively post sale. Where appropriate, allowance is also made for the relationship – either assumed or historically observed – between persistency and investment returns, and for the resulting additional risk.
(Audited) The parent company has signifi cant internal sources of liquidity which are suffi cient to meet all of its expected requirements for the foreseeable future without having to make use of external funding. In aggregate the Group has £2.1 billion of undrawn committed facilities, expiring between 2013 and 2017. In addition, the Group has access to liquidity via the debt capital markets. Prudential also has in place an unlimited commercial paper programme and has 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 have been assessed to be suffi cient under both sets of assumptions.
Prudential is exposed to operational risk through the course of running its business. It is dependent on the successful processing of a large and complex number of transactions, utilising various IT applications and platforms, across numerous and diverse products. It also operates under the ever evolving requirements set out by different regulatory and legal regimes (including tax), as well as utilising a signifi cant number of third parties to distribute products and to support business operations.
Prudential’s systems and processes incorporate controls that are designed to manage and mitigate the operational risks associated with its activities. The Prudential Group Governance Manual was developed to make a key contribution to the sound system of internal control that the Group is expected to maintain under the UK Corporate Governance Code and the Hong Kong Code on Corporate Governance Practices. Group Head Offi ce and business units confi rm that they have implemented the necessary controls to evidence compliance with the Manual.
Prudential has an operational risk management framework in place that facilitates both the qualitative and quantitative analysis of operational risk exposures. The output of this framework, in particular management information on key operational risk and control assessments, scenario analysis, internal incidents and external incidents, is reported by the business units and presented to the Group Operational Risk Committee. This information also supports business decision-making and lessons-learned activities; the ongoing improvement of the control environment; and determination of the adequacy of Prudential’s corporate insurance programme.
In addition to its strong capital position, on a statutory (Pillar 1) basis, the total credit reserve for the UK shareholder annuity funds also protects its capital position in excess of the IGD surplus. This credit reserve as at 31 December 2012 was £2.1 billion. This credit risk allowance represents 40 per cent of the bond portfolio spread over swap rates, compared to 33 per cent as at 31 December 2011.
The movements in 2012 mainly comprise: AAAAAAAAAAAAA Net capital generation mainly through operating earnings (in-force releases less investment in new business, net of tax) of £2.5 billion.
AAAAAAAAAAAAA Negative impact arising from foreign exchange movements of £0.1 billion.
(Unaudited) In March 2013, we have agreed with the FSA to amend the calculation of the contribution Jackson makes to the Group’s IGD surplus. Until now, the contribution of Jackson to the reported IGD was based on an intervention level set at 75 per cent of US Risk-Based Capital Company Action Level (CAL). Going forward, the contribution of Jackson to IGD surplus will equal the surplus in excess of 250 per cent of CAL. This is more in line with the level at which we currently report free surplus, which we have set at 235 per cent of CAL. In the absence of an agreed Solvency II approach, we believe that this change makes the IGD surplus a more meaningful measure and one that is more closely aligned with economic reality. The revised IGD surplus calculation has no impact on the way that the US business is managed or regulated locally.
Risk and capital management adverse for Prudential, including potentially that a signifi cant increase in capital may be required to support its business and that Prudential may be placed at a competitive disadvantage to other European and non-European fi nancial services groups. Prudential is actively participating in shaping the outcome through our involvement in industry bodies and trade associations, including the Chief Risk Offi cer and Chief Financial Offi cer Forums, together with the Association of British Insurers and Insurance Europe (formerly known as the Comité Européen des Assurances).
Currently there are also a number of other prospective global regulatory developments which could impact the way in which Prudential is supervised in its many jurisdictions. These include the Dodd-Frank Act in the US, the work of the Financial Stability Board (FSB) on Globally Systemically Important Financial Institutions (G-SIFIs) and the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) being developed by the International Association of Insurance Supervisors (IAIS).
The Dodd-Frank Act represents a comprehensive overhaul of the fi nancial services industry within the United States that, among other reforms to fi nancial services entities, products and markets, may subject fi nancial institutions designated as systemically important to heightened prudential and other requirements intended to prevent or mitigate the impact of future disruptions in the US fi nancial system. The full impact of the Dodd-Frank Act on Prudential’s businesses is not currently clear, however, as many of its provisions have a delayed effectiveness and/or require rulemaking or other actions by various US regulators over the coming years.
C.2 Solvency II and other global regulatory developments (Unaudited) The European Union (EU) is developing a new solvency 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. The new approach is based on the concept of three pillars – minimum capital requirements, supervisory review of fi rms’ assessments of risk, and enhanced disclosure requirements.
Representatives from the European Parliament, the European Commission and the Council of the European Union are currently discussing the Omnibus II Directive which, once approved, will amend certain aspects of the original Solvency II Directive. In addition the European Commission is continuing to develop, in consultation with stakeholders including industry, the detailed rules that will complement the high-level principles of the Directive, referred to as ‘implementing measures’. The Omnibus II Directive is not currently scheduled to be fi nalised until late 2013, while the implementing measures cannot be fi nalised until after Omnibus II.
There is a signifi cant uncertainty regarding the fi nal outcome from this process. In particular, the Solvency II rules relating to the determination of the liability discount rate and to the treatment of US business remain unclear and Prudential’s capital position is sensitive to these outcomes. With reference to the liability discount rate, solutions to remove artifi cial volatility from the balance sheet have been suggested by policymakers as the regulations continue to evolve. These solutions, along with transitional arrangements for the treatment of the US business, are continuing to be considered by policymakers as part of the process to reach agreement on the Omnibus II Directive. There is a risk that the effect of the measures fi nally adopted could be
As part of a global initiative to identify G-SIFIs, in May 2012, the IAIS published proposed assessment methodology for designating Globally Systemically Important Insurers (G-SIIs). For those groups that are designated by the FSB as G-SII then additional policy measures including enhanced supervision, introduction of recovery and resolution plans and higher loss absorbency requirements could be proposed. Further detail of the proposals is expected during 2013 and implementation is likely to be over a period of years. Furthermore, the FSA is considering the designation of Domestically Systemically Important Insurer (DSII) for those UK insurers that are signifi cant in UK terms. It is not yet clear what the impact of this designation may be.
ComFrame is also being developed by the IAIS to provide common global requirements for supervision of insurance groups. The framework is designed to develop common principles for supervision and so may increase the focus of regulators in some jurisdictions. It is also possible that some prescriptive requirements, including group capital, could be proposed. Further clarity on ComFrame is expected during the second half of 2013.
Prudential uses a variety of metrics for measuring capital performance and profi tability, including traditional accounting metrics and economic returns. Capital allocation decisions are supported by this quantitative analysis, as well as strategic considerations.
Creating social and economic value As a business that provides savings, income, investment and protection products and services, we create social value through our day-to-day operations. We provide customers with ways to help manage uncertainty and build a more secure future. By playing a key role in fi nancial markets, we provide long-term capital that fi nances businesses, builds infrastructure and fosters growth in both developed and developing countries.
The complexities and challenges surrounding ageing populations have signifi cant policy implications in many countries around the world. For example, through our partnership with the Washington DC-based think tank, the Center for Strategic and International Studies (CSIS), we have continued to contribute to the debate, through events and seminars with policymakers promoting the Global Aging Preparedness Index.
Asia In the emerging markets of Asia, where we now have 13 million insurance customers, the demand for savings and protection products continues to grow as people seek greater fi nancial security and peace of mind. We continue to broaden our offering to help meet our customers’ goals.
AAAAAAAAAAAAA Serving our customers: we aim to provide fair and transparent products which meet our customers’ needs; AAAAAAAAAAAAA Valuing our people: we aspire to retain and develop highly engaged employees; AAAAAAAAAAAAA Supporting local communities: we seek to make a positive contribution to our communities through long-term partnerships with charitable organisations that make a real diff erence; and
AAAAAAAAAAAAA Protecting the environment: we take responsibility for the environment in which we operate.
The US is the world’s largest retirement savings market, with considerable cohorts of the 78 million baby-boomers1 reaching retirement age each year, creating signifi cant demand for retirement income products.
Elite Access was created in 2012 to make Jackson’s products available to a much greater range of customers. Elite Access is a variable annuity designed to combat the volatility of the market by providing investors with the opportunity for greater portfolio diversifi cation through the use of alternative asset classes.
UK In the UK, challenging economic conditions continued to persist in 2012 and have led customers, more than ever, to seek fi nancial products that offer them the highest level of security from companies they feel they can trust.
Annuities are a key product for Prudential UK and market rates were at near historic lows during 2012. This means that it is more important than ever for customers looking to take income from their pensions to make informed choices. Our UK business paid out £2.9 billion in income to UK annuitants in 2012.
We are committed to responding to customer concerns quickly and effi ciently. The details of our approach to customers are published on the Prudential UK website in line with FSA guidance at www.pru.co.uk/about_us/complaints_data/
Asset management M&G, Prudential’s UK and European asset management business, has served retail and institutional investors for over 80 years, investing customers’ money in equities, fi xed income and real estate.
