Prudential helps people de‑risk their lives and deal with their biggest financial concerns. We provide our customers with the freedom to face the future with confidence.
At�the�end�of�January�2020,�we�announced� that�Shriti�Vadera�will�join�the�Board�on� 1�May�as�a�Non-executive�Director�and� member�of�the�Nomination�&�Governance� Committee,�and�that�she�is�expected�to� succeed�me�as�Chair�of�the�Board�and�the� Nomination�&�Governance�Committee�on� 1�January�2021.�Shriti�is�an�excellent�choice� for�the�future�Chair,�and�I�look�forward�to� working�with�her�on�the�Board�and�during� the�transition.
Our customers and wider stakeholders We�are�determined�to�build�new� capabilities�in�our�structural�growth� markets,�offering�our�products�to�more� customers�in�Asia�across�an�increasing� range�of�channels;�and�reaching�new� customers�in�Africa,�one�of�the�fastestgrowing �regions�in�the�world.�In�the�US,�the� world’s�largest�retirement�market,�we�are�a� leader�in�providing�asset�accumulation�and� income�products.�The�loyalty�of�our� existing�customer�base�is�an�important� source�of�financial�resilience�for�the�Group,� and�we�work�continuously�to�improve� service�and�outcomes.�The�nature�of�our� business�model�means�that�we�invest�our� customers’�savings�in�companies�and� infrastructure�that�help�to�drive�prosperity� and�strengthen�the�communities�we�serve.
Our�business�provides�social�benefits�to� our�customers�and�to�their�communities.�In� particular,�we�are�committed�to�broadening� access�to�healthcare�and�finance�and�to� providing�solutions�to�issues�emerging� from�demographic�change.�We�are�well� aware�of�the�risk�climate�change�presents� and�are�broadening�the�role�our�businesses� can�play�in�the�transition�to�a�sustainable� economy.�We�are�a�signatory�to�the� recommendations�of�the�Financial�Stability�
The�Board�remains�committed�to�ensuring� that�we�make�a�positive�impact�across� all�our�activities.�You�will�find�references� throughout�this�report�to�that�impact,� while�an�overview�of�what�we�have�done� across�all�areas�of�environmental,�social� and�governance�(ESG)�activity�in�2019� can�be�found�in�our�ESG�Summary�on� page�72�of�this�report.�Further�details�are�in� our�2019�ESG�Report�on�the�Prudential�plc� website.
During�early�2020,�our�business�has�been� responding�with�agility�to�the�global� challenges�posed�by�the�coronavirus� outbreak.�We�have�been�providing� customers�with�additional�benefits�and� service,�offering�advice�and�flexible� working�options�to�colleagues,�and� collaborating�with�governments�to�directly� support�affected�communities.�The�virus� outbreak�is�also�impacting�financial� markets.�We�are�monitoring�developments� closely�and�will�continue�to�be�proactive�in� helping�our�colleagues�and�customers.
We�exist�to�take�the�financial�risk�out� of�the�biggest�events�in�the�lives�of�our� customers,�enabling�them�to�face�the� future�with�confidence.�In�addition�to� fulfilling�our�traditional�role�of�providing� life�and�health�protection,�savings� opportunities�to�meet�family�goals�and� retirement�income,�we�aspire�to�lead�in� new�areas�aligned�with�this�purpose.� During�2019,�collectively�our�continuing� businesses�agreed�to�pay�over�$29�billion� to�our�customers�in�claims�and�savings� pay-outs.�Our�products�help�consumers� postpone�and�prevent�ill-health�through� digital�innovation,�increase�access�to� finance,�and�provide�solutions�for�an�ageing� world.�At�the�same�time,�we�are�investing� our�customers’�savings�in�the�real�economy,� helping�to�drive�sustainable�growth.�
We have delivered a positive operating performance during 2019, led by continued growth in our Asian business.
Accordingly,�we�are�today�announcing�that� preparations�have�commenced�for�a� minority�initial�public�offering�(IPO)�of� Jackson�and�have�already�taken�a�number� of�management�actions�to�support�this� path.�We�will�now�commence�detailed� engagement�with�key�stakeholders,�with�a� view�to�ensuring�that�Jackson�will�have�the� capital�strength�as�a�separately�listed� business�to�support�its�continued�success� as�a�broad�provider�of�retirement�solutions� for�America’s�aging�population.�We�will� provide�an�update�at�our�HY20�results� scheduled�for�11�August�2020.
Macroeconomic environment The�core�demand�for�our�long-term�savings� and�protection�products�has�remained� strong�despite�uncertain�conditions�in� the�macroeconomic�environment.� A�combination�of�low�interest�rates,�trade� disputes�and�volatile�international�politics� has�created�difficult�conditions�across� many�sectors.�The�US�government�10-year� bond�yield�fell�to�1.9�per�cent�at�the�end�of� 2019�(2018:�2.7�per�cent).�Equity�markets� finished�2019�higher�than�the�start�of�the� year,�especially�in�the�US,�where�the� S&P500�index�was�up�28.9�per�cent,�and� valuations�in�the�credit�markets�were�also� elevated�well�above�historic�norms.� We�continue�to�manage�our�business� conservatively�for�the�long�term,�with�a� cautious�allocation�of�shareholder�funds� and�extensive�hedge�programmes�in� Jackson.�These�hedge�programmes� manage�the�economic�risk,�with� consideration�of�the�local�regulatory� position,�of�the�guarantees�contained� within�the�products�sold�to�customers.
Alongside�our�financial�performance�we� have�made�significant�investments,�funded� regionally�and�centrally.�During�2019,�this� included�the�renewal�of�our�regional� strategic�bancassurance�alliance�with� United�Overseas�Bank�Limited�for�an�initial� fee�of�$853�million,�($301�million�of�which� was�paid�in�2019),�entering�into�an� exclusive�bancassurance�partnership�with� SeABank,�our�acquisition�of�50.1�per�cent� of�Thanachart�Fund�Management�Co.,�Ltd� for�$142�million3�and�a�total�investment�of� $619�million�of�free�surplus�in�writing� profitable�new�business�in�Asia,�along� with�an�investment�of�$539�million�in�free� surplus�in�US�new�business.
The�benefits�of�our�long�held�focus�on� writing�high�quality,�recurring�premium� business,�contributing�to�resilient�and� broad-based�in-force�growth�are�evident� in�the�12�per�cent8�increase�in�renewal� insurance�premium9�and�14�per�cent8� increase�in�adjusted�operating�profit2,� with�double-digit�growth8�in�eight� insurance�markets�including�24�per�cent� adjusted�operating�profit�growth�in� Hong�Kong�and�20�per�cent8�growth� in�mainland�China.
At�the�same�time,�our�Asian�asset�manager,� Eastspring,�has�continued�to�grow�well.� Average�assets�under�management�were� up�by�15�per�cent�(on�an�actual�exchange� rate�basis),�while�earnings�were�up�by� 18�per�cent8�and�net�external�inflows� totalled�$8.9�billion10.�Eastspring�is� continuing�to�expand�its�footprint�in�the� region,�and�in�December�acquired�a� controlling�stake�in�one�of�Thailand’s� leading�asset�managers,�Thanachart�Fund� Management�Co.,�Ltd,�with�the�option�to� acquire�the�remaining�equity�in�this� business�in�due�course.
In�the�US,�we�have�one�of�the�leading� distribution�teams14.�We�are�agile�and� successful�in�launching�well�designed,� customer-centric�products,�have� successful�risk�management�and�hedge� programmes�are�investing�in�technology� platforms�and�have�award-winning� customer�service.�We�are�continuing�to� work�towards�further�diversification�and� growth,�within�a�highly�competitive� industry.
Our�US�business�has�taken�important� steps�in�the�delivery�of�its�diversification� announced�with�our�half�year�results�in� August�2019�and�has�maintained�a�cautious� approach�to�managing�risk�through�its� dynamic�hedging�programme.�The� financial�results�of�the�US�business�reflect� the�execution�of�this�strategy.�While� adjusted�operating�profit2�increased�by� 20�per�cent�to�$3,070�million,�the�effects� of�strong�US�equity�market�performance� and�lower�interest�rates�in�the�period� led�to�a�post-tax�IFRS�loss�in�the�US�of� $(380)�million.�We�continue�to�accept� a�degree�of�volatility�in�our�IFRS�results�
A dditional inform ation prudentialplc.com� Prudential plc Annual�Report�2019 09 since�our�hedging�programme�is�based� on�managing�the�economic�risks�in�the� business�and�protecting�statutory�solvency� in�the�circumstances�of�large�market� movements.�Further�detail�is�provided� in�the�Group�Chief�Financial�Officer�and� Chief�Operating�Officer’s�report.
While�the�coronavirus�outbreak�has�slowed� down�economic�activity�in�the�year�to�date� and�dampened�our�sales�momentum�in� Hong�Kong�and�China,�we�remain� confident�in�the�medium�to�long-term� prospects�of�these�economies�and�their� respective�insurance�sectors.�Our�broad� geographic�spread�across�the�region�and� the�strength�of�our�recurring�premium� business�model�lends�considerable� resilience�to�our�earnings.
Given�the�impact�of�the�coronavirus� outbreak�on�travel�and�activity�in�the� markets�in�which�we�operate,�lower�levels� of�new�sales�activity�in�those�affected� markets�are�to�be�expected.�Our�book�of� existing�business�is�proving�resilient�and�we� are�taking�measures�to�manage�the�effect� of�lower�activity�while�maintaining�our� investment�in�products,�distribution�and� technology.�Existing�customers�in�both� Hong�Kong�and�mainland�China�continue� to�contribute�to�their�policies�with� premiums�being�paid�through�a�broad� range�of�remote�payment�facilities.
Group Chief Risk and Compliance Officer’s report on the risks facing our business and how these are managed 51
Our purpose Our purpose is to help people de-risk their lives and deal with their biggest financial concerns. We provide our customers with the freedom to face the future with confidence.
Our strategy Our strategy is to capture the long-term structural opportunities for our markets and geographies, while operating with discipline and seeking to enhance our capabilities through innovation to deliver high-quality resilient outcomes for our customers.
We aim to do this by: — Serving the protection and investment needs of the growing middle class in Asia; — Offering products to new customers in Africa, one of the fastest-growing regions in the world; and — Providing asset accumulation and retirement income products to US retirees.
Structural growth over the last 20 years has allowed our business to reach the scale where it can support its longterm goals through execution of its strategy and disciplined capital allocation. Prudential plc has a portfolio of businesses with access to the world’s largest and fastest-growing markets.
US retirement Strength and flexibility of our distribution network gives us a distinctive advantage
Note 1 GDP of markets in which Prudential plc operates as at 31 December 2019.
Source: IMF World Economic Outlook. 2 Source: Based on formal (Competitors’ results release, local regulators and insurance associations) and informal (industry exchange) market share data. Ranking based on new business (APE or weighted FYP depending on the availability of data).
Read more in the Group Chief Risk and Compliance Officer’s report on page 51.
2 US Department of Labor, ‘Private Pension Plan Bulletin Historical Tables and Graphs 1975 – 2017’, September 2019.
Asia Asia’s long‑term structural trends are powerful drivers of sustainable growth. These trends underpin a strong and growing demand for savings and protection across the region, as markets are challenged by low life insurance penetration and a large pension funding gap.
We are well placed to capture this opportunity, providing products that meet our customers’ needs and gaining political and regulatory support in our markets.
Asia We continue to invest significantly in tech‑driven capabilities and partnerships to address developing customer demand. Significant developments include the launch of Pulse by Prudential, our health and fitness app, and 18 new digital partnerships across the region.
US In the US, an extra 22 million individuals will need retirement solutions by 20351, and pension provision has been declining2. We see a growing demand for retirement products and an ongoing shift to fee‑based solutions. Jackson is evolving its product range to address these needs.
Our product innovation and distribution strategies will enable us to capture the industry trends towards advisory‑based distribution models.
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Government and regulators We monitor governmental, legislative and regulatory activity in the markets in which we operate, and meet periodically with government and regulator representatives, to help us understand their objectives, priorities and concerns, and how they affect or shape our business.
Employees We provide an inclusive working environment in which we develop our talent, reward great performance, protect our people and value our differences, and we believe that such an environment is essential to enabling us to deliver our strategy.
The Group has a number of key performance indicators internally to measure financial performance. Read more on page 16.
2 New business profit, on a post‑tax basis, on business sold in the period, calculated in accordance with EEV principles. 3 Growth rates on a constant exchange rate basis. 4 Adjusted IFRS operating profit based on longer‑term investment returns.
6 EEV shareholders’ funds at 31 December 2019 are not directly comparable to Group shareholders’ funds reported at 31 December 2018, as the prior year balance included shareholders’ funds of M&G plc which, following demerger, are not part of the Group as at 31 December 2019. The reported 31 December 2018 EEV shareholders’ funds were 2,445 cents.
7 The Group’s dividend policy will be determined from a 2019 US dollar base of 36.84 cents per share, representing the full‑year ordinary interim dividend for 2019 of 46.26 cents less the contribution of the discontinued M&G plc business (9.42 cents).
Group adjusted operating profit in 2019 is 20 per cent higher on a constant and actual exchange rate basis compared with 2018. Adjusted operating profit from Asia life and asset management operations was up 14 per cent on a constant exchange rate basis (13 per cent on an actual exchange rate basis). In the US, adjusted operating profit was up 20 per cent reflecting a lower market related deferred acquisition cost amortisation charge. 5,310
EEV new business profit3 $m Life insurance products are, by their nature, long term and generate profit over a number of years. Embedded value reporting provides investors with a measure of the future profit streams of the Group. EEV new business profit reflects the value of future profit streams which are not fully captured in the year of sale under IFRS reporting.
EEV operating profit3 $m EEV operating profit is provided as an additional measure of profitability. This measure includes EEV new business profit, the change in the value of the Group’s long‑term in‑force business, and profit from our asset management and other businesses. As with IFRS, EEV operating profit reflects the underlying results based on longer‑term investment returns.
Operating free surplus generation4 $m Free surplus generation is used to measure the internal cash generation of our business units. For insurance operations, it represents amounts maturing from the in‑force business during the period, less investment in new business and excludes other non‑operating items. For asset management, it equates to post‑tax operating profit for the year.
Business unit remittances5 $m Remittances measure the cash transferred from business units to the Group. Cash flows across the Group reflect our aim of achieving a balance between ensuring sufficient net remittances from business units to cover the dividend (after corporate costs) and the use of cash for reinvestment in profitable opportunities available to the Group.
Cash remitted to the Group from continuing operations in 2019 amounted to $1,465 million, including $950 million from Asia (up 4 per cent) and $509 from the US (up 13 per cent). During 2019, the Group’s holding company cash flows were managed in sterling and significant remittances were hedged. If local currency remittances in Asia had been translated directly into US dollars then the growth rate in Asia remittances would have been 8 per cent. The dividend paid by Jackson was $525 million (2018: $450 million).
Group local capital summation method6 $bn Following the demerger of M&G plc from Prudential plc, the Hong Kong Insurance Authority (IA) has assumed the role of the Group‑wide supervisor for the Prudential Group. The Group is no longer subject to Solvency II capital requirements and currently applies the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine Group regulatory capital requirements (both minimum and prescribed levels).
(AER) basis except where otherwise stated. Comparative results on a constant exchange rate (CER) basis are also shown in financial tables in the Chief Financial Officer’s report on our 2019 financial performance. Growth rates for 2018 to 2019 are on an AER basis.
6 Surplus over Group minimum capital requirement and estimated before allowing for second interim ordinary dividend. Shareholder business excludes the available capital and minimum capital requirement of participating business in Hong Kong, Singapore and Malaysia. 2018 surplus excludes M&G plc and includes $3.7 billion of subordinated debt issued by Prudential plc that was transferred to M&G plc on 18 October 2019. Further information on the basis of calculation of the LCSM measure is contained in note I(i) of the Additional unaudited financial information.
2019 performance highlights — Continued strong performance in key earnings and value metrics: adjusted operating profit up 14 per cent1 and European Embedded Value up 23 per cent2 to $39,235 million
— We expanded our presence in China with a new branch in Shaanxi, the addition of seven cities and a strong start to our wholly owned private fund manager
— We renewed our successful regional strategic bancassurance alliance with United Overseas Bank Limited (UOB) to 2034 and expanded its coverage
— Eastspring total funds under management grew to $241 billion, up 25 per cent2
— We developed over 160 products in 2019, contributing 16 per cent of life new business profit
— Our digital health SuperApp, branded Pulse by Prudential, is live in eight markets and over one million people have downloaded the app
We have made significant investments during 2019 to strengthen further and grow our Asia business. We renewed our successful regional bancassurance partnership with UOB until the end of 2034 and expanded its coverage to include Vietnam as well as UOB’s digital bank, TMRW. We extended our life insurance footprint to Myanmar, our 13th life market, and acquired a controlling stake in Thanachart Fund which makes us the fourth largest mutual fund manager in the attractive Thailand market with a 12 per cent market share. To date, over one million people have downloaded the ‘Pulse by Prudential’ app since its launch. Our focus on growing our presence in China saw our reach expand to a further seven cities, bringing our footprint to 94 cities, while our wholly owned private fund manager established in Shanghai in December 2018 has secured over one billion Yuan in its first year of operation.
We are able to translate these hallmarks of our business into financial success, with diversified growth in 2019 maintaining our strong track record of high-quality performance. We achieved a 14 per cent1 increase in adjusted operating profit, with eight markets growing at a double-digit rate. This is supported by a 12 per cent1 expansion in renewal premiums3, which reflects the long-term nature of our insurance business, and a 25 per cent2 increase in funds under management at Eastspring helped by strong third party net-inflows of $8.9 billion4. We also delivered 29 per cent1 growth in new business profit outside Hong Kong, with eight markets expanding at a double-digit rate, which underpinned a 23 per cent2 increase in European Embedded Value to $39,235 million.
Market opportunities We seek to enhance the health and wealth of consumers in Asia by providing life insurance and asset management solutions to address their protection and savings needs at all ages. The industry remains in the early stages of development, as characterised by the low penetration rates across the region for both insurance and asset management, and low levels of financial inclusion. In particular, most of our markets are approaching the level of per capita annual income when demand increases sharply. As a consequence, Asia is predicted to contribute about two-thirds of the global life insurance growth in the next 10 years5 and achieve a share of 42 per cent of the global insurance market by 2029 compared with just 32 per cent currently6. The Asia Pacific asset and wealth management industry is also expected to add about $13 trillion of assets under management between 2020 and 20257.
While these secular trends offer attractive prospects, we remain vigilant and focused in our execution. We have carefully managed our businesses through a range of unforeseen external events during 2019, including heightened capital market volatility arising from trade tensions between the US and China, a slowdown in the growth of the Chinese economy, suppressed yields on US dollar and other Asian currency fixed-income instruments, and social unrest in Hong Kong that led to a notable decline in mainland China visitor arrivals.
Strategic priorities We run our business with a focus on customers, quality growth and profitability. We favour health and protection products due to their resilience to market cycles and healthy margins. Collectively, such products produced 67 per cent of our new business profit in 2019 and contributed to our high mix of regular premiums, which comprised 93 per cent of our APE sales in 2019 and 99 per cent of our life weighted premium income9. This results in 86 per cent10 of our life IFRS operating income (excluding other income) arising from insurance margin and fee income, which in turn supports stable profit progression across market cycles and strong returns on equity.
This performance also reflects the disciplined execution of our four strategic priorities, which align with the evolving sources of demand across the region and help position our business for continued growth.
Diversification Adjusted operating profit by region Full year 2019 $3,276m +14%
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 21
We continue to identify and target new customer groups and segments outside our traditional focus in the mass and affluent space in order to accelerate our future growth. We first expanded into the high net worth segment in 2018 with Opus in Singapore, which provided a differentiated experience for our customers, including a dedicated service team, wealth planners and external experts covering trust and legal matters. APE sales in this segment delivered impressive growth of 46 per cent in 2019 to $76 million. Similarly, we also developed tailored offerings for SMEs, a segment that remains under-served and offers significant growth potential. This strategy is advanced through our all-inclusive platform, PRUworks, which provides a digitally-enabled HR solution for business owners and their employees, providing access to employee benefits and lifestyle programmes. In 2019, we achieved 22 per cent growth in our employee benefits APE in Singapore17 and leveraged this experience to extend our coverage to Indonesia. We have also developed strategies to reach the digitally-savvy millennial segment through TMRW, UOB’s digital bank, and new partners such as OVO in Indonesia.
Products We offer a wide range of insurance products that are tailored to local market requirements and fast-changing individual needs, with 67 per cent of new business profit contributed by health and protection solutions and the rest by savings products that include participating, linked and other traditional products. The diversity and resilience of our business is supported by the continued enhancements we make to our product range, which include broadening coverage for new risks and adding innovative features. Indeed, last year 16 per cent of new business profit and 55 per cent of external net inflows4 arose from the 166 products and 109 funds that were developed in 2019.
Distribution We believe in a multi-channel strategy for our business which can adapt and respond flexibly depending on local market conditions. Our distribution network is one of the strongest and most diversified in the Asia region. We have over 600,000 licensed tied agents across our life insurance markets, and this proprietary distribution channel is the core component of our success, comprising 83 per cent of our new business profit. We also have a leading bancassurance franchise that provides access to over 18,000 bank outlets through our strategic partnerships with multi-national banks and prominent domestic banks, which grew new business profit by 12 per cent in 2019. In recent years, we have also established non-traditional partnerships to broaden our reach further, with partners added in 2019 including Viettel, the largest telecommunications service provider in Vietnam. In total, we have more than 300 life insurance and asset management distribution partnerships in Asia.
We currently boast a number one position in agency APE sales in Hong Kong and have increased MDRT qualifiers by 35 per cent in our markets outside Hong Kong, reflecting our focus on agent recruitment, training and productivity across different markets. For example, in Indonesia, our segmented agency strategy is delivering positive early results and played a key role in driving APE sales growth in 2019, with the Elite segment growing APE sales by 57 per cent to account for 25 per cent of total agency APE sales for the year.
China Life insurance Market ranking19,21 4th Population20 1.4bn Penetration6 2.3% Average health protection gap per household8 $1,724
Life insurance Market ranking19 2nd Population20 1.4bn Penetration6 2.7% Average health protection gap per household8 $1,382
Life insurance Market ranking19 1st Population20 271m Penetration6 1.5% Average health protection gap per household8 $1,230
Vietnam Life insurance Market ranking19 3rd Population20 96m Penetration6 1.6% Average health protection gap per household8 $1,251
At Eastspring, in addition to embedding BlackRock’s Aladdin system, we have also made other digital advancements, with our Malaysian entity winning the ‘Fintech Innovation in Asset Management’ award in Asia Asset Management’s ‘2020 Best-of-the-Best awards’. This reflected the continued enhancements to our online platform, myEastspring, which enables our clients to access, monitor and transact online and includes tools for our agents to help clients predict their future savings needs. We also launched a new digital facility that empowers members of the Employees Provident Fund to take control of their investments and make transactions at nearly zero cost.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 25
The responsible and sustainable management of our tax affairs also helps us to maintain constructive relations with our stakeholders and play a positive role in the economy. We take a long-term perspective and balance our responsibility to support our business strategy with our responsibility to the communities in which we operate, which need sustainable tax revenues. We understand the importance of paying the right amount of tax on time. We manage our tax affairs transparently and seek to build constructive relationships with tax authorities in all the countries in which we operate.
COVID-19 update We continue to monitor closely the development of the coronavirus outbreak. Our priority is the health and wellbeing of our customers and staff during this challenging time. In China and Hong Kong, we were one of the first insurance companies to launch extra free protection and coverage against this disease. Similarly, in another eight Asian markets we are offering additional free hospital cash benefits and other lump sum benefits to customers diagnosed with this disease, alongside a series of measures and services to support affected customers in a timely manner, such as dedicated hotlines and simplified claims procedures. For our staff, we have put in place flexible work arrangements, for example on work hours and work location, as well as enhanced hygienic tools in the office.
We are well placed to capture these structural prospects given our marketleading positions, focused strategic priorities, high-quality execution and expanding digital capabilities.
IFRS balances. 4 Excludes Money Market Fund. 5 Source: Allianz Global Insurance Market at a crossroads, May 2019. Global life insurance premium derived from total insurance premium. 6 Market penetration: Swiss Re (Sigma) – based on insurance premiums as a percentage of GDP
in 2018 (estimated). 7 Source: PWC Asset & Wealth Management 2025 report. 8 Swiss Re Institute: The health protection gap in Asia, October 2018. Average gap per household is calculated as ‘total health protection gap divided by estimated number of households hospitalised under the mentioned gap range’. Report excludes Cambodia and Laos.
9 Weighted premium income comprises gross earned premiums at 100 per cent of renewal premiums, 100 per cent of first-year premiums and 10 per cent of single premiums.
10 Total insurance margin ($2,244 million) and fee income ($286 million) of $2,530 million divided by total life income excluding other income of $2,958 million (Comprised of total life income of $6,187 million less other income of $3,229 million). For discussion on the basis of preparation of the sources of earnings see note I(iv) of the Additional unaudited financial information.
12 Assuming no change in our shareholding. 13 Mutual fund market shares; mutual fund assets under management as at 31 December 2019. 14 Source: National Bureau of Statistics of China. 15 By life and health GWP in 2019.
19 Based on full year 2019 or the latest information available. Sources include formal (eg competitors results release, local regulators and insurance association) and informal (industry exchange) market share data. Ranking based on new business (APE sales, weighted full year premium or full year premium depending on availability of data). Full year 2019 data is not yet available for Hong Kong; full year 2018 has been used instead.
20 United Nations, Department of Economic and Social Affairs, Population Division, World Population Prospects 2019 Revision.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 27
of APE sales in regular premium 83% of all new business submitted through e-point-of-sale technology
Distribution We are well-positioned in terms of the scale and diversity of our distribution to reach and serve our customers’ needs. At the core of our distribution model is face-to-face customer interaction that delivers high-quality, needs-based advice.
Providing America’s ageing population with financial strategies for their retirement through product innovation and developing marketleading distribution capabilities.