M&G’s retail business launched the Bond Vigilantes blog providing market insight straight from the trading fl oor. In addition to the constant stream of market views posted by M&G, comments are posted by users, establishing the blog as a genuine discussion forum.
Diversity and inclusion We provide opportunities for our people regardless of their gender, ethnicity, disability status, age, religion, caring responsibilities or sexual orientation.
Employee engagement We strive to create a work environment and conditions that are conducive to a culture of engagement. Engaging our employees is critical to sustaining a high-performing business and retaining talent. In 2012, we utilised a range of mechanisms to drive engagement at all levels.
The wellbeing of our employees is paramount. We have a series of initiatives, including assessments, activity programmes and access to confi dential telephone and face-to-face coaching and counselling with professionals.
Across Prudential, we encourage continuous dialogue to engage with our employees. Through events and ‘open forums’ – such as the M&G Staff Consultative Committee and the Employee Forum within Prudential UK – employees can engage directly with their executive teams and raise questions. In addition, our businesses in the UK have a long-standing relationship with the union Unite.
The success of our engagement efforts have been recognised internally and externally. Engagement surveys in various business units have shown excellent results and several of our businesses have won prestigious awards. For example, M&G was named one of the best places to work in the City by the website Here is the City News, and was also the highest-rated asset management fi rm in a survey voted for by employees, and a number of our businesses in Asia, including our Life business in Singapore, were awarded The People Developer Standard.
Performance and reward We offer reward packages that support a high-performing organisation, in order to attract, retain and motivate talented people. Each individual contributes to the success of the Group and should be rewarded accordingly.
Rewards are linked to the delivery of business goals and expected behaviours. We place emphasis on goals being met in an appropriate manner. To ensure this, employees are not only regularly assessed on ‘what’ they have achieved, but also on ‘how’ they did so.
Talent development All employees are encouraged to take responsibility for driving their own development and agreeing plans with their managers. To support them, the organisation provides on-going development activities. The majority of these activities sit within our business units, while Group HR focuses on programmes for senior leaders across the organisation.
At Group level, the emphasis is on succession planning for senior roles and development of our overall leadership talent pipeline. In support of this, there are a number of new Group-wide programmes. In addition to The Top 100 initiative, which focuses on individually tailored development for our most senior executives, we provide programmes that are specifi cally designed to enhance colleagues’ cross-business unit/functional leadership skills and experience.
Within our businesses, there are several programmes that demonstrate our commitment to furthering talent. Prudential Corporation Asia developed a holistic Talent Development Framework with clear segmentation, to enable the identifi cation of talent in each market, as well as the design and accurate targeting of ‘top of the class’ leadership development programmes.
In the US, Jackson, alongside employees from across the Group, provided more than 5,000 volunteer hours in support of fi nancial literacy as part of its work with Junior Achievement, a charity which teaches young people about money management and how business works. Jackson is one of only 10 companies across the US to have been awarded a Bronze US President’s Volunteer Service Award for the 2011-2012 programme.
Through the partnership, 86 volunteers are working with schools in Reading, Stirling and Westminster. As well as supporting performance management training and people management skills for senior teachers and school leaders, a ‘menu of activities’ has been created to help young people understand the opportunities available to them when they leave school, as well as working with young people to improve their confi dence and motivation.
At Group Head Offi ce, a new charitable partnership was established in 2012 with Greenhouse, a London-based charity which assists young people in some of the most deprived areas of the city. It uses sport, including basketball, to turn young lives around. Sports coaches work full-time in schools to help young people improve their health and fi tness, while mentoring them to increase their engagement with their education and community. Prudential’s support enables over 1,000 disadvantaged young people to participate weekly through Greenhouse’s basketball programme.
Employee volunteering We believe in sharing the skills of our global workforce with their local communities. Many of our employees play an active role through volunteering, charitable donations and fundraising. Financial support is always important, but it is the combination of all these resources that means we can make a far more positive contribution to all our communities across the globe. We recognise that employee volunteering brings benefi t not only to the charities, but also to the development of our people, and we actively encourage colleagues to participate in our programmes.
The social value of our business – helping customers manage uncertainty and build a more secure future, as well as our investments providing long-term capital that fi nances businesses, builds infrastructure and fosters economic growth – is further underpinned by our community programmes and activities.
Cha-Ching, PCA’s fl agship regional fi nancial education programme, gathered greater momentum in 2012.
In 2012, Cha-Ching was developed with the launch of ‘Season Two’, featuring three new music videos on budgeting, credit and investing. A new online game, Cha-Ching Saver World Tour, and a fi rst mobile game app, Cha-Ching Band Manager, were also launched.
In October 2011, many areas of northern and central Thailand were hit by severe fl ooding caused by tropical storm Nalgae. More than 13 million people were affected by the catastrophe which caused the loss of 750 lives.
In the US, Jackson staff gave over 6,500 volunteer hours in 2012, providing support to local charities benefi ting children and the elderly.
In the UK, 43 per cent of Prudential UK employees took part in volunteering during 2012, mentoring schoolchildren, supporting the elderly and skills-sharing with local charities.
At M&G, 118 employees have been actively involved in initiatives with community organisations, charities and schools in and around Chelmsford and London.
Chairman’s Challenge In 2012, 4,500 employees volunteered through Prudential’s fl agship international programme, the Chairman’s Challenge. The programme encourages employees from across the Group to volunteer on projects initiated by our global charity partners, including Plan International, Help Age International and Junior Achievement. It allows us to support many different charities with volunteers, as well as fi nancial support. Prudential donates £150 to our charity partners for every employee who registers for the programme. Charity partners use this money to seed-fund charitable projects for Prudential volunteers.
Shortlisted projects 2012: AAAAAAAAAAAAA The Taiwan Fund For Children and Families (TFCF) – Children’s Financial Camp Annual Child Protection Campaign and Wishing Doll Fundraising Campaign. 766 employees volunteered in 2012, 30 of whom used their business skills to design and deliver four fi nancial camps to 120 disadvantaged children, while the remainder supported the TFCF’s protection and fundraising campaign; AAAAAAAAAAAAA Snehasadan, Mumbai – Holistic Development of Children. The programme rehabilitates homeless children and gives them education, life skills and professional training to make them independent. 50 volunteers supported the project for the fi rst time in 2012, benefi ting 240 children; AAAAAAAAAAAAA Junior Achievement, US – Economic Gardening: Growing Success One Student At A Time. 528 Jackson employees were involved in volunteering activities either in the classroom delivering fi nancial literacy sessions or through fundraising; and
AAAAAAAAAAAAA Junior Achievement Thailand – Cha-Ching in Ourselves. 140 Prudential Corporation Asia employees dedicated volunteering time to educate young people in fi nancial literacy skills.
Reducing our direct impact: occupied properties We monitor energy consumption, carbon dioxide emissions, water consumption, waste, paper use and recycling at all our UK sites, and at Jackson’s main premises in North America in Lansing, Michigan, Denver, Colorado, and Nashville, Tennessee. We also monitor energy consumption and carbon dioxide emissions from 46 occupied properties in Asia, where Prudential Corporation Asia occupies approximately 20,000 square feet or more, for a combined total of 2.45 million square feet.
Corporate Property continues to maintain certifi cation to ISO 14001 (an internationally recognised standard for environmental management) for services it provides to UK Business Units. Compliance with ISO 14001 drives improved environmental performance.
There will be a new mandatory greenhouse gas emissions reporting requirement for all listed companies on the London Stock Exchange. Prudential plc will include a carbon footprint report in its Annual Report 2013.
In 2012, the Group spent £12.6 million supporting community activities, an increase of 39.5 per cent on 2011.
The cash contribution to charitable organisations from our EU operations is broken down as follows: education £1.3 million; social, welfare and environment £2.4 million; cultural £0.2 million and staff volunteering £0.1 million.
o rp o rate resp o n sib ility rev iew
Supply chain management Prudential recognises that its own social, environmental and economic impacts go beyond the products and services it supplies, to include the performance of its suppliers and contractors.
It is our policy to work in partnership with suppliers whose values and standards are aligned with our Group Code of Business Conduct.
Accountability and governance The Board The Board regularly reviews the Group’s CR performance and scrutinises and approves the Group CR report and strategy on an annual basis.
Code of Business Conduct Consideration of environmental, social and community matters is integrated in our Code of Business Conduct. Our code is reviewed by the Board on an annual basis. Refer to page 98 for more information.
G o v ern a n ce 87Prudential plc Annual Report 2012
Michael McLintock is the Chief Executive of M&G, a position he held at the time of M&G’s acquisition by Prudential in 1999, having joined M&G in 1992. Michael has been a Trustee of the Grosvenor Estate since October 2008 and was appointed as a non-executive director of Grosvenor Group Limited in March 2012. He previously served on the board of Close Brothers Group plc as a non-executive director from 2001 to 2008 and has been a member of the Finance Committee of the MCC since October 2005. Age 51.
Keki was a member of the Audit Committee from 2005 to 2007 and was appointed as a member of the Prudential Corporation Asia Audit Committee in July 2012. During 2006, he was appointed as a non-executive director of ICICI Prudential Life Assurance Company Limited and ICICI Prudential Trust Limited.