2019 performance highlights — Launches of Jackson’s RateProtector, a single premium, multi-year guarantee fixed annuity, as well as MarketProtector and MarketProtector Advisory fixed index annuity products, contributing to an 8 per cent increase in new business sales
— Expanded advisory distribution footprint with Morgan Stanley, DPL Financial Partners, TD Ameritrade and RetireOne
— Awarded ‘Contact Center World Class CX Certification’ and ‘Highest Customer Service for the Financial Industry’ awards by The Service Quality Measurement Group, Inc
— Adjusted operating profit up 20 per cent to $3,070 million and new business profit down 28 per cent to $883 million
To overcome these challenges, Americans need and demand retirement strategies that offer them the opportunity to grow and protect the value of their existing assets, as well as the ability to provide guaranteed income that will last throughout their extended lifetimes. Achieving this will reduce the gap many retirees face between income needed during retirement and the income they can generate from their retirement assets and social security. Reducing this gap is a public benefit as it helps reduce strain on supplemental government programmes for those in need.
Jackson believes that a retirement plan integrated with an income guarantee annuity will mitigate much of the risk of retirees running out of money during retirement. In response to this demand and the ongoing shift to fee-based solutions, Jackson has positioned itself with product innovation and distribution strategies to provide a wide spectrum of choice when selecting the retirement product that best fits customer needs. This will allow Jackson to enhance further our market-leading variable annuity position in the brokerage market, diversify in the fixed annuity and fixed index annuity space and grow in the advisory retirement solutions market. Jackson has demonstrated its ability to diversify during the year, growing the proportion of APE sales accounted for by fixed annuity, fixed index annuity and wholesale business to 34 per cent, from 19 per cent in the prior year.
Customers and products Through its distribution partners, Jackson provides products that offer Americans the retirement strategies they need, including variable, fixed and fixed index annuities. Each of these products offer a unique range of features tailored to meet the individual needs of the retiree as discussed below: Variable annuity A Jackson variable annuity, with investment freedom, represents an attractive option for retirees and soon-to-be-retirees, providing both access to equity market appreciation and guaranteed lifetime income as an add-on benefit.
Fixed index annuity A Jackson fixed index annuity is a guaranteed product with limited market exposure but no direct equity ownership. It is designed to build wealth through a combination of a base crediting rate that is generally lower than a traditional fixed annuity crediting rate, but with the potential for additional upside, based upon the performance of the linked index. Jackson also provides access to guaranteed lifetime income as an add-on benefit.
Fixed annuity A Jackson fixed annuity is a guaranteed product designed to build wealth without market exposure, through a crediting rate that is likely to be superior to interest rates offered from banks or money market funds.
Jackson has a proven track record in this market with its market-leading flagship product, Perspective II1. Jackson’s success has been built on its quick-to-market product innovation, as demonstrated by the development and launch of Elite Access, our investment-only variable annuity. Further demonstrating Jackson’s flexibility and manufacturing capabilities, and in response to the trend in financial services toward fee-based solutions, Jackson has launched Perspective Advisory II, Elite Access Advisory II and the innovative MarketProtector Advisory, the industry’s first fully-liquid advisory fixed index annuity, to serve advisers and distributors with a preference for advisory products.
In June 2019, Jackson launched RateProtector, a single premium, multi-year guarantee fixed annuity. RateProtector offers consumers the opportunity to protect and grow their assets through guaranteed interest rates that will not fluctuate during a select period, combined with the ability to defer taxes on any earnings until money is withdrawn.
Distribution Jackson distributes products in all 50 states of the US and in the District of Columbia. Operations in the state of New York are conducted through a New York subsidiary. Jackson markets its retail products primarily through advice-based distribution channels, including independent agents, independent broker-dealer firms, regional broker-dealers, wirehouses and banks. For variable annuity sales, Jackson is the leader in the independent broker-dealer, bank and wirehouse channels2 and third in regional firms2.
Jackson’s distribution strength also sets us apart from our competitors. Our highly productive wholesaling force is the largest3 in the annuity industry and is instrumental in supporting the independent advisers who help the growing pool of American retirees develop effective retirement strategies. Our wholesalers provide extensive training to thousands of advisers about the range of products and the investment strategies that are available to support their clients. Based on the latest available data, Jackson is the second most productive variable annuity wholesale distribution force in the US3.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 31
Regulatory landscape The regulatory outlook for the industry has improved since the passing of the Securities and Exchange Commission’s (SEC) Best Interest Regulation in June 2019. This replaced proposed legislation known as the DOL Fiduciary Duty Rule. The SEC’s finalised rule creates a best interest standard of conduct for brokerdealers and is designed to be ‘product agnostic’ meaning that it is not intended to give preference to or target any specific product. Instead, the rule enhances the diligence required when advising customers about suitable, albeit more complex, products such as variable annuities. The rule became effective 60 days after being published in the Federal Register (12 July 2019) and includes a transition period until 30 June 2020.
Regardless of the outcome of the SEC best interest standard, the regulatory disruption caused by the now rescinded DOL Rules has challenged the industry to review the ways in which investment advice is provided to American investors. Manufacturers will need to have the ability to provide product and system adaptations in order to support the success of various distribution partners in their delivery of the retirement strategies that investors need. Because of its strong distribution, leadership in the annuities market, best-in-class service and an efficient operation, we believe that Jackson is well positioned to take advantage of this opportunity.
In December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was passed into law, bringing positive changes to the US retirement system. A significant change includes the portability of lifetime income products, permitting participants to preserve their lifetime income investments and avoid surrender charges and fees. Another provision of the Act clarifies the existing Employee Retirement Income Security Act safe harbour and removes ambiguity about the applicable fiduciary standard that currently acts as a roadblock to offering lifetime income benefit options under a defined contribution plan. Under this provision, for purposes of fulfilling their fiduciary duty to select an annuity provider, defined contribution plan fiduciaries may rely on representations from insurers regarding their status under state insurance laws. The enactment of these provisions, and the SECURE Act as a whole, are important steps in facilitating Americans’ ability to achieve financial freedom for life.
At 31 December 2019, Jackson early adopted the new US regulatory regime enacted by the National Association of Insurance Commissioners in respect of variable annuities. The effect of this change is further discussed in the Group Chief Financial Officer and Chief Operating Officer’s report on the 2019 financial performance.
Corporate responsibility As a provider of savings and protection products, stewardship is core to what we do. We recognise that to help our customers look to the future with confidence, we need to take a long-term view on a wide range of issues that affect our business and the communities in which we operate. To do this, we maintain a proactive dialogue with our stakeholders – customers, investors, employees, communities, regulators and governments – to ensure that we are managing these issues sustainably and delivering long-term value.
Jackson seeks to provide the best retirement solutions that we can, while striving to communicate information about those products in a fair and transparent way. In the US, Jackson continues to be a leader in shifting perspectives and simplifying the language around financial products. In 2018, Jackson led the creation of a groundbreaking, industry-wide coalition seeking to help mitigate America’s looming retirement crises, the Alliance for Lifetime Income. The Alliance is a tremendous leap forward in Jackson’s ongoing commitment to educating Americans about the importance of lifetime income in retirement planning.
At Jackson, we take an inclusive approach to responsible investment, seeking to integrate environmental, social and governance (ESG) considerations into our investment processes and stewardship activities through active ownership practices and engagement with investee companies. We also maintain the ability to exclude entities from our internal investment mandates, where their practices, policies or procedures conflict with our values, or where we see a need to explicitly recognise international consensus.
Jackson is making significant investments in new technologies, which allows us to provide better service that will give our customers what they want, when they want it. These new technologies will also provide higher quality data so that our executives and staff across the business can make better informed decisions with regard to risk, and with how and where to invest.
Notes 1 ©2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar www.AnnuityIntel.com Total Sales by Contract 3Q YTD 2019. Jackson’s Perspective II for base states ranks #1 out of 927 VA contracts with reported sales to Morningstar’s quarterly sales survey as of 3Q YTD 2019.
3 Independent research and Market Metrics, a Strategic Insight Business: U.S. Advisor Metrics 2019, as of 30 September 2019.
4 LIMRA/Secure Retirement Institute, US Individual Annuity Participants Report 3Q YTD 2019. 5 2018 annual estimate. Annual estimates of the residential population by single year of age and sex for the United States: 1 April 2010 to 1 July 2018. U.S. Census Bureau, Population Division.
#1 selling variable annuity contract in the independent channel since 20036
Distribution Jackson’s distribution teams set us apart from our competitors. Jackson’s annuity wholesaling force is the largest and one of the most productive in the industry, supporting thousands of advisers across multiple channels and distribution outlets.
New partnerships with State Farm, Morgan Stanley, DPL financial partners, TD Ameritrade and RetireOne, adding significant distribution access
Approximately 24% of Jackson’s 2019 advisory annuity sales from new advisers8
Corporate responsibility Jackson is committed to be a responsible partner with customers, employees, shareholders and the community.
Growth has once again been led by our businesses in Asia, which reflects the benefits of our well positioned and broad-based portfolio, which has long focused on high quality, recurring premium business. In 2019, this saw our life businesses outside Hong Kong deliver overall new business profit growth of 29 per cent1, and within this 10 markets increasing new business profit. While Hong Kong has seen a more challenging sales environment, the resilience of its business model is demonstrated by its 24 per cent1 growth in adjusted operating profit, which contributed to the 14 per cent1 increase in adjusted operating profit delivered by our overall Asia business.
The impact of these market effects are most prevalent in the US’s results. Jackson’s hedging programme is focused on managing the economic risks in the business and protecting statutory solvency in the circumstance of large market movements. The hedging programme does not aim to hedge IFRS accounting results and this can lead to volatility in the IFRS results in periods of significant market movements, as was seen in 2019. In particular, while higher equity markets are expected to deliver ultimately increased profitability to Jackson through higher future fee income, this benefit is not fully recognised in the IFRS results in the short term. This contrasts with the impact on the derivatives within the hedging programme, designed to provide protection when markets fall, where rises in equity markets lead to short term losses in the IFRS results. These losses have been exacerbated by falling interest rates in 2019, which have led to an increase in the IFRS liabilities for the guarantees attaching to variable annuities given lower discount rates and lower assumed future separate account growth, impacting directly on the income statement. Collectively, these factors led
GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2019 FINANCIAL PERFORMANCE
The $(142) million cost of corporate transactions reflects gains from disposals offset by the $(407) million incurred in the year in connection with the demerger of M&G plc from Prudential plc, in line with our previous guidance. Further information is set out in note D1.1 to the financial statements.
Falling interest rates in certain parts of Asia led to unrealised bond gains in the year which are accounted for within nonoperating profit. In the US, rising equity markets and falling interest rates have resulted in negative effects primarily reflecting net losses on hedge instruments used to manage the market exposure of Jackson’s products and by changes in the IFRS value for these features. Further discussion of Jackson’s non-operating items is contained in the US section of this report.
IFRS loss after tax from discontinued operations In the period prior to demerger, $1,319 million IFRS profit after tax was recognised from the discontinued M&G plc business. On distribution to shareholders as a dividend in specie the net assets of the business were remeasured to the market value of M&G plc on listing, resulting in a gain of $188 million recognised within the loss from discontinued operations for the year. As a result of representing the historical results of M&G plc in US dollars (as opposed to sterling), a loss of $(2,668) million was recognised at the date of demerger representing cumulative foreign exchange differences held in the currency translation reserve. This arose from the fall in the sterling/US dollar exchange rate over the period since the currency translation reserve was established in 2004. This was matched by an equal and opposite gain in other comprehensive income resulting in no overall impact on shareholders’ funds. Reflecting the above, the total loss from discontinued operations after tax was $(1,161) million. The rest of this report focuses solely on the continuing operations of the Group.
Total segment profit from continuing operations 6,346 5,451 16 5,435 17
Total adjusted operating profit based on longer-term investment returns before tax and restructuring costs 5,420 4,484 21 4,502 20
Amortisation of acquisition accounting adjustments (43) (61) 30 (61) 30 Gain (loss) on disposal of businesses and corporate
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 37
At 31 December 2019, the Group’s LCSM surplus over the Group minimum capital requirement (GMCR) was estimated at $9.5 billion on a shareholder basis6, equivalent to a solvency ratio of 309 per cent, and compares with a like-for-like position at 31 December 2018 of $9.7 billion and ratio of 356 per cent.
The Group is no longer subject to Solvency II capital requirements nor regulated by the Bank of England.
Subordinated debt substituted to M&G plc in 2019 – – – 3,718 82 3,800
Total borrowings of shareholder-financed businesses 5,594 633 6,227 9,761 233 9,994
Less: holding company cash and short-term investments (2,207) – (2,207) (4,121) – (4,121)
The total borrowings of the shareholderfinanced businesses decreased by $(4.2) billion, from $9.8 billion to $5.6 billion in 2019. This reflected the substitution of $4,161 million Tier 2 subordinated notes to M&G plc as part of the demerger (including £300 million 3.875 per cent Tier 2 subordinated notes issued in July 2019), and the redemption of £400 million 11.375 per cent Tier 2 subordinated notes in May 2019. The Group had central cash resources of $2.2 billion at 31 December 2019 (31 December 2018: $4.1 billion), resulting in net core structural borrowings of the shareholder-financed businesses of $3.4 billion at end 2019 (2018: $5.6 billion).
In addition to the Group’s traditional sources of liquidity and financing, Jackson also has access to funding via the Federal Home Loan Bank of Indianapolis with advances secured against collateral posted by Jackson. Given the wide range of Jackson’s product set and breadth of its customer base including retail, corporate and institutional clients, further sources of liquidity also include premiums and deposits.