He is Chairman of the Breach Candy Hospital Trust and a trustee for a number of Indian charities. Keki is the non-executive Chairman of Omnicom India Marketing Advisory Services Private Limited, an unquoted Indian company, and is also a board member of various other unquoted Indian companies. He serves as Chairman of Sony India Pvt Ltd and Senior Advisor to Sony Group in India.
Barry Stowe is the Chief Executive of Prudential Corporation Asia, a position he has held since October 2006. Before joining Prudential, he 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.
Barry is a member of the Board of Directors of the International Insurance Society and was a director of the Life Insurance Marketing Research Association (LIMRA) and the Life Offi ce Management Association (LOMA) from October 2008 to October 2011. He is also a member of the Board of Visitors of Lipscomb University, a member of the Board of Managers of the Hong Kong International School and Chairman of Save the Children (HK) Ltd. Age 55.
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 North America in 1995. In 1996 Swiss Re acquired Mercantile & General Reinsurance Group and Ann became Chief Financial Offi cer of Swiss Re Life & Health, North America. In 1997 she was made Chief Executive Offi cer of Swiss Re Life & Health, Canada. She moved to London as Chief Financial Offi cer of Swiss Re Life & Health Division in 1998 and joined the Property & Casualty Business Group, based out of Zurich, as Chief Financial Offi cer on its establishment in 2001. From 2003 until February 2007, Ann was Chief Financial Offi cer of the Swiss Re Group.
Appointments Board: May 2006 Chairman of the Remuneration Committee: June 2011 Risk Committee: November 2010 Nomination Committee: June 2011
Kai Nargolwala was the non-executive Chairman of Credit Suisse Asia Pacifi c until December 2011, having joined Credit Suisse in 2008 as a member of the Executive Board and CEO of the Asia Pacifi c region.
Philip Remnant is a senior adviser at Credit Suisse, a Deputy Chairman of the Takeover Panel, a non-executive director of UK Financial Investments Limited (since 2009) and Chairman of City of London Investment Trust plc (since 2011). He was previously a Vice Chairman of Credit Suisse First Boston (CSFB) Europe and Head of the UK Investment Banking Department. Philip was seconded to the role of Director General of the Takeover Panel, which administers the UK’s code on takeovers and mergers, 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, which manages the relationships between the UK Government and the businesses in which it is a shareholder. Age 58.
Compliance with Corporate Governance Codes UK Corporate Governance Code and the Corporate Governance Code for Hong Kong In line with its premium and main listings on the London and Hong Kong stock exchanges, Prudential applies the principles of the UK Corporate Governance Code (the ‘UK Code’) and the Corporate Governance Code issued by the Hong Kong Stock Exchange (‘the HK Code’) to its governance framework.
The Board confi rms Prudential is currently in compliance with the UK Code provisions although, during the year, there was a period when the Company was without a Senior Independent Director (in accordance with Code Provision A.4.1) due to the appointment of Paul Manduca as Chairman in July 2012. Following this appointment, the search for a new Senior Independent Director commenced and was successfully concluded with the appointment of Philip Remnant, who joined the Board in January 2013. Throughout the search process, the Company ensured that the non-executive directors were available for shareholders to contact should they have had any concerns and the Company believes that the governance of the Board and the Company as a whole was not adversely affected during the period while a successor was sought.
The principles of the UK and HK Codes have been applied as set out below and in the Directors’ remuneration report, which can be found on pages 113 to 143.
Leadership Role of the Board 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 signifi cant risks and apply appropriate measures to manage and mitigate them. The Board is responsible for setting strategic targets and for ensuring that the Group is suitably resourced to achieve those targets. In doing so, the Board takes account of its responsibilities to the Group’s stakeholders, including the Group’s employees, shareholders, suppliers and the communities in which Prudential operates.
The Board has also delegated authority for the operational management of the Group’s businesses 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 respective business unit and each has established a management board comprising its most senior executives.
In the ordinary course of business, Board and Committee papers are provided to the directors approximately one week in advance of each meeting.
Notes 1 Harvey McGrath did not attend Nomination Committee meetings when it dealt with the appointment of the successor to his Chairmanship, in accordance with the UK Code.
2 Paul Manduca was the Senior Independent Director and attended all scheduled Audit and Remuneration Committee meetings prior to his appointment as Chairman on 2 July 2012.
5 There was one additional Remuneration Committee meeting and two additional Risk Committee meetings during the year. 6 Kai Nargolwala was unable to attend one additional Risk Committee meeting and one additional Remuneration Committee meeting. 7 Lord Turnbull was unable to attend one additional Risk Committee meeting.
The Chairman is responsible for the leadership and governance of the Board, and ensuring that suffi cient time is available for discussion of all agenda items. The Chairman also facilitates the contribution of the non-executive directors and constructive relationships between the non-executive and executive directors by promoting a culture of openness and debate.
Senior Independent Director Paul Manduca was the Senior Independent Director until July 2012 when he succeeded Harvey McGrath as Chairman of the Board. The Nomination Committee concluded its search for a suitable replacement in December 2012, with the appointment of Philip Remnant. Philip’s appointment became effective on 1 January 2013.
The Senior Independent Director is also responsible for leading the performance evaluation of the Chairman.
During the year, the Chairman met with the non-executive directors without the executive directors being present on four occasions.
Table 1 on page 94 details the number of board and committee meetings attended by each director during the year.
Eff ectiveness Composition At the date of this report, the Board comprised the Chairman, seven executive directors and eight independent non-executive directors.
Re-election Directors appointed to the Board since the 2012 Annual General Meeting will stand for election for the fi rst time and, in accordance with the provisions of the UK Code, all other serving directors will offer themselves for re-election at the Annual General Meeting to be held on 16 May 2013. The Board believes that the non-executive directors bring a wide range of business, fi nancial and international experience to the Board and its committees.
The inclusion of women extends to the Board and is an important consideration during searches for new Board members. Prudential embraces the proposition that more women on boards would be advantageous to companies as well as to society at large. The Group remains duty-bound to recruit the best available talent, and although the Board does not endorse quotas, it does commit to having an increasing representation of women in senior positions in the Group and on the Board.
Paul Manduca succeeded Harvey McGrath as Chairman in July 2012 and is considered to have met the independence requirements of the UK Code on appointment. As the ongoing test of independence is not appropriate in relation to the Chairman under the UK Code, and to ensure a consistent approach in how the Chairman is described in all corporate communications, the Chairman has not been asked to provide confi rmation of his independence for the purposes of the Hong Kong Listing Rules for the fi nancial year 2012 and will not be asked to do so in future.
Ongoing professional development was undertaken by all directors during 2012. This included a number of sector-specifi c and business issues as well as legal, accounting and regulatory changes and developments, and covered an update on key changes applicable to companies listed on the Hong Kong Stock Exchange. A number of business unit chief executive offi cers together with relevant senior executives gave presentations to the Board during the course of the year on the challenges and opportunities currently faced by their business unit. In addition, senior managers within certain head offi ce functions presented to the Board on the key issues currently facing their function and directors received briefi ngs on Solvency II. Members of the Audit Committee have the option to attend meetings of the business unit audit committees to aid their understanding of topical matters of interest to them and how they are handled by the Group.
Non-executive directors have also received updates and briefi ngs relevant to their duties as directors of a company listed on the Hong Kong Stock Exchange.
In respect of 2012, the review was carried out internally and was facilitated by the Group Company Secretary. The review was conducted using a combination of face-to-face meetings and questionnaires, and the fi ndings will be presented to the Board in March 2013. Opportunities to improve Board performance will be documented and an action plan for 2013 agreed.
Confl icts of interest Directors have a statutory duty to avoid confl icts of interest with the Company. The Company’s Articles of Association allow the directors to authorise confl icts of interest and the Board has adopted a policy and effective procedures to manage and, where appropriate, approve confl icts or potential confl icts of interest. Under these procedures directors are required to declare all directorships or other appointments to companies which are not part of the Group as well as other situations which could result in confl icts or could give rise to a potential confl ict. The Nomination Committee, or the Board where appropriate, evaluates and approves each such situation individually where applicable.
Directors’ interests Individual directors’ interests are set out on page 133 of the Directors’ remuneration report.
Directors’ indemnities and protections Suitable insurance cover is in place in respect of legal action against directors and senior managers of companies within the Prudential Group. Protection for directors, and certain senior managers, of companies within the Group, against personal fi nancial exposure which may be incurred in their capacity as such, is also provided. These include qualifying third party indemnity provisions (as defi ned by the Companies Act 2006) for the benefi t 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 2012 and remain in force.
Corporate responsibility framework: Provides an overview of the Group-wide philosophy and approach to corporate responsibility; supports the Group’s commercial focus and the increasing challenges faced including changes in stakeholder expectations. A key element is the Group Code of Business Conduct which sets out the ethical standards the Board requires of itself, employees, agents and others working on behalf of the Group, in their dealings with employees, customers, shareholders, suppliers, and competitors, in the wider community and in respect of the environment.