Prudential plc seeks to maintain its financial strength rating which derives, in part, from the high level of financial flexibility to issue debt and equity instruments which is intended to be maintained and enhanced in the future.
Cash and short-term investments at beginning of year 4,121 3,063 Foreign exchange movements 92 (120)
During 2019, the Group’s holding company cash flow was managed in sterling and significant remittances were hedged and recorded on that basis. Growth rates are therefore distorted by the onwards translation into US dollars for presentation purposes. If local currency remittances in Asia had been translated directly into US dollars8, then the growth rate in Asia remittances year-on-year would have been 8 per cent (compared with 4 per cent shown in the table above). The dividend paid by the US in 2019 was $525 million (2018: $450 million). From 1 January 2020, holding company cash flow will be managed in US dollars and no such distortions will occur.
Mark-to-market value movements on Jackson assets backing surplus and required capital – – 206 (127)
Net increase (decrease) in shareholders’ funds (2,491) 206 (8,691) 2,935 Shareholders’ funds at beginning of the year 21,968 21,762 63,402 60,467
The total return from continuing operations (including other comprehensive income) on Group’s closing shareholders’ funds for the year was 27 per cent12, after excluding items arising from the demerger of $528 million (being costs of undertaking the demerger and interest). The demerger alters the size of the Group’s shareholders’ equity and the nature of its operations, rendering a comparison with the prior year return on shareholders’ funds value unrepresentative.
Free surplus generation is the financial metric we use to measure the internal cash generation of our business operations and is based (with adjustments) on the capital regimes that apply locally in the various jurisdictions in which the Group operates. For life insurance operations, it represents amounts emerging from the in-force business during the year, net of amounts reinvested in writing new business. For asset management businesses, it equates to post-tax adjusted operating profit for the year.
Asia operating free surplus generation14 increased by 13 per cent to $1,772 million in line with business growth, higher asset management earnings and stable levels of new business investment.
Analysis of movement in free surplus for insurance and asset management operations13
Impact of 2019 US EEV hedge modelling enhancements (903) – n/a – n/a
Total movement in free surplus from continuing operations 646 (598) Free surplus at 1 January from continuing operations 5,351 5,949
Analysis of operating free surplus generated from in-force life business and asset management before restructuring costs and US EEV hedge modelling enhancements
This policy is expected to result, over the medium term, in future central outflows, ie dividends, debt interest costs and other central expenses (including central payments for bancassurance distribution agreements and restructuring costs) net of tax recoverables, being covered by remittances from business units.
The Board intends to maintain the Group’s existing formulaic approach to first interim dividends, which are calculated as one-third of the previous year’s full-year dividend.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 41
This is reflected in diversified growth, with 10 markets expanding new business profit and our Asia ex-Hong Kong businesses growing new business profit by 29 per cent. Our earnings continue to be supported by high quality drivers with a 14 per cent increase in insurance margin, underpinned by our protection propositions for customers, alongside 18 per cent growth in asset management earnings, helped by a 15 per cent increase in average funds under management.
Embedded value at 1 January 32,008 28,879 Embedded value at 31 December 39,235 32,008
Asia EEV operating profit increased marginally compared with the prior period to $6,138 million (2018: $6,052 million1), driven by the 2 per cent increase in life new business profit, balanced by a 1 per cent reduction in the contribution from in-force life business.
The development of the in-force life result of $2,366 million (2018: $2,383 million1) reflects a 4 per cent reduction in the expected return, partly offset by higher, favourable operating assumption changes and experience development. Under our active EEV assumption framework, the lower expected return is a function of lower period end interest rates leading to lower period end risk discount rates. These lower risk discount rates are applied to the opening embedded value in this analysis, and result in a lower expected return compared with the prior period, only partly offset by a higher starting embedded value position. Operating assumption and experience developments were positive at $824 million (2018: $769 million1) and are driven by favourable persistency and mortality/morbidity effects among other factors, and again reflect the high quality of our in-force life business.
The asset management segment operating profit after tax increased by 20 per cent to $250 million (2018: $209 million1), which is discussed in more detail below.
Operating free surplus generated from in-force life business and asset management before restructuring costs 2,391 2,215 8 2,213 8
Non-operating (loss) profit 1,195 (525) Net cash flows to parent company (950) (916) Foreign exchange movements on foreign operations, timing differences and other items (357) (847)
Total movement in free surplus 1,629 (750) Free surplus at 1 January 2,591 3,341
IFRS earnings Overall, Asia adjusted operating profit increased by 14 per cent to $3,276 million, with life insurance earnings up 14 per cent and asset management earnings up 18 per cent. Our Asia life insurance earnings growth is broad-based and at scale, reflecting the benefits of our focus on high quality recurring premium business and well diversified business portfolio. 86 per cent16 of our total life income (excluding other income described below) arises from insurance margin and fee income, again supporting stable profit progression across market cycles.
Overall, eight insurance markets reported double-digit growth, with five delivering growth of 20 per cent or more. Six markets delivered annual adjusted operating profit of above $200 million and three in the region of $500 million or higher. At a market level, highlights include Hong Kong (up 24 per cent) driven by the high quality of its in-force growth, China JV (up 20 per cent), Vietnam (up 20 per cent) and the Philippines (up 26 per cent). Adjusted operating profit in Indonesia of $540 million remains at a high level, but was 3 per cent below the prior period.
Profit margin analysis of Asia long-term insurance and asset management operations17
Other income primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses. As such, the 9 per cent increase in margin on revenues largely reflects ongoing business growth and the associated continued growth in overall premiums received. Acquisition costs borne by shareholders increased by 8 per cent in relation to a 4 per cent increase in overall APE sales. The ratio of shareholder acquisition costs to shareholder related APE sales (excluding with-profits related sales) reduced to 66 per cent (2018: 69 per cent on an actual exchange rate) as a result of changes in product mix. Administration expenses, including renewal commissions, increased by 6 per cent reflecting ongoing business growth.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 45
External funds under management ($bn) 124.7 77.8 60 Internal funds under management ($bn) 116.4 114.9 1
Analysis of adjusted operating profit Retail operating income 392 336 17 Institutional operating income 244 230 6
Operating income before performance-related fees 636 566 12 Performance-related fees 12 23 (48)
Group’s share of tax on joint ventures’ adjusted operating profit (36) (36) –
Average funds managed by Eastspring $214.0bn $186.3bn 15 Margin based on operating income 30bps 30bps – Cost/income ratio10 52% 55% (3) ppts
Eastspring delivered a strong performance in 2019 reflecting positive operating momentum and the benefit of recent acquisitions. Overall funds under management of $241.1 billion and adjusted operating profit of $283 million, are at record levels.
The increase in external funds under management to $124.7 billion (2018: $77.8 billion) reflected $8.9 billion18 (2018: $(2.1) billion18) in positive third-party net flows, favourable market performance and $7.5 billion from the TFUND acquisition in
December 2019. In addition, following the demerger of M&G plc, $26.7 billion of M&G related assets have been reclassified to external from internal funds under management.
Third party net inflows were positive in both retail and institutional products and across both equity and fixed income funds, reflecting the benefit of new products and mandates. Overall funds under management were also supported by continued positive internal net flows resulting in total funds under management of $241.1 billion at year end (2018: $192.7 billion on an actual exchange rate basis).
An increase in average funds managed by Eastspring of 15 per cent2 resulted in adjusted operating profit rising by 18 per cent (up 17 per cent on an actual exchange rate basis) to $283 million and growth in operating income of 10 per cent2. Disciplined cost management has led to an improvement in its costincome ratio10 to 52 per cent (2018: 55 per cent on an actual exchange rate basis), with operating expenses increasing at a slower rate of 8 per cent (6 per cent on an actual exchange rate basis).
Operating return on closing shareholders’ funds (%) 26 30 Total comprehensive return on closing shareholders’ funds (%) 36 20
GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2019 FINANCIAL PERFORMANCE CONTINUED
United States Operational and financial highlights The financial performance of the US business in the period reflects the impact of the execution of the first steps of its strategic diversification together with the varying financial effects of strong US equity market performance and lower interest rates in the period. We have decided to adopt early as at 31 December 2019 the new National Association of Insurance Commissioners (NAIC) capital rules related to variable annuities and have made consequential updates to our EEV basis results. All of the results below reflect the whole US segment, except for the discussion on local statutory capital which covers Jackson National Life only.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 47
Adjusted operating profit from long-term business and asset management before restructuring costs 3,070 2,563
(Loss) profit for the year after tax before restructuring costs (380) 1,982
Spread income declined to $642 million (2018: $778 million) reflecting the combination of lower core spread income and lower income derived from swaps held for duration management purposes. The development of the core spread income was driven by the effect of lower invested asset yields and the full consolidation of the assets acquired with the John Hancock transaction towards the end of 2018, resulting in a reduction in the spread margin to 112 basis points (2018: 155 basis points).
Acquisition costs increased by 6 per cent, broadly in line with the 8 per cent increase in new APE sales. Administrative expenses increased from $(1,607) million in 2018 to $(1,675) million in 2019, primarily as a result of higher asset-based commissions. Excluding these asset-based commissions, the resulting administration expense ratio would be 33 basis points (2018: 34 basis points).
DAC adjustments, being the cost deferred on sales in the period net of amortisation of amounts deferred previously, of $510 million (2018: $(152) million) were favourable compared with the prior period, in part due to higher sales in the period. Over 2019, strong capital market returns resulted in a separate account investment performance materially in excess of that assumed within the DAC mean reversion formula which led to a favourable DAC deceleration effect of $280 million (2018: unfavourable DAC acceleration effect of $(259) million).
In addition to the effects seen above, falling interest rates resulted in gains of $2.7 billion being recognised outside the income statement on bonds held by Jackson’s general account. In total, Jackson’s segment shareholders’ funds increased to $8,929 million (2018: $7,163 million).
New business profit 883 1,230 (28) Business in force 874 1,594 (45)
This is a function of weak equity markets in the fourth quarter of 2018, and the adoption of a new hedge model as discussed above.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 49
Operating free surplus generated before restructuring costs and EEV hedge modelling enhancements 2,028 1,895 7
The US in-force business generated $2,567 million (2018: $2,195 million) prior to allowing for the change to the allowance for hedging costs discussed above. This included a $355 million benefit following the integration of the John Hancock business acquired in 2018. Offsetting this increase was a higher investment in new business (up 80 per cent to $(539) million). The increase in investment in new business to $(539) million (2018: $(300) million) is a function of a higher weight of general account new sales in the period.
Operating free surplus generated14 after allowing for the impact of changes to hedge modelling was $1,120 million.
After adopting this new regime, the surplus of available capital over required capital (set at 100 per cent of the Company Action Level) was $3,795 million. This equated to a risk-based capital ratio of 366 per cent (2018: 458 per cent using the previous NAIC framework). An analysis of the estimated movement in Jackson’s risk-based capital position over 2019 is set out below. Jackson continues to remain within its existing risk appetite and expects the new capital regime to result in a more stable RBC ratio than under the previous regime, in low interest rate scenarios.
Capital generation from new business written during 2019 119 263 (144) (75) Operating capital generation from business in force at 1 January 2019* 1,406 (125) 1,531 141
Non-operating and other capital movements reduced the RBC ratio by 121 percentage points ($(1.4) billion) due to: — adoption of the new capital regime at 31 December 2019, resulting in a one-off reduction in the RBC ratio of 17 percentage points; — one-off hedge losses in respect of managing through the changeover to the new regime representing a 28 percentage point fall in the RBC ratio; — an increase in deferred tax assets not admitted as statutory capital, which reduced the RBC ratio by 26 percentage points, bringing the total non-admitted DTA to $0.9 billion at 31 December 2019. $0.5 billion of this non-admitted DTA balance relates to hedge losses incurred in 2019 which are required to be spread over three years for tax purposes and so is expected to be carried forward to be deducted from Jackson’s taxable income in the next two years; and
6 Surplus over Group minimum capital requirement and estimated before allowing for second interim ordinary dividend. Shareholder business excludes the available capital and minimum requirement of participating business in Hong Kong, Singapore and Malaysia. Further information on the basis of calculation of the LCSM measure is contained in note I(i) of the Additional unaudited financial information.
7 Net cash remitted by business units are included in the holding company cash flow, which is disclosed in detail in note I(iii) of the Additional unaudited financial information. This comprises dividends and other transfers from business units that are reflective of emerging earnings and capital generation.
14 Operating free surplus generated before restructuring costs. 15 The pro forma dividend for 2019 of the $958 million represents the first interim ordinary dividend paid of $528 million (£428 million based on spot exchange rate at the payment date) plus the second interim ordinary dividend of $675 million (£510 million based on spot rate at 31 December 2019) less the contribution of remittances from the discontinued M&G plc business to the second interim ordinary dividend of $245 million (£185 million based on spot exchange rates at 31 December 2019).
16 Total insurance margin ($2,244 million) and fee income ($286 million) of $2,530 million divided by total life income excluding other income of $2,958 million (Comprised of total life income of $6,187 million less other income of $3,229 million).
17 For discussion on the basis of preparation of the sources of earnings in the table see note I(iv) of the Additional unaudited financial information.