Further details on the procedures for the management of risk and the systems of internal control operated by the Group are given in the section on Risk Governance on pages 105 and 106.
Committees The Board has established Audit, Remuneration, Nomination and Risk Committees as principal standing committees of the Board. Each committee has written terms of reference which are kept under regular review. These committees are key elements of the Group’s corporate governance framework and reports on each committee are included below.
Membership The Audit Committee (the Committee) is comprised of the independent non-executive directors as set out below: AAAAAAAAAAAA Ann Godbehere (Chairman)
The membership is selected to provide a broad range of fi nancial, commercial and other experience relevant to meet the Committee’s objectives.
In performing its duties, the Committee has access to employees and their fi nancial or other relevant expertise across the Group and to the services of the Group-wide Internal Audit Director and the Group Company Secretary. The Committee may also seek external professional advice at the Company’s expense.
The Board has determined that Ann Godbehere, the Committee Chairman, has recent and relevant fi nancial experience in respect of the fi nancial reporting period under review and for the purposes of the UK Code and the Hong Kong Listing Rules. In March 2012, the Board designated Ann Godbehere as its audit committee fi nancial expert for Sarbanes-Oxley Act purposes. This will be reviewed during 2013 in conjunction with the publication of Form 20-F.
By invitation, the Chairman of the Board, the Group Chief Executive, the Chief Financial Offi cer, the Group Chief Risk Offi cer and the Group General Counsel, as well as other senior staff from the Group fi nance, internal audit, risk, compliance and security functions attended the meetings to contribute to the discussions relating to their respective areas of expertise. The lead and other partners of the external auditor also attended the meetings.
A detailed forward agenda has been in operation for a number of years and is reviewed and updated regularly to ensure all matters for which the Committee is responsible are addressed at the appropriate time of year.
The Committee’s responsibilities consist of oversight over fi nancial reporting, the eff ectiveness of the internal control systems and monitoring auditor independence. Its duties include gaining assurance on the control over fi nancial processes and the integrity of the Group’s fi nancial reports, monitoring the performance, objectivity and independence of the external auditor, reviewing the work of the internal auditor and providing oversight to the Group Compliance function.
The Committee Chairman reported to the Board on matters of particular signifi cance after each meeting and the minutes were circulated to all Board members. The terms of reference for the Committee are kept under regular review and are updated where required. A copy of these can be found on the Company’s website.
The Committee recognises the need to meet without the presence of executive management. Such sessions were held with the external auditor in July and October 2012, and with the internal auditor in July 2012. At all other times management and auditors had open access to the Chairman and the Committee.
Business unit audit committees have adopted standard terms of reference across the Group with minor variations to address local requirements or particular requirements of the business. The terms of reference of those committees were reviewed during the year and all include escalation of signifi cant matters to the Committee, recommendations for approval of the business unit internal audit plans and overseeing the adequacy of internal audit resources. During the year the business unit audit committees reviewed their respective internal audit plans, resources and the results of internal audit work, and both external and internal auditors were able to discuss any relevant matters with the Chairman and members of the Committee as required.
The fi ndings were reviewed by the Group-wide Internal Audit business unit audit director in conjunction with the Chairman and discussed by the respective business unit audit committees. In addition, the Chairman of each business unit audit committee has confi rmed that, in their opinion, the current members have the appropriate balance of skills, knowledge and expertise to oversee the relevant business unit.
On completion of the review, Group-wide Internal Audit concluded that the overall arrangements for the business unit audit committees remained appropriate for the nature and purpose of each business unit and that each business unit audit committee continued to meet the responsibilities as set out in their respective terms of reference.
The Committee assesses the effectiveness of the internal audit function by means of regular reviews, some of which are carried out by external advisers, and through ongoing dialogue with the Group-wide Internal Audit Director. A further external effectiveness review of Group-wide Internal Audit was undertaken in quarter four 2012, the fi ndings of which were reported to the Committee in detail in February 2013. The purpose of the review was to ensure that the activities and resources of internal audit continue to be effectively organised to support the oversight responsibilities of the Committee. The review, performed by PriceWaterhouseCoopers, confi rmed that Group-wide Internal Audit continued to remain in general conformance with the Institute of Internal Auditors (IIA) International Standards with no material exceptions and demonstrated a noted enhancement of GwIA processes and practices, since the last review in 2011.
The Committee approved the Group-wide Internal Audit annual audit plan of assurance work to be undertaken during 2013.
Group Compliance The Committee receives regular reports from Group Compliance, who are responsible for assessing the risks posed to the Group as a result of non-compliance with relevant regulations, including those in respect of anti-money laundering and sanctions. Each business unit has its own compliance function, and the role of Group Compliance is to assess the effectiveness of these functions, as well as to provide oversight and support in the identifi cation, mitigation and reporting of regulatory risks arising from both current business activities and from changes in the regulatory environment.
During 2012, the Committee reviewed and approved the target operating model, as well as the plan of work to be undertaken by Group Compliance during 2013.
Following its review of the external auditor’s effectiveness and independence, the Committee has recommended to the Board that KPMG Audit Plc be re-appointed as auditor of the Company and a resolution for the re-appointment of KPMG Audit Plc as auditor of the Company will be put to a shareholder vote at the Annual General Meeting on 16 May 2013.
In performing its duties, the Committee has access to the services of the Group Company Secretary. The Committee may also seek external professional advice at the Company’s expense.
Full biographical details of the members of the Committee are set out on pages 88 to 92.
Meetings The Committee meets at least twice a year to consider the Board composition and membership of the principal Committees and to consider the suitability of all directors standing for re-election at the AGM. In addition, the Committee meets to consider candidates for appointment to the Board. The Group Chief Executive is closely involved in the work of the Committee and is invited to attend and contribute to meetings. By invitation, the Group HR Director also attends the meetings.
The Committee met on nine occasions during 2012 and details of Committee members’ attendance is set out on page 94.
The focus of the Committee during the year was the search for a new Chairman and a replacement for the role of the Senior Independent Director. Harvey McGrath, the retiring Chairman, was not involved in the selection or appointment of the new Chairman, a process which was led by Lord Turnbull. Once this appointment had been made, the Committee, led by Paul Manduca, initiated the process for fi nding a Senior Independent Director. The Committee used the services of Spencer Stuart, Korn Ferry International and Ridgeway Partners, executive search agencies to facilitate both of these searches. None of these fi rms undertook any other signifi cant projects for the Group.
The effectiveness of the Committee was reviewed as part of the internally facilitated review of the Board and its committees. The fi ndings will be discussed by the Board in March 2013.
The Chairman reported to the Board on matters of particular signifi cance after each meeting. The terms of reference for the Committee are kept under regular review and are updated where required. A copy of these can be found on the Group’s website.
The Committee also reviews confl icts of interest or potential confl icts of interest raised by directors between Board meetings and for prospective Board members. In cases where there might be an actual or potential confl ict of interest the Committee has powers to authorise any such actual or potential confl ict situation on behalf of the Board, imposing any terms and conditions it deems appropriate, or to make recommendations to the Board as to whether the confl ict or potential confl ict should be authorised and if any specifi c terms should be included in the authorisation.
Membership The Risk Committee (the Committee) is comprised of the independent non-executive directors as set out below: AAAAAAAAAAAA Sir Howard Davies (Chairman)
The Chairman of the Board, the Group Chief Executive, the Chief Financial Offi cer, the Group Chief Risk Offi cer, Group-wide Internal Audit Director, the Group General Counsel and the Group Risk Directors are invited to attend the meetings.
During 2012, the Committee held fi ve scheduled meetings and details of Committee members’ attendance is set out on page 94.
The Committee undertook the identifi cation and comprehensive analysis of the Group’s key risks and approved the enhancements to the management information provided to the Group Risk Committees and the Board. The Committee further received presentations from certain of the business units on the particular risks inherent in those businesses, as well as the systems and controls in place to monitor and manage those risks. The Committee approved and subsequently reviewed the process for approving large credit risk exposures; it also approved a framework which provides separate limits for global counterparties in respect of counterparty risk exposures. The Committee also reviewed the Group-wide risk appetite framework, including risk appetite statements and limits by risk type. The Committee worked closely with the Audit Committee to ensure any risk assurance relevant to fi nancial reporting was referred to the Audit Committee and with the Remuneration Committee on providing input in respect of risk adjustment measures for the executive remuneration policy. In addition, the role of the Committee includes responding to the needs of the business and carrying out reviews of specifi c areas of risk as they arise. The Committee worked closely with management and the Group-wide Internal Audit Director during the year and assisted the Board by providing oversight over requests for specifi c risk assessments.
The Risk Committee continued its work during 2012 with the specifi c objectives of furthering the in depth understanding of the risks facing the business and enhancing the risk reporting framework with a view to ensuring that the various stakeholders received both timely and suitable information around risk exposures.
The principal responsibilities of the Committee are to: AAAAAAAAAAAAA review the Group risk, capital and liquidity management framework, as well as the Group’s risk appetite, its risk policies and standards, including the parameters used and methodologies and processes adopted for identifying and assessing risks; AAAAAAAAAAAAA review the material and emerging risk exposures of the Group, including market, credit, insurance, operational, liquidity and economic and regulatory capital risks as well as regulatory and compliance matters; AAAAAAAAAAAAA oversee the Group’s processes and policies for determining risk tolerance and reviewing management’s measurement and eff ectiveness of the Group’s risk tolerance levels; AAAAAAAAAAAAA receive and review Group-wide Internal Audit reports on the risk management function; AAAAAAAAAAAAA assist the Board in reviewing the risks inherent in the business plans; and
AAAAAAAAAAAAA provide qualitative and quantitative advice to the Remuneration Committee on risk weightings applied to performance objectives incorporated in executive remuneration and evaluate whether the remuneration approach for senior executives was positioned within the Group’s overall risk appetite framework.
The Committee also continued to build synergies with the Audit Committee, to ensure that areas of overlap were managed appropriately.
Prudential’s risk governance framework requires that all of the Group’s businesses and functions establish processes for identifying, evaluating and managing the key risks faced by the Group. The framework is based on the concept of ‘three lines of defence’ comprising risk taking and management, risk control and oversight and independent assurance.
Primary responsibility for strategy, performance management and risk control lies with the Board, which has established the Risk Committee to assist in providing leadership, direction and oversight in respect of the Group’s signifi cant risks, and with the Group Chief Executive and the chief executives of each of the Group’s business units.
The BSCMC is comprised of functional specialists and supports the Chief Financial Offi cer in the management of the Group’s balance sheet, as well as providing oversight to the activities of Prudential Capital, which undertakes the treasury function for the Group.
Risk oversight Risk control and oversight constitutes the second line of defence, and is achieved through the operation of a number of Group-level risk committees, chaired by either the Chief Financial Offi cer or the Group Chief Risk Offi cer, which monitor and keep risk exposures under regular review. These committees are as follows: Group Executive Risk Committee: the committee meets monthly to oversee 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: the committee reports directly to the Group Executive Risk Committee and meets monthly to review the Group’s investment and counterparty credit risk positions; Group Operational Risk Committee: the committee meets quarterly to oversee the Group’s operational risk exposures. The committee reports directly to the Group Executive Risk Committee; Solvency II Technical Oversight Committee: the committee normally meets ten times per year to provide ongoing technical oversight and advice to the Board and executive in respect of their duties with regard to the Group’s Internal Model. The committee reports to the Group Executive Risk Committee; Technical Actuarial Committee: the committee reports to the Group Executive Risk Committee and usually meets monthly to set the methodology for valuing Prudential’s assets, liabilities and capital requirements under Solvency II and the Group’s internal economic capital basis; and
The Group-level risk committees are supported by the Group Chief Risk Offi cer, 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 verifi cation of compliance with regulatory standards and informs the Board, as well as the Group’s 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.
Independent assurance The third line of defence comprises the Group-wide Internal Audit function, which provides independent and objective assurance to the Board, GEC, Audit and Risk Committees on the overall effectiveness of risk management, control and governance processes across the Group.
The Group’s capital position and overall position against risk limits are reviewed regularly by the Group Executive Risk Committee, the Group Risk Committee and the Board. Key economic capital metrics, as well as risk-adjusted profi tability information, are included in the business plans which are reviewed by the Group Executive Risk Committee, the Group Risk Committee and the Board.
Routine internal reporting by the business units vary according to the nature of the business, with each business unit responsible for ensuring that its risk reporting framework meets both the needs of the respective business unit and the standards set by the Group Risk function. Clear escalation criteria and processes are in place for the timely reporting of risks and incidents by business units to the various Group-level risk committees and, where appropriate, the Board.
Remuneration The report on the responsibilities and activities of the Remuneration Committee can be found in the Directors’ remuneration report, which is set out on pages 113 to 143.
The Company has continued its practice of calling a poll on all resolutions and the voting results, including all proxies lodged prior to the meeting, are displayed at the meeting and published on the Company’s website. This practice provides shareholders present with suffi cient information regarding the level of support and opposition to each resolution and ensures all votes cast either at the meeting or through proxies are included in the result.
Company constitution The Company is governed by the Companies Act 2006, other applicable legislation and regulation as well as by provisions of its Articles of Association. The Memorandum and Articles of Association are available on the Group’s website.
Any change to the Articles must be approved by special resolution of the shareholders in accordance with the provisions of the Companies Act 2006. There were no changes to the Company’s constitutional documents during 2012.
The Company has maintained a suffi ciency of public fl oat throughout the reporting period as required by the Hong Kong Listing Rules.
Rights to dividends under the various schemes are set out in note I4 on page 308.
Certain restrictions may be imposed from time to time by applicable laws and regulations (for example, insider trading laws) and pursuant to the Listing Rules of both the Financial Services Authority, and any successor organisation, and the Hong Kong Stock Exchange, as well as Prudential’s own share dealing rules, whereby directors and certain employees of the Company require the approval of the Company to deal in the Company’s ordinary shares.
Signifi cant shareholdings The Company had received notifi cation of interests in the shares of Prudential plc as at 31 December 2012 and in accordance with Rule 5.1.2 R of the Disclosure and Transparency Rules of the Financial Services Authority, from Legal & General Group plc of 3.99 per cent, from Norges Bank of an interest in 4.03 per cent, from BlackRock, Inc. of an interest in 5.08 per cent and from Capital Group International Inc., of an interest in 10.39 per cent. No further notifi cations have been received between the end of 2012 and the date of this report.
In accordance with the terms of a waiver granted by the Hong Kong Stock Exchange, the Company confi rms that it complies with the applicable law and regulation in the UK in relation to the holding of shares in treasury and with the conditions of the waiver in connection with the purchase of own shares and any treasury shares it may hold.
Authority to purchase own shares The directors also require authority from shareholders in relation to the purchase of own shares by the Company. The Company seeks authority by special resolution on an annual basis for the buyback of its own shares in accordance with the relevant provisions of the Companies Act 2006 and other related guidance. The Company has not made use of that authority since it was last granted at its Annual General Meeting in 2012. This existing authority is due to expire at the end of this year’s Annual General Meeting. A special resolution to approve the renewal of this authority will be put to shareholders at the Annual General Meeting on 16 May 2013.
Model code for securities transactions by directors The Company confi rms that it has adopted a code of conduct regarding securities transactions by directors on terms no less exacting than required by Appendix 10 to the Hong Kong Listing Rules, and that the directors of the Company have complied with this code of conduct throughout the period.
In particular, in relation to the provisions of Section 302 of that Act, which covers disclosure controls and procedures, a Disclosure Committee has been established reporting to the Group Chief Executive, chaired by the Chief Financial Offi cer and comprising members of senior management. The objectives of this Committee are to: AAAAAAAAAAAAA Assist the Group Chief Executive and the Chief Financial Offi cer in designing, implementing and periodically evaluating the Company’s disclosure controls and procedures; AAAAAAAAAAAAA Monitor compliance with the Company’s disclosure controls and procedures; AAAAAAAAAAAAA Review and provide advice to the Group Chief Executive and the Chief Financial Offi cer with regard to the scope and content of all public disclosures made by the Company which are of material signifi cance to the market or investors; and
AAAAAAAAAAAAA Review and consider, and where applicable follow up on, matters raised by other components of the disclosure process. These may include, to the extent they are relevant to the disclosure process, any matters to be raised with the Audit Committee, the internal auditors or the external auditor on the Company’s internal controls.
The provisions of Section 404 of the Act require the Company’s management to report on the effectiveness of internal controls over fi nancial reporting in its annual report on Form 20-F, which is fi led with the US Securities and Exchange Commission. To comply with this requirement to report on the effectiveness of internal control, the Group has documented and tested its internal controls over fi nancial reporting in the format required by the Act. The annual assessment and related report from the external auditor will be included in the Group’s annual report on Form 20-F.
In addition, the Disclosure Committee evaluates whether or not a particular matter requires disclosure to the market, taking into account relevant regulations and reviews all forward looking statements.
Financial reporting The directors have a duty to report to shareholders on the performance and fi nancial position of the Group and are responsible for preparing the fi nancial statements on pages 147 to 323 and the supplementary information on pages 326 to 362. It is the responsibility of the auditor to form independent opinions, based on its audit of the fi nancial statements and its audit of the EEV basis supplementary information; and to report its opinions to the Company’s shareholders and to the Company. Its opinions are given on pages 325 and 364.
Company law requires the directors to prepare fi nancial statements for each fi nancial year which give a true and fair view of the state of affairs of the Company and of the Group. The criteria applied in the preparation of the fi nancial statements are set out in the statement of directors’ responsibilities on page 324 and page 363.
The directors are further required to confi rm that the directors’ report includes a fair review of the development and performance of the business, with a description of the principal risks and uncertainties. Such confi rmation is included in the statement of directors’ responsibilities on page 324 and page 363.
The Chief Financial Offi cer’s overview provides, on pages 68 to 78, a description of the Group’s risk and capital management, which includes a description of the Group’s liquidity position. The Group has considerable internal and external fi nancial resources and the directors believe that the Group is well placed to manage its business risks successfully.