Financial markets After�a�volatile�2018,�which�was�marked� by�sharp�falls�in�equity�markets�in�the�final� quarter,�2019�saw�a�significant�rebound� with�all�major�risk�assets,�particularly�global� equities,�providing�strong�returns�over� the�course�of�the�year.�Government�bonds� also�saw�good�returns�as�yields�declined� significantly,�with�the�US�10-year� government�bond�yield�falling�by�circa� 80�basis�points�over�the�year.�Corporate� bonds�performed�similarly�well,�with�credit� spreads�tightening�and�mirroring�the� strong�equity�returns�observed.�The�year� was�largely�characterised�by�relatively� defensive�investor�sentiment�and�a� preference�for�higher�credit�quality�within� asset�classes.�This�positive�performance� was�facilitated�by�the�accommodative� environment�driven�by�the�shift�in� monetary�policy�by�major�central�banks,� but�came�amid�a�deterioration�in� macroeconomic�indicators,�an�increase�in� perceived�US�recession�risk�and�the�trade� negotiations�between�the�US�and�China� which�ebbed�and�flowed,�all�of�which� negatively�impacted�global�risk�sentiment.� Political�headlines�and�the�monetary�policy� shift�by�central�banks�were�the�primary� drivers�of�currency�market�movements� during�2019,�with�the�US-China�trade� negotiations�and�developments� surrounding�the�UK’s�departure�from�the� EU�impacting�the�US�dollar�(in�particular� the�USD-RMB�rate)�and�UK�pound� respectively.�Funding�markets�came�under� significant�pressure�in�September�when�a� sudden�spike�in�repo�rates�was�observed,� prompting�the�US�Federal�Reserve�to� intervene�and�inject�significant�funding� through�a�combination�of�permanent� and�temporary�open�market�operations.� Global�financial�markets�remain�highly� susceptible�to�reversals�in�risk�sentiment,� as�demonstrated�in�Q1�2020�with�the� coronavirus�outbreak,�which�has�increased� market�downside�risks�significantly.
Prudential plc Annual�Report�2019� prudentialplc.com52 international�trade�disputes,�notably� between�the�US�and�China�during�2019.� Increasing�polarisation�has�become�a�driver� of�geopolitical�risk,�both�between�nations� and�within�them.�Populations�appear�to�be� increasingly�active�in�voicing�and�acting� collectively�on�their�discontent.�2019�has� been�described�as�‘the�year�of�the�street� protestor’�with�mass�demonstrations� having�taken�place�across�the�world,� including�in�Spain,�France,�Hong�Kong,� India�and�the�Middle�East�over�the�course� of�the�year�and�continuing�into�2020.� A�weakening�of�civil�order�and�domestic� disruption�are�potential�consequences,�and� this�is�testing�the�resilience�of�businesses� and�governments.�As�a�global�organisation,� the�Group�has�developed�plans�to�mitigate�
Transformation risks around key change programmes, including those related to the Group’s digital strategy
How ‘risk’ is defined Prudential�defines�‘risk’�as�the�uncertainty� that�is�faced�in�implementing�the�Group’s� strategies�and�achieving�its�objectives� successfully,�and�includes�all�internal�or� external�events,�acts�or�omissions�that�have� the�potential�to�threaten�the�success�and� survival�of�the�Group.�Accordingly,�material� risks�will�be�retained�selectively�when�it�is� considered�that�there�is�value�in�doing�so,� and�where�it�is�consistent�with�the�Group’s� risk�appetite�and�philosophy�towards� risk-taking.
Oper at ional, disr uptio n a nd cy ber ri sk s
Ri sk s t o ou r fi n an cia l si tuation
Risk�culture�forms�part�of�the�Group� Risk�Framework�and�the�Group�works� to�promote�a�responsible�risk�culture� in�the�following�ways: �— Senior�management�in�business�units� promote�a�responsible�culture�of�risk� management�by�emphasising�the� importance�of�balancing�risk�with� profitability�and�growth�in�decisionmaking. �This�balance�is�included�in� the�performance�evaluation�of�key� individuals,�including�both�senior� management�and�those�directly� responsible�for�risk�management; �— The�Group�works�to�build�skills�and� capabilities�in�risk�management,�which� are�needed�by�both�senior�management� and�risk�management�specialists,�while� attempting�to�allocate�scarce�resources� appropriately;�and
Risk identification Group-wide�risk�identification�takes� place�throughout�the�year�as�the�Group’s� businesses�undertake�a�comprehensive� bottom-up�process�to�identify,�assess�and� document�its�risks.�This�concludes�with� an�annual�top-down�identification�of�the� Group’s�principal�risks,�which�considers� those�risks�that�have�the�greatest�potential� to�impact�the�Group’s�operating�results�and� financial�condition�and�is�used�to�inform� risk�reporting�to�the�risk�committees�and� the�Board�for�the�year.�
Our�risk�identification�process�also�includes� the�Group’s�Own�Risk�and�Solvency� Assessment�(ORSA)�and�horizon-scanning� performed�as�part�of�our�emerging�risk� management�process.�In�addition�to�risk� identification,�the�ORSA�is�also�the� ongoing�process�of�assessing,�controlling,� monitoring�and�reporting�the�risks�to�which� the�business�is�exposed.�It�includes�an� assessment�of�capital�adequacy�to�ensure� that�the�Group’s�solvency�needs�are�met� at�all�times�as�well�as�quantitative�and� qualitative�assessments�of�the�Group’s�risk� profile�and�solvency�needs�on�a�forwardlooking �basis,�incorporating�the�Group’s� strategy�and�business�plan.�The�Group’s� regular�ORSA�report�was�produced�in� H1�2019,�with�an�additional�ORSA�report� produced�in�October�2019�in�anticipation� of�the�completion�of�the�demerger�of�M&G� plc�which�included�a�forward-looking� assessment�of�the�post�demerger�Group’s� capital�and�liquidity�position�under�a�range� of�stresses�and�scenarios.
Risk measurement and assessment All�identified�risks�are�assessed�based�on� an�appropriate�methodology�for�that�risk.� All�quantifiable�risks,�which�are�material� and�mitigated�by�holding�capital,�are� modelled�in�the�Group’s�internal�model,� which�is�used�to�determine�economic� capital�requirements.�Governance� arrangements�are�in�place�to�support�the� internal�model,�including�independent� validation�and�processes�and�controls� around�model�changes�and�limitations.
Risk management and control The�control�procedures�and�systems� established�within�the�Group�are� designed�to�manage�the�risk�of�failing�to� meet�business�objectives.�These�focus�on� aligning�the�levels�of�risk-taking�with�the� Group’s�strategy�and�can�only�provide� reasonable,�and�not�absolute,�assurance� against�material�misstatement�or�loss.
Risk monitoring and reporting The�identification�of�the�Group’s�key�risks� informs�the�management�information� received�by�the�Group�risk�committees�and� the�Board.�Risk�reporting�of�key�exposures� against�appetite�is�also�included,�as�well�as� ongoing�developments�in�the�Group’s� principal�and�emerging�risks.
iii Risk appetite, limits and triggers The�Group�recognises�that�interests�of� its�customers�and�shareholders�and�a� managed�acceptance�of�risk�lies�at�the� heart�of�its�business,�and�that�effective�risk� management�capabilities�represent�a�key� source�of�competitive�advantage.�The� extent�to�which�Prudential�is�willing�to�take� risk�in�the�pursuit�of�its�business�strategy� and�objective�to�create�shareholder�value� is�defined�by�a�number�of�qualitative�and� quantitative�expressions�of�risk�appetite,� operationalised�through�measures�such�as� limits,�triggers�and�indicators.�The�Group� Risk�function�is�responsible�for�reviewing� the�scope�and�operation�of�these�risk� appetite�measures�at�least�annually�to� determine�that�they�remain�relevant.� The�Board�approves�all�changes�made�to� the�Group’s�aggregate�risk�appetite�and� has�delegated�authority�to�the�Group�Risk� Committee�to�approve�changes�to�the� system�of�limits,�triggers�and�indicators.
Group�risk�appetite�is�defined�and� monitored�in�aggregate�for�financial� and�non-financial�risks�by�the�setting� of�objectives�for�its�liquidity,�capital� requirements�and�non-financial�risk� exposure.�Further�detail�is�included�in� sections�5�and�6,�as�well�as�covering�risks� to�shareholders,�including�those�from� participating�and�third-party�business.� Group�limits�operate�within�these� expressions�of�risk�appetite�to�constrain� material�risks,�while�triggers�and�indicators� provide�further�constraint�and�defined� points�for�escalation.
Liquidity The�objective�of�the�Group’s�liquidity�risk� appetite�is�to�ensure�that�the�Group�is�able� to�generate�sufficient�cash�resources�to� meet�financial�obligations�as�they�fall� due�in�business-as-usual�and�stressed� scenarios.�Risk�appetite�with�respect�to� liquidity�risk�is�measured�using�a�liquidity� coverage�ratio�(LCR)�which�considers�the� sources�of�liquidity�against�liquidity� requirements�under�stress�scenarios.�
Monitor and report Escalation�requirements�in�the� event�of�a�breach�are�clearly� defined.�Risk�reporting�provides� regular�updates�to�the�Group’s� Board�and�risk�committees�on� exposures�against�Board-approved� appetite�statements�and�limits.� Reporting�also�covers�the�Group’s� key�risks.
Risk governance and culture Risk�governance�comprises�the� Board,�organisational�structures,� reporting�relationships,�delegation� of�authority,�roles�and�responsibilities,� and�risk�policies.�Risk�culture�is�a� subset�of�broader�organisational� culture,�and�shapes�the�organisationwide �values�used�to�prioritise�risk� management�behaviours.
5 Summary risks Broadly,�the�risks�assumed�across�the� Group�can�be�categorised�as�those�relating� to�its�financial�situation,�its�business�and� industry,�regulatory�and�legal�compliance� and�those�relating�to�ESG.�Principal�risks,� whether�materialising�within�the�Group�or� at�third�parties�on�which�the�Group�relies,� may�have�a�financial�impact�and�could�
Prudential�and�the�insurance�industry�are�making�increasing� use�of�emerging�technological�tools�and�digital�services,� or�forming�partnerships�with�third�parties�that�provide�these� capabilities.�While�this�provides�new�opportunities,�opening� up�markets,�improving�insights�and�increasing�scalability,� it�also�comes�with�additional�risks�which�are�managed�within� the�Group’s�existing�governance�and�risk�management� processes,�including�additional�operational�risks�and� increased�risks�around�data�security�and�misuse.�Automated� digital�distribution�channels�increase�the�criticality�of�system� and�process�resilience�in�order�to�deliver�uninterrupted� service�to�customers.
The�insurance�risks�that�the�business�is�exposed�to�by�virtue� of�its�products�include�persistency risk�(customers�lapsing� their�policies�at�different�levels�than�expected,�and�a�type�of� policyholder�behaviour�risk);�mortality risk�(higher�number� of�policyholders�with�life�protection�dying�than�expected);� morbidity risk�(more�policyholders�with�health�protection� becoming�ill�than�expected)�and�longevity risk�(policyholders� living�longer�than�expected).�The�medical�insurance�business�in� Asia�is�also�exposed�to�medical inflation risk (the�increasing� cost�of�medical�treatments�being�higher�than�expected).
Risks from the nature of our business and our industry These�include�the�Group’s�non-financial�risks�(including�operational�and�financial�crime�risk),�transformation�risks�from� significant�change�activity�and�the�insurance�risks�assumed�by�the�Group�in�providing�its�products.
These�include�the�environmental risks�associated� with�climate�change�and�the�impact�of�this�on�the�business,� such�as�the�physical�impacts�on�the�Group’s�operational� resilience,�underwriting�assumptions�and�claims�profile,� as�well�as�the�impact�to�long-term�asset�valuations�resulting� from�the�transition�to�a�low�carbon�economy.�Social risks� affecting�Prudential�may�arise�from�public�health�and� demographic�changes�(such�as�increasing�obesity�and� urbanisation),�which�may�impact�on�product�claims�profiles.� Social�risks�may�also�arise�from�a�failure�to�consider�the�rights,�
6 Further risk information In�reading�the�sections�below,�it�is�useful� to�understand�that�there�are�some�risks� that�Prudential’s�policyholders�assume� by�virtue�of�the�nature�of�their�products,� and�some�risks�that�the�Company�and�its� shareholders�assume.�Examples�of�the� latter�include�those�risks�arising�from�assets� held�directly�by�and�for�the�Company�or�the� risk�that�policyholder�funds�are�exhausted.� This�report�is�focused�mainly�on�risks�to� the�shareholder�but�will�include�those� which�arise�indirectly�through�our� policyholder�exposures.
6.1 Risks to the Group’s financial situation, including those from the external macroeconomic and geopolitical environment a Market risk (Audited) The�main�drivers�of�market�risk�in�the� Group�are: �— Investment�risk,�which�arises�on� our�holdings�of�equity�and�property� investments,�the�prices�of�which� can�change�depending�on�market� conditions.�The�main�investment�risk� exposure�arises�from�the�portion� of�the�profits�from�the�Hong�Kong� with-profits�funds�which�the� shareholders�are�entitled�to�receive;� the�value�of�the�future�fees�from� the�fee-earning�products�in�the� Asia�business;�and�from�the�asset� returns�backing�Jackson’s�variable� annuities�business; �— Interest�rate�risk,�which�is�driven�by� the�valuation�of�Prudential’s�assets� (particularly�the�bonds�that�it�invests�in)� and�liabilities,�which�are�dependent�on� market�interest�rates�and�exposes�it�to� the�risk�of�those�moving�in�a�way�that�is� detrimental.�The�Group’s�interest�rate� risk�is�driven�by�Jackson’s�fixed�annuity� business,�the�cost�of�guarantees�in� its�fixed�index�and�variable�annuity� business,�and�the�guarantees�of�some� non-unit-linked�investment�savings� products�in�Asia.�The�impact�of�lower� interest�rates�also�manifests�through� reduced�solvency�levels�in�some�of�the� Asian�businesses�as�well�as�reduced� new�business�profitability;�and
Interest rate risk Some�products�that�Prudential�offers� are�sensitive�to�movements�in�interest� rates.�As�part�of�the�Group’s�ongoing� management�of�this�risk,�a�number�of� mitigating�actions�to�the�in-force�business� have�been�taken,�as�well�as�repricing�and� restructuring�new�business�offerings�in� response�to�recent�relatively�low�interest� rates.�Nevertheless,�some�sensitivity�to� interest�rate�movements�is�still�retained.
In�Asia,�our�exposure�to�interest�rate�risk� arises�from�the�guarantees�of�some�non-unitlinked �investment�savings�products,� including�the�Hong�Kong�with-profits�and� non-profit�business.�This�exposure�exists� because�of�the�potential�for�an�asset� and�liability�mismatch,�where�long-dated� liabilities�and�guarantees�are�backed� by�short-dated�assets,�which�cannot�be� eliminated,�but�is�monitored�and�managed� through�local�risk�and�asset�liability� management�committees�against�risk� appetite�aligned�with�the�Group’s�limit� framework.
In�cases�where�a�non-US�dollar� denominated�surplus�arises�in�an� operation�which�is�to�be�used�to�support� Group�capital,�or�where�a�significant� cash�payment�is�due�from�a�subsidiary� to�the�Group,�this�currency�exposure� may�be�hedged�where�it�is�believed�to�be� favourable�economically�to�do�so.�Further,� the�Group�generally�does�not�have�appetite� for�significant�direct�shareholder�exposure� to�foreign�exchange�risks�in�currencies� outside�the�countries�in�which�it�operates,� but�it�does�have�some�appetite�for�this� on�fee�income�and�on�non-sterling� investments�within�the�with-profits�fund.� Where�foreign�exchange�risk�arises� outside�appetite,�currency�swaps�and� other�derivatives�are�used�to�manage� the�exposure.
b Credit risk (Audited) Prudential�invests�in�bonds�that�provide� a�regular,�fixed�amount�of�interest�income� (fixed�income�assets)�in�order�to�match�the� payments�needed�to�policyholders.�It�also� enters�into�reinsurance�and�derivative� contracts�with�third�parties�to�mitigate� various�types�of�risk,�as�well�as�holding� cash�deposits�at�certain�banks.�As�a�result,� it�is�exposed�to�credit�risk�and�counterparty� risk�across�its�business.
A�number�of�risk�management�tools�are� used�to�manage�and�mitigate�this�credit� risk,�including�the�following: �— A�credit�risk�policy�and�dealing�and� controls�policy; �— Risk�appetite�statements�and�limits� that�have�been�defined�on�issuers,� and�counterparties; GROUP�CHIEF�RISK�AND�COMPLIANCE�OFFICER’S�REPORT�ON�THE�RISKS�FACING�OUR�BUSINESS� AND�HOW�THESE�ARE�MANAGED CONTINUED
�— Collateral�arrangements�for�derivative,� secured�lending�reverse�repurchase� and�reinsurance�transactions; �— The�Group�Credit�Risk�Committee’s� oversight�of�credit�and�counterparty� credit�risk�and�sector�and/or�namespecific �reviews; �— Regular�assessments;�and
c Liquidity risk (Audited) Prudential’s�liquidity�risk�arises�from�the� need�to�have�sufficient�liquid�assets�to�meet� policyholder�and�third-party�payments� as�they�fall�due.�This�incorporates�the�risk� arising�from�funds�composed�of�illiquid� assets�and�results�from�a�mismatch� between�the�liquidity�profile�of�assets� and�liabilities.�Liquidity�risk�may�impact�on� market�conditions�and�valuation�of�assets� in�a�more�uncertain�way�than�for�other�risks� like�interest�rate�or�credit�risk.�It�may�arise,� for�example,�where�external�capital�is� unavailable�at�sustainable�cost,�increased� liquid�assets�are�required�to�be�held�as� collateral�under�derivative�transactions� or�where�redemption�requests�are�made� against�Prudential�external�funds.
The�Group�has�significant�internal�sources� of�liquidity,�which�are�sufficient�to�meet�all� of�our�expected�cash�requirements�for�at� least�12�months�from�the�date�the�financial� statements�are�approved,�without�having� to�resort�to�external�sources�of�funding.� The�Group�has�a�total�of�£2.0�billion�of� undrawn�committed�facilities�that�can�be� made�use�of,�expiring�in�2024.�Access�to� further�liquidity�is�available�through�the� debt�capital�markets�and�an�extensive� commercial�paper�programme�is�in�place,� and�Prudential�has�maintained�a�consistent� presence�as�an�issuer�in�the�market�for� the�past�decade.
6.2 Risks arising from the nature of the Group’s business and industry a Transformation risk A�number�of�significant�change� programmes�are�currently�running�in�order� to�implement�the�Group’s�strategic�vision,� comply�with�impending�regulatory�changes� and�to�maintain�market�competitiveness.� Many�of�these�programmes�are� interconnected�with�complex� dependencies�and/or�of�large�scale,� and�may�have�financial�and�non-financial� implications�if�they�fail�to�meet�their� objectives.�Additionally,�these�programmes� inherently�give�rise�to�design�and�execution� risks,�and�may�introduce�new,�or�increase� existing,�business�risks.�These�include� an�increased�strain�on�the�operational� capacity,�newly-implemented�controls� being�ineffective�or�general�weakening� of�the�control�environment�of�the�Group.� Implementing�further�strategic�initiatives� may�amplify�these�risks.�Furthermore,� these�programmes�require�ongoing� oversight,�coordinated�independent� assurance�and�regular�monitoring�and� consolidated�reporting,�as�part�of�the� Group’s�Transformation�Risk�Framework,� to�mitigate�the�risks�to�the�business.
The�Group’s�current�significant�change� programmes�relate�to�an�expansion�of�its� use�of�technology,�platforms�and�analytics,� improving�the�efficiency�of�certain�business� functions�and�processes�(data,�systems,� people)�and�the�establishment�of�new� third-party�arrangements.�The�Group’s� transformation�portfolio�also�includes� programmes�related�to�regulatory�change,� including�but�not�limited�to,�the�transition� to�the�Hong�Kong�IA’s�GWS�framework,� the�discontinuation�of�IBORs�and�the� implementation�of�IFRS�17�–�see�section� 6.3�for�further�information.�
Business disruption risk Prudential�recognises�that�business� disruption�is�a�key�risk�to�effective�business� operations�and�delivery�of�business� services,�and�has�the�potential�to�impact� our�customers�and�the�market�more� broadly.�The�Group�therefore�continuously� seeks�to�develop�greater�business� resilience�through�planning,�preparation,� testing�and�adaption.�Business�continuity� management�(BCM)�is�one�of�a�number� of�activities�undertaken�by�the�Group� Security�function�that�helps�the�Group� to�protect�its�key�stakeholders�and�its� systems,�and�business�resilience�is�at�the�
Information security risk and data privacy Information�security�risk�remains�an�area� of�heightened�focus�after�a�number�of� recent�high-profile�attacks�and�data�losses� across�industries.�Criminal�capability�in� this�area�is�maturing�and�industrialising,� with�an�increased�level�of�understanding� of�complex�financial�transactions�which� increases�the�risks�to�the�financial� services�industry.�The�threat�landscape� is�continuously�evolving,�and�the�systemic� risk�of�sophisticated�but�untargeted� attacks�is�rising,�particularly�during�times� of�heightened�geopolitical�tensions.
worldwide.�This�increases�financial�and� reputational�implications�for�Prudential�in� the�event�of�a�breach�of�its�(or�third-party� suppliers’)�IT�systems.�As�well�as�protecting� data,�stakeholders�expect�companies�and� organisations�to�use�personal�information� transparently�and�appropriately.�Given�this,� both�information�security�and�data�privacy� are�key�risks�for�the�Group.�As�well�as� having�preventative�risk�management�in� place,�it�is�fundamental�that�the�Group�has� robust�critical�recovery�systems�in�place� in�the�event�of�a�successful�attack�on�its� infrastructure,�a�breach�of�its�information� security�or�a�failure�of�its�systems�in�order� to�retain�its�customer�relationships�and� trusted�reputation.
The�strategic�objectives�of�the�programme� include�achieving�consistency�in�the� execution�of�security�disciplines�across� the�Group,�improving�visibility�across� Prudential’s�businesses�and�deployment� of�automation�to�detect�and�address� threats.�It�also�includes�achieving�security� by�design�by�aligning�subject�matter� expertise�to�the�Group’s�digital�and� business�initiatives�to�embed�security� controls�across�platforms�and�ecosystems.� Implementation�of�the�operating�model� and�progress�against�these�strategic� objectives�have�continued�over�the�year.���
Financial crime risk As�with�all�financial�services�firms,� Prudential�is�exposed�to�risks�relating� to�money�laundering�(the�risk�that�the� products�or�services�of�the�Group�are� used�by�customers�or�other�third�parties�to� transfer�or�conceal�the�proceeds�of�crime);� fraud�(the�risk�that�fraudulent�claims�or� transactions,�or�procurement�of�services,� are�made�against�or�through�the�business);� sanctions�compliance�(the�risk�that�the� Group�undertakes�business�with� individuals�and�entities�on�the�lists�of�the� main�sanctions�regimes);�and�bribery�and� corruption�(the�risk�that�employees�or� associated�persons�seek�to�influence�the� behaviour�of�others�to�obtain�an�unfair� advantage�or�receive�benefits�from�others� for�the�same�purpose).
The�Group-wide�policies�we�have�in�place� on�anti-money�laundering,�fraud,�sanctions� and�anti-bribery�and�corruption�reflect�the� values,�behaviours�and�standards�that�are� expected�across�the�business.�Across�Asia,� screening�and�transaction�monitoring� systems�are�in�place�and�a�series�of� improvements�and�upgrades�are�being� implemented,�while�a�programme�of� compliance�control�monitoring�reviews�is� being�undertaken.�Risk�assessments�are� performed�annually�at�higher�risk�locations.� Due�diligence�reviews�and�assessments� against�Prudential’s�financial�crime�policies� are�performed�as�part�of�the�Group’s� business�acquisition�process.�The�Group� continues�to�undertake�strategic�activity� to�monitor�and�evaluate�the�evolving�fraud� risk�landscape,�mitigate�the�likelihood�of� fraud�occurring�and�increase�the�rate�of� detection.
�— Application�of�a�risk�and�control� assessment�(RCA)�process,�where� operational�risk�exposures�are�identified� and�assessed�as�part�of�a�periodical� cycle.�The�RCA�process�considers�a� range�of�internal�and�external�factors,� including�an�assessment�of�the�control� environment,�to�determine�the� business’s�most�significant�risk� exposures�on�a�prospective�basis; �— An�internal�incident�management� process,�which�identifies,�quantifies� and�monitors�remediation�conducted� through�root�cause�analysis�and� application�of�action�plans�for�risk� events�that�have�occurred�across� the�business; �— A�scenario�analysis�process�for�the� quantification�of�extreme,�yet�plausible� manifestations�of�key�operational�risks� across�the�business�on�a�forwardlooking �basis.�This�is�carried�out�at�least� annually�and�supports�external�and� internal�capital�requirements�as�well�as� informing�risk�oversight�activity�across� the�business;�and
�— A�transformation�risk�framework�that� assesses,�manages�and�reports�on�the� end-to-end�transformation�life�cycle,� project�prioritisation�and�the�risks,� interdependencies�and�possible� conflicts�arising�from�a�large�portfolio� of�transformation�activities; �— Internal�and�external�review�of�cyber� security�capability�and�defences;�
c Insurance risks (Audited) Insurance�risk�makes�up�a�significant� proportion�of�Prudential’s�overall�risk� exposure.�The�profitability�of�its�businesses� depends�on�a�mix�of�factors,�including�levels� of,�and�trends�in,�mortality�(policyholders� dying),�morbidity�(policyholders�becoming� ill)�and�policyholder�behaviour�(variability�in� how�customers�interact�with�their�policies,� including�utilisation�of�withdrawals,�take-up� of�options�and�guarantees�and�persistency,� ie�lapsing�of�policies),�and�increases�in�the� costs�of�claims,�including�the�level�of� medical�expenses�increases�over�and� above�price�inflation�(claim�inflation).