The directors who held offi ce at the date of approval of this directors’ report confi rm 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 confi rmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006.
Essential contracts or arrangements There are a number of signifi cant relationships with third parties, which have value to the business. No single relationship, however, is considered to be essential to the Group as a whole.
For the year ended 31 December 2012, none of the directors of the Company, their associates or any shareholders of the Company (which have, to the knowledge of the directors of the Company, owned more than 5 per cent of the Company’s issued share capital) had any interest in the Group’s major customers.
111Prudential plc Annual Report 2012Additional disclosures/Index to principal directors’ report disclosures A
Information required to be disclosed in the directors’ report may be found in the following sections: Information Section in Annual Report Page number(s)
Post balance sheet events Note I11 of the Notes on the Group fi nancial statements and Additional disclosures
Future developments of the business of the Company Group Chief Executive’s report 10
Creditors – policy on payment and practice Corporate responsibility review 85
Rules governing changes to the articles of association Corporate governance report 107
Signifi cant agreements impacted by a change of control Additional disclosures 110
Agreements for compensation for loss of offi ce or employment on takeover
In addition, the risk factors set out on pages 386 to 391 and the additional unaudited fi nancial information set out on pages 366 to 384, are incorporated by reference into this directors’ report.
As I indicated in my letter last year, during 2012 the Committee reviewed Prudential’s executive director remuneration architecture for 2013 and beyond. These are the fi rst major changes to the architecture since current arrangements were implemented in 2006.
AAAAAAAAAAAA Reward executives for delivering our business plans and generating sustainable growth and returns for shareholders.
The proposed changes Where aspects of the previous reward architecture remain appropriate and eff ective, we have retained them. For example, we have not proposed changes to executives’ maximum incentive opportunities as a percentage of salary. We have made revisions where there was scope for better alignment with our aims. Some of the key changes are: AAAAAAAAAAAA A more consistent approach will apply to the deferral of annual bonuses across the senior executive team; AAAAAAAAAAAA Enhanced clawback provisions will apply to future deferred bonus awards; AAAAAAAAAAAA Shareholding guidelines for executive directors will be increased; and
AAAAAAAAAAAA A new long-term incentive plan is proposed for shareholder approval. We have designed this plan to reward the achievement of IFRS profi t targets and the delivery of superior shareholder returns.
I would like to take this opportunity to thank shareholders for their feedback, which we have taken into account when developing these proposals.
This outstanding growth was achieved while operating within the Group’s risk appetite, risk framework, and maintaining appropriate levels of capital. The 2012 bonuses that we awarded to executive directors refl ect these achievements.
The 2010 Group Performance Share Plan awards, which have a performance condition of relative total shareholder return, will therefore be released in full.
Clear information provided in this report The UK Government continues to develop its proposals aimed at increasing the information available to shareholders in remuneration reports. This report refl ects some aspects of the draft requirements. Once the fi nal requirements are clear, we will incorporate them into our report for 2013.
I look forward to receiving your support for the directors’ remuneration report at our AGM.
The directors’ remuneration report has been prepared by the Remuneration Committee (the ‘Committee’) and has been approved by the Board. Shareholders will be given the opportunity to approve the report at the Annual General Meeting on 16 May 2013.
The Remuneration Committee The Committee is responsible for: AAAAAAAAAAAA Determining the remuneration of the Chairman and approving the remuneration of the executive directors of the Company; and
AAAAAAAAAAAA The oversight of the remuneration of a defi ned leadership population and for individuals with the opportunity to earn over £1 million per annum.
Each business unit also has its own remuneration committee, with similar terms of reference, to ensure effective remuneration governance in all our businesses.
Remuneration strategy and principles The aims of Prudential’s remuneration structure are: AAAAAAAAAAAA To attract and retain the high calibre executives required to lead and develop the Group; and
AAAAAAAAAAAA Competitive, to engage executives who are in demand in the global talent market and, if required, support hiring the best external talent.
The remuneration strategy is underpinned by a number of remuneration principles: AAAAAAAAAAAAA A substantial portion of total remuneration is delivered through performance-related reward, with the highest levels of reward only being paid for the highest levels of achievement; AAAAAAAAAAAAA A signifi cant element of performance-related reward is deferred and provided in the form of shares; AAAAAAAAAAAAA The total remuneration package for each executive director is set with reference to the relevant employment market(s); AAAAAAAAAAAAA The performance of executive directors responsible for business units is measured at both a business unit and Group level; AAAAAAAAAAAAA Performance measures include absolute fi nancial measures and a relative measure of Total Shareholder Return, as appropriate; AAAAAAAAAAAAA Reward structures are designed to deliver fair and equitable remuneration for all employees; and
The remuneration strategy and principles outlined in this section are cascaded to other employees within the Company. Employees receive remuneration which is appropriate given their skills and experience, is competitive within the relevant market(s) and which rewards strong performance.
Salary and benefi ts No changes were made to the policy on salary and benefi ts.
Bonuses reward annual performance using a range of measures linked to the annual business plan.
Share ownership guidelines Share ownership guidelines have increased to: 350 per cent of salary for the Group Chief Executive; and 200 per cent of salary for other executive directors.
The President and Chief Executive Offi cer of Jackson continues to share in the JNL bonus pool in addition to receiving awards under the AIP.
Allows the deferred element of the bonus to be forfeited in specifi c circumstances, including a material, adverse restatement of the fi nancial results or regulatory breach.
The use of a combination of Group and business unit metrics for business unit Chief Executives continues.
The Chief Executive of M&G will continue to participate in the M&G Executive LTIP.
The Prudential Long Term Incentive Plan provides reward for achievement of IFRS operating profi t as well as superior relative TSR.
Subject to shareholder approval, 2013 awards will be made under this plan.
The awards made to the Chief Executive of M&G will be calculated as a percentage of salary. He will receive awards with a face value of 150 per cent of salary under the Prudential Long Term Incentive Plan and 300 per cent of salary under the M&G Executive LTIP.
Assessing performance against peers’ ranked performance (rather than an index) is more straightforward.
The requirement for the Group Chief Executive has increased from 200 per cent to 350 per cent of salary.
The requirement for all other executive directors will be increased to 200 per cent of salary. Most executive directors were previously required to hold Prudential plc shares with a value of 100 per cent of salary.
Executives will have fi ve years from the implementation of this policy (or the date of their appointment, if later) to build the additional level of required ownership.
Executive directors receive bonus awards under the Annual Incentive Plan (the AIP). The 2012 AIP: AAAAAAAAAAAAA Strongly aligns annual reward with the KPIs that underpin the Group’s business strategy; AAAAAAAAAAAAA Incentivises the executive team to outperform stretching annual targets; and
IFRS targets will be set at a Group or business unit level, dependent on role.
The target for Group IFRS operating profi t will be disclosed when the performance period ends.
TSR will continue to be measured on a local currency basis.
TSR will be measured relative to a revised peer group to ensure the continued relevance of this measure. In order to refl ect the international scope of the Group’s business operations, the peer group has been extended to encompass the global insurance peers with which we compete for customers and capital. Our revised peer group is outlined below.
Revised TSR peer group for awards made from 2013 onwards: Aegon, Afl ac*, 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* Those peers marked with an asterisk have been added to the peer group for 2013 onwards.
For any Prudential Long Term Incentive Plan award to vest, the Committee must be satisfi ed that the quality of the Company’s underlying fi nancial performance justifi es the level of reward delivered at the end of the performance period. To ensure close alignment with our shareholders’ long-term interests, participants receive the value of reinvested dividends over the performance period for those shares which ultimately vest. If performance measures are not achieved in full, the unvested portion of any award lapses and performance cannot be retested.
Paying salaries at an appropriate level ensures that Prudential continues to be competitive when recruiting and retaining key executives.
The Committee reviews salaries annually. Changes in base salaries are generally eff ective from 1 January.
The Group Chief Executive and Chief Executive of M&G are required to build up and hold shares equal to 200 per cent of base salary.
Other executive directors are required to build up and hold shares equal to 100 per cent of base salary.
Pension To provide executives with an opportunity to save for an income in retirement.
The pension provision for executive directors depends on the arrangements in place for other employees in their business unit when they joined the Group.
Executives who joined aft er June 2003 have the option to: Receive payments into a defi ned contribution scheme; or
Executives who joined the Group before June 2003 were entitled to join the defi ned benefi t plans available at that time. At the end of 2012, no executive director was an active member of a Group defi ned benefi t scheme.
The maximum annual bonus opportunity available to the majority of executive directors is between 160 per cent and 200 per cent of salary.
Based on relevant market practice, the Chief Executive of M&G and the President & CEO, Jackson have bonus opportunities which are not capped as a percentage of their salaries. The Chief Executive of M&G has an overriding cap on total remuneration of 3 per cent of M&G’s IFRS profi t.
Details of executive directors’ 2012 bonus opportunities are provided on page 125.
The maximum combined award under the GPSP and BUPP is 550 per cent of salary, although the actual awards made in 2012 were below this level.