Prudential’s�insurance�risks�are�managed� and�mitigated�using�the�following: �— The�Group’s�insurance,�product�and� underwriting�risk�policies; �— The�risk�appetite�statements,�limits� and�triggers; �— Using�persistency,�morbidity�and� longevity�assumptions�that�reflect� recent�experience�and�expectation�of� future�trends,�and�industry�data�and� expert�judgement�where�appropriate; �— Using�reinsurance�to�mitigate�mortality� and�morbidity�risks; �— Ensuring�appropriate�medical� underwriting�when�policies�are�issued� and�appropriate�claims�management� practices�when�claims�are�received� in�order�to�mitigate�morbidity�risk; �— Maintaining�the�quality�of�sales� processes,�training�and�using�initiatives� to�increase�customer�retention�in�order� to�mitigate�persistency�risk; �— Using�product�repricing�and�other� claims�management�initiatives�in�order� to�mitigate�medical�expense�inflation� risk;�and
6.3 Risks related to regulatory and legal compliance Regulatory�risks�may�impact�Prudential’s� business�or�the�way�in�which�it�is� conducted.�This�covers�a�broad�range�of� risks�including�changes�in�government� policy�and�legislation,�capital�control� measures,�and�new�regulations�at�either� national�or�international�level.�In�addition� to�the�risks�arising�from�regulatory�change,� the�breadth�of�local�and�Group-wide� regulatory�arrangements�presents�the� risk�that�regulatory�requirements�are�not� fully�met,�resulting�in�specific�regulator� interventions�or�actions�including� retrospective�interpretation�of�standards� by�regulators�which�may�result�in� regulatory�censure�or�significant�additional� costs�to�the�business.
Efforts�to�curb�systemic�risk�and�promote� financial�stability�are�also�under�way.� At�the�international�level,�the�Financial� Stability�Board�(FSB)�continues�to�develop� recommendations�for�the�asset� management�and�insurance�sectors,� including�ongoing�assessment�of�systemic� risk�measures.�The�International� Association�of�Insurance�Supervisors�(IAIS)� has�continued�its�focus�on�the�following� two�key�developments.
The�FSB�has�endorsed�a�new�holistic� framework�(HF)�for�systemic�risk�for� implementation�by�the�IAIS�in�2020�and� suspended�G-SII�designations�until�a� review�to�be�undertaken�in�2022.�Many�of� the�previous�G-SII�measures�have�already� been�adopted�into�the�insurance�core� principles�(ICPs)�and�ComFrame�–�the� common�framework�for�the�supervision� of�internationally�active�insurance�groups� (IAIGs).�Prudential�is�likely�to�satisfy�the� criteria�of�an�IAIG�and�therefore�continue� to�be�subject�to�these�measures.�The�HF� also�includes�a�monitoring�element�for�the� identification�of�a�build-up�of�systemic�risk� and�to�enable�supervisors�to�take�action� where�appropriate.�The�IAIS�has�already� consulted�on�an�application�paper�on�the� liquidity�risk�elements�introduced�into� the�ICPs�and�ComFrame�with�a�further� consultation�focused�on�macroeconomic� elements�expected�to�follow�in�2021.
In�May�2017,�the�International�Accounting� Standards�Board�(IASB)�published�IFRS�17� which�will�introduce�fundamental�changes� to�the�IFRS-based�reporting�of�insurance� entities�that�prepare�accounts�according� to�IFRS�from�2021.�In�June�2019,�the�IASB� published�an�exposure�draft�proposing�a� number�of�targeted�amendments�to�this� new�standard�including�the�deferral�of� the�effective�date�by�one�year�from�2021� to�2022.�As�a�result�of�comments�on� this�exposure�draft,�the�IASB�plans�to� redeliberate�on�a�number�of�areas�of�IFRS� 17,�with�an�amended�standard�expected�to� be�issued�in�mid-2020.�IFRS�17�is�expected� to,�among�other�things,�include�altering�the� timing�of�IFRS�profit�recognition,�and�the� implementation�of�the�standard�is�likely� to�require�changes�to�the�Group’s�IT,� actuarial�and�finance�systems.�The�Group� is�reviewing�the�complex�requirements� of�this�standard�and�considering�its� potential�impact.
Policies�and�procedures�to�support�how� the�Group�operates�in�relation�to�certain� ESG�topics�are�included�in�the�Group� Governance�Manual.�Prudential�manages� key�ESG�issues�through�a�multi-disciplinary� approach�with�functional�ownership�for� ESG�topics.�The�ESG�Executive�Committee� coordinates�these�activities�and�seeks,� as�one�of�its�aims,�to�ensure�a�consistent� approach�in�managing�ESG�considerations� in�its�business�activities,�including� investment�activities.�It�is�supported� by�senior�functional�leaders�and� representatives�from�the�Group’s�business� units,�including�the�chief�investment� officers�of�the�Group’s�asset�managers.
The�environmental�risks�associated�with� climate�change�is�one�ESG�area�that�poses� significant�risks�to�Prudential�and�its� customers.�The�global�transition�to�a�lower� carbon�economy�could�potentially�see� the�financial�assets�of�carbon-intensive� companies�re-price�as�a�result�of�facing� significantly�higher�costs�or�decreasing� demand�for�their�products�and�services.� The�speed�of�this�transition,�including�the� extent�to�which�it�is�orderly�and�managed,� will�be�influenced�by�factors�such�as�public� policy,�technology�and�changes�in�market� or�investor�sentiment.�This�‘transition�risk’� may�adversely�impact�the�valuation�of� investments�held�by�the�Group.�The�Group� expects�the�physical�impacts�of�climate� change,�driven�by�both�specific�short-term� climate-related�events�such�as�natural� disasters�and�longer-term�changes�in� the�natural�environment,�to�increasingly� influence�the�longevity,�mortality�and� morbidity�risk�assessments�of�the� Group’s�product�offerings.�Climate-driven�
All�of�the�Group’s�activities�are� underpinned�by�ongoing�risk� management,�implemented�via�the�Group� Risk�Framework�and�risk�appetite�limits� described�on�pages�55�to�58.�The�Group’s� management�of�wider�environmental,� social�and�governance�issues�that�could� pose�a�risk�in�the�future�to�the�Group�is� set�out�in�the�Environmental,�Social�and� Governance�summary�report�on�pages�76� to�87.�This�focus�supports�the�sustainability� of�our�business�over�the�longer�term.�
For�the�purposes�of�assessing�the�Group’s� viability,�the�Directors�considered�those� risks�where�the�impact�of�possible�adverse� external�developments�could�be�of�such� speed�and�severity�to�present�a�shock�to� the�Group’s�financial�position.�The�risks� considered,�from�those�detailed�on�pages� 59�to�61�are:�market�risk,�credit�risk,� liquidity�risk�and�regulatory�risk.�The� Directors�considered�the�macroeconomic� environment�and�geopolitical�risks�in�the� markets�which�the�Group�operates,�as�well� as�subsequently�considering�the�impact�of� the�outbreak�of�coronavirus�(‘COVID-19’),� which�could�trigger�wider�economic� consequences�such�as�slow�down�or� recession�in�key�economies�and�negative� impacts�in�the�global�financial�market.
Stress and scenario testing As�noted�above,�underpinning�the� projections�in�the�business�plan�are�a� number�of�economic�and�other� assumptions.�To�evaluate�the�Group’s� resilience�to�significant�deteriorations�in� market�and�credit�conditions�and�other� shock�events,�these�risks�are�grouped� together�into�scenarios�which�are�then� applied�to�the�assumptions�underlying�the� business�plans�considered.�For�example,� scenarios�were�used�to�assess�the�potential� impact�of�up�or�down�interest�rate� movements�combined�with�corporate�credit� spread�widening,�falling�equity�values�and� insurance�stresses�(such�as�changes�in� policyholder�behaviour,�including�lapses,� and�increased�morbidity�in�Asia),�together� with�the�impact�on�central�liquidity�of�a� scenario�assuming�the�closure�of�shortterm �debt�markets,�as�well�as�additional� calls�on�liquidity�by�the�business�units.�
The�scenarios�tested�showed�that�the� Group�would�be�able�to�maintain�viability� over�the�three-year�period�under� assessment,�after�taking�account�of�the� actions�available�to�management�to� mitigate�the�impacts�on�capital�and�liquidity� in�such�scenarios.�In�addition,�the�Group� conducts�an�annual�reverse�stress�test� which�gives�the�Directors�an� understanding�of�the�maximum�resilience� of�the�Group�to�extremely�severe�adverse� scenarios.�This�analysis�assists�in� identifying�management�actions�that� could�be�implemented�to�restore�the� Group’s�capital�and�liquidity�resources� from�extreme�positions.�This�analysis�also� informs�the�Group’s�recovery�plan�and� liquidity�risk�management�plan.
We are helping consumers postpone and prevent ill-health through digital innovation, increasing access to finance and providing solutions for an ageing world. At the same time, we are investing our customers’ savings in the real economy, helping to drive sustainable growth. We are working every day to be a better and more sustainable business that continues, through our strong and clear sense of purpose, to have a positive impact. We are committed to delivering the best possible performance across all areas of our environmental, social and governance (ESG) activity, and we are continuing to develop to improve the way we work in the interest of all our stakeholders.
This strategic report complies with the Non-Financial Reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006. This ESG
— How we do it – understanding our customers and providing suitable solutions that meet their needs, fostering long-term relationships with our stakeholders, investing in our people and making responsible investments, in order to generate sustainable long-term returns in line
We exist to take the financial risk out of the biggest events in the lives of our customers, enabling them to face the future with confidence. As well as providing life and health protection, savings opportunities to meet family goals, and retirement income, we aspire to lead in new areas aligned with this purpose.
People Overview, relevant risks and associated management practices – page 81
Relevant KPIs: community investment, fundraising and donations, employee volunteering hours – page 86
Business integrity Overview, relevant risks and associated management practices – page 80
UK Companies Act, Section 172 Statement Section 172 of the UK Companies Act requires each Director to act in a way that he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing this, Section 172 requires a Director to have regard (among other matters) to the needs of employees, suppliers, customers and other wider stakeholder interests. During 2019 we engaged with our various stakeholder groups closely and we took account of their concerns in our decision-making. Below we have outlined how we have engaged with our stakeholders and the outcome of that engagement.
Colleagues During 2019 two of our Non-executive Directors, Kai Nargolwala for Asia and Africa and Tom Watjen for the US and the UK, were appointed to represent employee interests in line with new requirements under the revised UK Corporate Governance Code. They both conducted formal meetings with colleagues, including town halls and smaller-group meetings, and informal activities, including job shadowing and floorwalking. The Board is updated biannually on their activity and reflections. Across the business, we also held a variety of events to engage with colleagues, including town halls, smallergroup meetings and one-to-ones, and we used our various intranets for two-way communication, encouraging colleagues to submit questions and suggestions.
In 2019 the key concerns of colleagues were around the demerger, including what it meant for jobs, working arrangements and transfer of roles to M&G plc, and what it meant for the future of the business. Throughout this process, we kept our people informed about the progress of the demerger and the outlook for the Group, responded to all questions promptly and transparently, and escalated concerns to senior executives and the Board as appropriate. Ahead of the demerger, we also initiated a consultation on a set of proposed changes to our pension schemes for all our UK colleagues. A formal 60-day consultation took place to enable colleagues to understand the proposed changes in detail and respond to them. One-to-one, group and education sessions were held, and we received individual feedback submissions and questions to our helpline. Having discussed and reviewed the feedback, the pensions proposals were updated for both defined benefit and defined contribution members. Colleagues were also concerned about the impact of the demerger on shares, share options and existing employee share plans. In response, the Remuneration Committee approved a method for converting the value of the demerger dividend in specie into additional Prudential plc shares in respect of outstanding share awards of employees.
In order to support the Group’s strategic direction and the focus of our technology resources on the development of customer-facing applications, the Board took the decision to outsource certain IT infrastructure and operations activities that were previously performed in-house within Prudential Corporation Asia and Jackson.
A significant factor in the choice of supplier was the strength of the employee proposition offered by the successful supplier. The vendor chosen committed to re-hire all identified impacted employees on substantially similar terms and conditions, for a minimum of 12 months. The firm was noted as a growing IT-focused service company, which would provide transferred staff with greater opportunities for growth and exposure and to work on new innovative technologies, and around 97 per cent of the affected colleagues agreed to transfer to the new provider.
We make sure that the ESG issues that are important to our stakeholders are understood and managed. This enables the Group to manage risks more effectively and better inform key decision-making. We strive to meet the expectations of our stakeholders in a transparent and fair manner, and this is underpinned by our comprehensive identification process, which enables us to address our material ESG issue effectively and constructively.
ESG policy framework – Group Governance Manual The Group Governance Manual (GGM) establishes standards for managing key material ESG issues across the Group, setting out the policies and procedures to support how we operate. The GGM is used to ensure that we comply with relevant statutory and regulatory requirements. Our Group-wide policies relating to our identified material issues include: Material ESG issues Our Group-wide policies
Anti-Money Laundering and Sanctions Policy outlines how we prohibit money laundering or terrorist financing in our working practices, setting out how we establish parameters to prevent this taking place across the organisation and the commitment we have to comply with sanctions, laws and regulations by screening, prohibiting or restricting business activity, and following up through investigation.
Security Policy outlines our commitment to ensuring security aligns to industry recommended practice for managing our regulatory and legal obligations. This includes how we manage incidents under the ‘Speak Out’ programme, our whistleblowing process.
Tax Risk Policy includes our processes to manage tax-related risk, by identifying, measuring, controlling and reporting on issues considered an operational, reputational or regulatory risk.