The performance measures for the BUPPs and the M&G Executive LTIP vary according to the business plan and strategy of the business unit. These are outlined on pages 127 to 128.
As part of the review of remuneration architecture, the Remuneration Committee has proposed a new long-term incentive (the Prudential Long Term Incentive Plan) for approval at the 2013 AGM.
Subject to shareholder approval, the fi rst awards will be made under this plan in May 2013.
The revised guidelines are: 350 per cent of salary for the Group Chief Executive; and 200 per cent of salary for all other executive directors.
Full details of the revised guidelines are outlined on page 118.
Full details of the amounts paid by the Company with regards to pension provision are outlined in the remuneration table on page 134 and the pensions table on page 130.
The operation of the Remuneration Committee in 2012 The members of the Committee during 2012 are listed below. All are independent non-executive directors: AAAAAAAAAAAAA Lord Turnbull KCB CVO (Chairman)
March 2012 Approve 2012 long-term incentive awards and performance measures; and
Confi rm 2011 annual bonuses and the vesting of long-term incentive awards with a performance period ending on 31 December 2011 in light of audited fi nancial results.
June 2012 Review the remuneration of the Group Leadership Team, senior risk staff and of employees with a remuneration opportunity over £1 million per annum; Note the dilution levels resulting from the Company’s share plans; and
September 2012 Monitor performance against long-term incentive targets, based on the half year results; Review the Committee’s terms of reference; Approve proposed changes to the remuneration architecture for shareholder consultation; and
In January 2012, the Remuneration Committee met to conclude issues arising from the December 2011 Committee meeting. In addition, the Committee met for a working session in September 2012 to discuss changes to the remuneration architecture to be implemented in 2013.
The operation of the reward policy in 2012 In 2012, executive directors were rewarded on the basis set out below: Long-term incentives (2012 award as a percentage of salary)
Rob Devey Chief Executive, UK & Europe £600,000 160% 112.5% 112.5% 225.0% John Foley Group Chief Risk Offi cer £610,000 160% 250.0% – 250.0% Michael McLintock Chief Executive, M&G £360,000 note 1 100.0% 344.1% 444.1% Nic Nicandrou Chief Financial Offi cer £630,000 175% 225.0% – 225.0% Barry Stowe Chief Executive, PCA HK$8,000,000 160% 112.5% 112.5% 225.0% Tidjane Thiam Group Chief Executive £1,000,000 200% 400.0% – 400.0% Mike Wells President & CEO, JNL US$1,050,000 note 2 230.0% 230.0% 460.0%
2 Mike Wells’ maximum annual bonus fi gure is comprised of 160 per cent of salary and a 10 per cent share of the Jackson senior management bonus pool based on the target performance of Jackson.
3 All long-term incentives have a three-year performance period. For the awards detailed above the performance period will end on 31 December 2014. 4 Where awards are made in shares, the fi nal number of shares awarded is calculated in line with the respective plan rules. Details on the shares granted under these plans are outlined in the Directors’ outstanding long-term incentive awards tables in the Supplementary information section.
The package for 2012 offered the following proportions of fi xed and variable short- and long-term reward to executive directors (average of executive directors): Good performance 26% Base salary 30% Cash bonus for 2012, paid in 2013 18% Deferred bonus for 2012, vesting in 2016 26% 2012 LTIP Award, vesting in 2015
Superior performance 15% Base salary 21% Cash bonus for 2012, paid in 2013 14% Deferred bonus for 2012, vesting in 2016 50% 2012 LTIP Award, vesting in 2015
As illustrated above, ‘Good’ performance results in the payment of 2012 annual bonus at the target level and 2012 long-term incentive awards vesting at the threshold level. ‘Superior’ performance generates maximum payment of 2012 annual bonuses and 2012 long-term incentive awards vest in full.
The single fi gure Although the UK Government’s proposed reporting requirements have not been fi nalised, we have anticipated the requirement to present a single fi gure for executives’ total remuneration. This is included in the main remuneration table for 2012 on page 134. The single fi gure has been calculated including the following elements: AAAAAAAAAAAAA The salary and the cost of providing benefi ts in 2012; AAAAAAAAAAAAA The bonus awarded for performance in 2012 (including the value at award of the deferred element which will be released in 2016); AAAAAAAAAAAAA The value of long-term incentive awards with a performance period ending in 2012 which will be released in 2013, using the average share price over the period 1 October 2012 to 31 December 2012; and
AAAAAAAAAAAAA The value of any salary supplement for pension, employer contributions to a defi ned contribution pension plan or the increase in transfer value of fi nal salary pension benefi ts in 2012 (less contributions made by the director during 2012).
Mike Wells President & CEO, JNL Towers Watson US Financial Services Survey
Rob Devey £600,000 £618,000 John Foley £610,000 £628,300 Michael McLintock £360,000 £370,800 Nic Nicandrou £630,000 £648,900 Barry Stowe HK$8,000,000 HK$8,240,000 Tidjane Thiam £1,000,000 £1,030,000 Mike Wells US$1,050,000 US$1,081,500
A portion 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 specifi c goals related to their functional and/or business unit role (for instance, project measures relating to the implementation of Solvency II
requirements). In addition, all employees are required to comply with the regulatory, governance and risk management practices and policies as these relate to their role and business area. Specifi cally, all business units must act within the Group’s risk appetite and framework, and all individuals must act within the Group’s Code of Business Conduct.
A proportion of each executive director’s annual bonus is not paid in cash and must be deferred. This portion is deferred for three years in the form of the Company’s shares. This deferral aligns the interests of our executive directors with our shareholders and helps to ensure a focus on the sustainable success of the Company.
Notes 1 Michael McLintock’s annual bonus and long-term incentive opportunities in 2012 were based on M&G’s performance both in absolute terms and relative to its peers. In line with practice in the asset management sector, there is no specifi ed maximum incentive award. Michael’s total remuneration (including long-term incentives) is subject to an overriding cap which requires that his total remuneration must not be greater than 3 per cent of M&G’s annual IFRS profi t.
2 Mike Wells’ annual bonus fi gure comprises an AIP opportunity of 160 per cent of salary and a 10 per cent share of the Jackson senior management bonus pool. The fi gure above is based on the target performance of Jackson.
Note 1 In addition to the AIP, Mike Wells also received 10 per cent of the JNL senior management bonus pool. His total 2012 bonus, including his AIP and JNL senior management award, is US$4,599,500.
Peer companies used within the Index for all outstanding GPSP awards Aegon, Allianz, Aviva, Axa, Generali, ING, Legal & General, Manulife, Old Mutual and Standard Life
The peer group’s TSR index was 100 at the start of the 2010 to 2012 performance period and was 111.8 at the end of the period (as illustrated opposite). In order for the 2010 GPSP awards to vest in full, Prudential’s TSR index over the period had to outperform the peer index by 20 per cent, ie increase from 100 to at least 134.2 (111.8 x 120 per cent). The TSR performance achieved by Prudential of 156.4 per cent equals an outperformance of the peer index of 139.9 per cent.
The Committee believes that the GPSP performance condition is a stretching requirement that requires exceptional performance, relative to other international insurance companies, for awards to be released in full.
Jackson BUPP The President and CEO, JNL receives an award under the Jackson BUPP. Vesting of awards made under this plan is dependent on Shareholder Capital Value (SCV) growth over the performance period. The SCV growth required is outlined in the table below. Vesting occurs between these performance levels on a straight-line basis.
On 31 December 2012, the performance period for the 2010 UK BUPP (which began on 1 January 2010) came to an end. As detailed above, Prudential’s TSR over this period was equal to 139.9 per cent of the peer index. The Committee, having satisfi ed itself as to the quality of the business unit’s underlying fi nancial performance, confi rmed vesting of 100 per cent of Rob Devey’s 2010 to 2012 UK BUPP award (for reference 100 per cent of Rob Devey’s 2009 to 2011 UK BUPP award vested).
For any BUPP award to vest, the Committee must be satisfi ed that the quality of underlying fi nancial performance of the relevant business unit justifi es the level of reward delivered at the end of the performance period. To ensure close alignment with our shareholders’ long-term interests, participants receive the value of reinvested dividends over the performance period for those shares which ultimately vest. If the performance conditions are not achieved in full, the unvested portion of any award lapses and cannot be retested.
AAAAAAAAAAAAA Between these points, the value of phantom shares will be reduced on a straight-line basis from no reduction to the complete elimination of the value of the award.
Investment performance The value of phantom shares vesting will be adjusted by an investment performance measure as follows: AAAAAAAAAAAAA Where the investment performance of M&G’s funds is in the top two quartiles during the three-year performance period, the value of phantom shares vesting will be enhanced. The value of phantom shares may be doubled if performance is in the top quartile; AAAAAAAAAAAAA Investment performance in the third quartile will not change the value of phantom shares vesting; and
AAAAAAAAAAAAA Investment performance in the bottom quartile will result in awards being forfeited, irrespective of any profi t growth.
On 31 December 2012, the performance period for the 2010 award under the M&G Executive Long-Term Incentive Plan (which began on 1 January 2010) came to an end. M&G’s profi t at the end of the performance period was 204 per cent of that at the start and M&G’s investment performance was in the second quartile. The Committee, having satisfi ed itself about the quality of M&G’s underlying fi nancial performance, confi rmed vesting of Michael McLintock’s 2010 award with a value of £2.65 per share. This will result in a payment of £2,616,024 to Michael McLintock in 2013 (for reference, the 2009 to 2011 award vested with a value of £2.96 per share which resulted in a payment of £5,417,359 to Michael McLintock during 2012). Based on 2011 performance, an award of 952,960 phantom shares with an expected value of £1,238,849 was made to Michael McLintock in 2012.
irecto rs’ rem u n eratio n rep o rt 12 im p lem en tatio n o f rem u n eratio n p o licy 2012 implementation of remuneration policy
Share ownership guidelines As a condition of serving, all directors are required to have benefi cial ownership of a minimum of 2,500 ordinary shares in the Company. This interest in shares must be acquired within 12 months of appointment to the Board if the director does not have such an interest upon appointment.
Shareholding at 31 December 2012 as a percentage of base salary note 2013 Shareholding guideline as a percentage of base salary
Other benefi ts may be offered to executives, dependent on: AAAAAAAAAAAAA Local market practice; AAAAAAAAAAAAA The benefi ts offered to other employees within the business unit; and
UK-based executive directors are eligible to participate in the HM Revenue and 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.
Participants elect to enter into savings contracts of up to £250 per month for a period of three or fi ve 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.
UK-based executive directors are also eligible to participate in the Company’s HMRC approved Share Incentive Plan (SIP). This allows all UK-based employees to purchase Prudential plc shares up to a value of £125 per month from their gross salary (partnership shares). For every four partnership shares bought, an additional matching share is awarded which is purchased by Prudential on the open market. Dividend shares accumulate while the employee participates in the plan. Partnership shares may be withdrawn from the scheme at any time. If the employee withdraws from the plan within fi ve years, matching shares are forfeited.
Pension benefi ts Michael McLintock elected to become a deferred member of a contributory defi ned benefi t scheme (described overleaf) on 5 April 2012. Michael McLintock now receives a salary supplement of 25 per cent of salary. John Foley elects to receive a combination of contributions into the money purchase scheme and a cash supplement with a total value of 25 per cent of salary. All other executive directors based in the UK have chosen to receive their pension benefi ts in the form of a cash supplement of 25 per cent of salary throughout 2012. These executives are provided with life assurance cover of up to four times salary plus a dependants’ pension.
Barry Stowe receives a cash supplement of 25 per cent of salary and a payment to the Hong Kong Mandatory Provident Fund. He is provided with life assurance cover of up to four times salary. Mike Wells participates in Jackson’s Defined Contribution Retirement Plan, a qualified 401(k) retirement plan, on the same basis as all other US-based employees. The Company provides matching contributions of 6 per cent of base salary (Mike Wells’ salary for pension purposes is limited to US$250,000). He also participates in the profit sharing element of the plan which provides eligible participants with an annual profit sharing contribution, depending on the financial results of Jackson for the plan year, to a maximum of an additional 6 per cent of pensionable salary. An annual profit sharing contribution equivalent to 6 per cent of pensionable salary was made in 2012 (in 2011, the profit share contribution was 5 per cent of pensionable salary). Mike Wells is provided with life assurance cover of two times salary.
Those executives who joined the Group before June 2003 were entitled to maintain their membership of the defined benefit plans available at that time. However, at the end of 2012, no executive director was an active member of a Group defined benefit scheme. Until 5 April 2012, Michael McLintock participated in a contributory defined benefit scheme that provides a target pension of two thirds of final pensionable earnings on retirement at age 60 for an employee with 30 years or more potential service, his contribution was 4 per cent of base salary. Michael McLintock participated on the same basis as other employees who joined M&G at the same date. Benefits under the plan are subject to a notional scheme earnings cap (set at £129,600 for the 2011/2012 tax year) which replicates the HMRC earnings cap in force before A-Day (6 April 2006). Michael McLintock was also entitled to supplements based on his salary above the notional earnings cap.
Details of directors’ pension entitlements under HMRC approved defined benefit schemes and supplements in the form of contributions to pension arrangements paid by the Company are set out in the following table: Additional pension earned during year ended 31 December 2012
Allowing for inflation on pension earned to 31 December note (2)
Rob Devey 44 – John Foley 56 50 Michael McLintock (note 5) 51 20 56 1 (1) 1,323 1,102 218 – Nic Nicandrou 47 – Barry Stowe 55 2 Tidjane Thiam 50 – Mike Wells 52 19
No enhancements to retirement benefits were paid to or receivable by directors or former directors other than the discretionary pension increases awarded to all pensioners which have been made during the year.
Executive directors’ service contracts The normal notice of termination that the Company is required to give executive directors is 12 months. Accordingly, in normal circumstances, a director whose contract is terminated would be entitled to one year’s salary and benefi ts in respect of their notice period. Additionally, outstanding awards under annual and long-term incentive plans may vest depending on the circumstances and according to the rules of the plans. When considering the termination of any service contract, the
Remuneration Committee will have regard to the specifi c circumstances of each case, including the director’s obligation to mitigate his loss. Payments are phased over the notice period.
Executive directors’ service contracts provide details of the broad types of remuneration to which they are entitled, and about the kinds of plans in which they may be invited to participate. The service contracts offer no certainty as to the value of performance-related reward and confi rms that any variable payment will be at the discretion of the Company.
Policy on external appointments Subject to the Group Chief Executive’s or the Chairman’s approval, executive directors are able to accept external appointments as non-executive directors of other organisations. Any fees paid may be retained by the executive director. During 2012, Michael McLintock received £47,500 as a trustee of another organisation (for reference, Michael McLintock received £45,000 for this role in 2011). Other directors served on the boards of educational, development, charitable and cultural organisations without receiving a fee for such services.
Keki Dadiseth (note 1) 1 April 2005 AGM 2005 6 months AGM 2013 Howard Davies 15 October 2010 AGM 2011 6 months AGM 2014 Michael Garrett (note 1) 1 September 2004 AGM 2005 6 months AGM 2013 Ann Godbehere 2 August 2007 AGM 2008 6 months AGM 2014 Alistair Johnston 1 January 2012 AGM 2012 6 months AGM 2015 Paul Manduca (note 2) 15 October 2010 AGM 2011 6 months AGM 2014 Kaikhushru Nargolwala 1 January 2012 AGM 2012 6 months AGM 2015 Kathleen O’Donovan (note 3) 8 May 2003 AGM 2004 6 months n/a Philip Remnant (note 4) 1 January 2013 AGM 2013 6 months AGM 2016 Lord Turnbull 18 May 2006 AGM 2006 6 months AGM 2015
Non-executive directors’ share ownership requirements In July 2011, a share ownership requirement for non-executive directors was introduced. Non-executive directors are required to hold shares with a value equivalent to one times the annual basic fee (excluding additional fees for chairmanship and membership of any committees). Non-executive directors will be expected to attain this level of share ownership within three years of the implementation of this requirement (or within three years of their date of appointment, if later). The Chairman is required to hold shares with a value equivalent to one times his annual fee and is expected to attain this level of share ownership within fi ve years of the date of his appointment.
Directors’ shareholdings The interests of directors in ordinary shares of the Company are set out below. ‘Shares subject to deferral’ includes shares acquired under the Share Incentive Plan (detailed in the table on page 142), deferred annual incentive awards and interests in shares awarded on appointment (detailed in the ‘Other Share Awards’ table on pages 140 and 141).
Keki Dadiseth 32,196 32,196 – 32,196 – 32,196 Howard Davies 3,083 3,192 – 3,192 – 3,192 Rob Devey 126,006 154,746 120,697 275,443 537,208 275,443 John Foley 364,378 277,178 46,057 323,235 351,917 323,235 Michael Garrett 39,233 39,233 – 39,233 – 39,233 Ann Godbehere 15,914 15,914 – 15,914 – 15,914 Alistair Johnston note (1) – 5,000 – 5,000 – 5,000 Paul Manduca 2,500 2,500 – 2,500 – 2,500 Harvey McGrath note (2) 300,636 – – – – – Michael McLintock 595,363 487,203 195,530 682,733 161,834 682,733 Kaikhushru Nargolwala note (3) – 16,000 – 16,000 – 16,000 Nic Nicandrou note (4) 167,655 227,791 123,067 350,858 546,037 350,907 Kathleen O'Donovan note (5) 24,425 – – – – – Philip Remnant note 6) – – – – – – Barry Stowe note (7) 274,575 359,997 151,234 511,231 625,976 511,231 Tidjane Thiam 650,116 524,123 399,716 923,839 1,408,368 923,839 Lord Turnbull 16,624 16,624 – 16,624 – 16,624 Mike Wells note (8) 438,718 369,142 222,666 591,808 1,152,908 591,808
2 Harvey McGrath retired from the Board on 2 July 2012. 3 Kaikhushru Nargolwala was appointed to the Board on 1 January 2012.