Political Donations Policy outlines our position that as an organisation we do not donate to political parties.
Third-Party Supply Policy covers how we manage and oversee our third-party arrangements, through due diligence/ selection criteria, contractual requirements, the ongoing monitoring of such relationships and reporting and escalation. Additionally, our policy considers the requirements of the UK Modern Slavery Act and the principles of the UN’s Universal Declaration of Human Rights.
People Diversity and Inclusion Policy sets out how we foster an inclusive workforce and ensure all our employees are treated fairly and feel valued, and together have the diversity in skill sets and backgrounds that enriches the organisation. Our policy considers a range of diversity aspects of our employees, including gender, age, ethnicity, disability, sexual orientation and background. Further information on the diversity of our Board, our policy in respect of this, how this is implemented and the associated results in 2019 can be found in our Governance statement on pages 110 to 117. Employee Relations Policy outlines the way we engage our employees and motivate them to achieve success for the Group: promoting positive relationships with employees, representative organisations and trade unions, and maintaining a positive reputation for the treatment of employees. Performance and Learning Policy sets out the importance of our people and frames how we invest in their development to deliver against our strategy and the future success of the organisation. This includes our Performance Management Framework.
Health and Safety Policy covers our employees, business partners, customers and others that may be affected by our operations. This details our health and safety core principles, our commitments and the measuring and reporting on our health and safety performance.
Summary of ESG issues Our key ESG issues can be categorised into the following areas: customers, responsible investments, climate, business integrity, people, technology, environment and supporting our communities.
Customers Our relationships with our customers are at the heart of our business. We deliver products that meet their needs and help them to de-risk their lives, and we ensure that we treat them with the highest standards of care. We are continually innovating to find new ways to improve the products we deliver, how we deliver them and how we serve our customers.
In line with our commitment to help protect our customers’ health, we have continued our efforts to create best-in-class health capabilities by offering more comprehensive and flexible coverage and a wider range of value-added services. Across Asia, consumers, healthcare providers, insurers and governments are confronted with problems such as a rising, underinsured middle class and a growing ageing population. As lifestyles in Asia have changed and income levels have risen, there has been a rise in noncommunicable diseases such as diabetes. This has led to a growing demand for healthcare for more complex conditions, many of which require long-term treatment or management. We are taking steps to meet the needs of an ageing workforce and help people prepare for longer life. Our digital health tools aim to empower the broader consumer group to take control of their personal health and wellbeing anytime and anywhere. We also offer a wide range of insurance products that are tailored to local market requirements and fast-changing individual needs, such as Prudential Malaysia PRUMy Critical Care, which provides comprehensive financial protection against 160 critical illnesses, and Prudential Hong Kong’s first-in-market cancer protection plan for cancer sufferers.
Financial security in the US In the US, for those nearing the end of their working careers, a financially secure retirement is at risk due to insufficient accumulation of savings and the current combination of low yields and market volatility. Through our distribution partners, Jackson provides products that offer Americans the retirement strategies they need. Jackson seeks to provide the best retirement solutions that we can, while striving to communicate information about those products in a fair and transparent way. Jackson continues to be a leader in shifting perspectives and simplifying the language around financial products.
Expanding our distribution We continue to expand our distribution platform in 2019, including by: — Completing our acquisition of a majority stake in a leading life insurer in West and Central Africa
Customer care We are committed to offering our customers the highest standards of professional care and service. We take our commitment seriously when training our personnel, who deliver service consistent with our values. Where customers have cause to complain to us, we have documented procedures in place to manage complaints received through multiple touchpoints, in a timely, robust and professional manner and in accordance with our Customer Commitments Policy and local regulatory requirements. Business units conduct analysis of complaints to understand their underlying causes, with the aim of reducing the overall number of complaints, and perform ongoing monitoring to identify issues that could lead to customer detriment and take prompt action to address any errors.
Responsible investment As a life insurer, asset owner and manager, we believe that the quality of corporate governance practices, and how companies manage the environmental and social aspects of their operations, can be material to delivering superior financial returns and longer-term shareholder value. Responsible investment at Prudential involves incorporating ESG factors into our investment decisions, alongside traditional financial analysis, to better manage risk and generate sustainable, long-term returns for our customers.
Our Group-wide Responsible Investment Framework is designed to draw together the ESG-related approaches of our asset management businesses (Eastspring in Asia and PPM America in the US) and our asset owner insurance businesses (Prudential Corporation Asia in Asia and Jackson in the US). The ESG Executive Committee now maintains our Group-wide Responsible Investment Standards, which are based upon our Group Code of Business Conduct and set minimum requirements for each of our business units. These Group-level standards require all of our businesses to develop and maintain their own local responsible investment policies, which capture their own approaches to responsible investment and are appropriate to the jurisdictions in which they operate. The strength of the commitment of our asset management businesses to responsible investment and helping to build a sustainable financial system can be demonstrated by the fact that they are both signatories to the United Nations-supported Principles for Responsible Investment (Eastspring since February 2018 and PPM America since October 2018).
ESG integration in the investment process Integrating ESG analysis into our investment processes is an ongoing activity that will continue to progress over time as the characteristics of each asset class and each of our investment strategies evolve. When making investment decisions, PPM America and Eastspring’s Singapore-based equity team look to identify all material risks to sustainable earnings for a company. ESG issues are incorporated into our fundamental analysis and integrated into our decision-making process when we believe they could have a material impact on a company’s valuation and financial performance. This analysis incorporates the governance of a company, as well as its social and environmental impact, including any plans or strategies to improve environmental performance and resilience, in our assessment of the drivers of longer-term returns.
Industry engagement, memberships and collaborative bodies During 2019, Eastspring continued to engage with industry participants to promote awareness and understanding of responsible investment across Asia, organising a number of workshops in Asia to continue to help improve the understanding of climate-related risks across the region. These were jointly held in partnership with organisations including the Asia Investor Group on Climate Change (AIGCC), the World Wildlife Fund and ISS Climate. Eastspring is an active member of the AIGCC, which aims to create awareness among Asia’s asset owners and financial institutions about the risks and opportunities associated with climate change and low-carbon investing.
Eastspring continued to participate in industry roundtable discussions throughout 2019 and was a Sustainable Finance panel member at Euromoney’s Asia Sustainable & Responsible Capital Markets Forum in June. In April, Eastspring Singapore also hosted a Bloomberg Buy-side Women’s Network on Responsible Investment and ESG Integration. Both Eastspring and Prudential Corporation Asia are members of the Asian Corporate Governance Association (ACGA), and during 2019 Eastspring contributed to a number of ACGA white papers on corporate governance in the China and Japan equity markets. Eastspring Indonesia also engaged with the ACGA regarding strategies related to improved corporate governance practices in relation to proxy voting.
Following the successful completion of the demerger of M&G plc in late 2019, we took the opportunity to increase Committee representation from our businesses in Asia. We also took steps to further integrate our
Strategy As an asset owner and asset manager, we rely on investment returns to fulfil the longer-term obligations of our saving, annuity and health and protection liabilities. We recognise that in the transition to a low-carbon economy, there may be a disorderly adjustment to the value of the assets that we hold, arising from regulatory and technological change. The physical impacts of climate change, such as rising temperatures, rising sea levels and increased occurrence of extreme weather events, may also impact the value of the Group’s assets. Such physical risks may also cause disruption to our customers, employees and property portfolio.
As a life insurer, the potential impact of climate change on life expectancy (mortality risk) and medical health and well-being (morbidity risk) could impact the profitability of our protection and health insurance products respectively. The long-term impact of climate change on the life insurance sector is complex, as climate change acts in conjunction with other factors, including demographic and social change and rapid urbanisation, all of which place increased demand on health services. As the risks from climate change intensify, so will the consequences for humanity and the natural environment – from disruptions in food, water and energy supplies to rising sea levels and increased occurrence of extreme weather events. In some regions, the negative impacts of climate change may have serious implications on public health, for example increasing the levels of life-threatening vector-borne diseases. Against this backdrop, there is a need for us to develop products and services that help to provide protection and support climate change adaptation.
Our business units manage morbidity and mortality risk by analysing our experience from our customers, supplemented by industry data and stress testing. We assess changes in morbidity and mortality that have been observed in the past and consider how they may emerge in the future. As a life and health insurer, we are committed to playing a greater role in preventing and postponing illness in order to protect our customers. We are investing in artificial intelligence technology to enable access to affordable and quality healthcare and enhancing our digital offering to help improve access to finance and health protection products.
Our Code of Conduct Our governance framework, setting out the principles by which we conduct our business and ourselves, includes our Group Code of Business Conduct, which is a central feature of our Group Governance Manual. Our Group Code of Business Conduct sets outs the ethical standards that the Board expects of itself, our employees, our agents and others working on behalf of the Group. The Group Governance Manual consists of a range of policies covering all of our business units, setting out our principles for good governance. We review these policies on a regular basis to ensure that we meet the expectations of our stakeholders.
Fighting financial crime We take the fight against money laundering, terrorist financing, bribery and corruption and fraud seriously and are committed to implement and maintain industry-leading policies and standards. In the majority of our markets we maintain business relationships with agents and intermediaries, who act on our behalf. We provide training to our staff to ensure they are familiar with international standards and best practice, as well as being well equipped to implement our policies in their respective markets.
Our Group-wide financial crime policies were updated in 2019 to reflect the requirements of our new lead regulator, the Hong Kong Insurance Authority. Our Group anti-bribery and corruption policy provides guidance to our diverse businesses on gifts and hospitality and how we deal with government officials, and highlights the importance of due diligence when dealing with third parties.
All of our Group-level financial crime policies are cascaded down to local business units through regional compliance teams, which ensure adherence to the Group requirements and applicable laws and expectations of local regulators. These policies are part of the Group governance framework, with business units attesting their compliance in addition to compliance and internal audit reviews.
The Group Risk Committee continues to review the effectiveness of the financial crime programme and the Group Financial Crime Compliance team regularly updates the Committee on risks and controls, and on the improvements made to processes in the financial crime framework. Any material matters on financial crime are reported to the Committee.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 81 agents, clients and the public, enabling reporters to raise concerns in a choice of languages through web and hotline channels. Reporters are able to log concerns covering a range of issues, including but not limited to anti-bribery and corruption, compliance breaches, discrimination and harassment and health and safety. Concerns are recorded by an independent third party and investigated by appropriately trained and skilled investigators. Qualitative programme improvements in 2019 included updates to the website, case management system upgrades, refreshed staff training and enhanced training for line managers. Since launching Speak Out in 2016, the number of concerns reported has increased by nearly 200 per cent.
Our strategic, long-term approach to D&I is reviewed regularly to ensure that it remains outcomes-focused and enables Prudential plc to be appropriately placed to become a more diverse and inclusive organisation over time. The Board of Prudential plc is committed to recruiting the best available talent and appointing the best candidate for a role, from Board level to any role within the wider company, ensuring the necessary diversity of experience, skillsets and professional backgrounds.
As a signatory to the HMT Women in Finance Charter since 2016, we have an externally disclosed target of having 30 per cent women in senior management by the end of 2021. At 31 December 2019 the figure was 28 per cent and we remain on track to meet our 2021 target.
We give full and fair consideration to applications for employment by disabled people. If an employee incurs a disability while employed by us, efforts are made to continue their employment. Training, career development and promotion opportunities are equally applied for all our employees, regardless of disability.
Senior managers Excludes the Chairman, all Directors and GEC members 53 38 15 – –
Notes 1 Excludes Prudential Corporation Asia joint ventures. 2 In many of our businesses, we provide our employees with the option to not disclose their gender. For these employees, gender is recorded as ‘undisclosed’.
3 No specification or information is captured on gender for an immaterial number of our employees. These employees are recorded as ‘unspecified’.
Responsible working practices We are committed to supporting human rights and to acting responsibly and with integrity at all times. Our policies are guided by the principles of the UN’s Universal Declaration of Human Rights and the International Labor Organization’s core labour standards, which are incorporated into our Group Code of Business Conduct, setting out our values and standards of employee behaviour, and into our Group Third-Party Supply Policy.
Our Group Employee Relations and Resourcing polices are available on the Group website at www.prudentialplc.com/ investors/governance-and-policies/ employee-relations-policy, along with our Board-approved Modern Slavery Act statement at www.prudentialplc.com/ investors/governance-and-policies/ modern-slavery-statement. Our business units implement policies and practices at a local level that aim to ensure compliance with statutory and regulatory requirements in the local labour market and the prevention of slavery, human trafficking and child and forced labour. Compliance with Group policies is certified annually through our Group Governance Manual attestation process.
The Group’s community investment strategy is closely aligned with our business purpose and one of the principal themes is employee engagement. Many of our employees play an active role in their communities through volunteering, charitable donations and fundraising. Chairman’s Challenge is our flagship international volunteering programme, bringing people together across the Group to help their communities. More information is available in the Supporting our communities section on page 86.
We also believe in the importance of giving employees the opportunity to benefit from the Group’s success through share ownership, and operate share plans for employees in the UK and Asia. This includes the award-winning PruSharePlus plan, which enables employees in Asia to share in the longer-term success of the business and actively encourages share ownership and engagement. Similar all-employee share plans operate in the UK.
For the seventh consecutive year, salary increases in 2019 for executives were aligned with the bottom of the range of pay budgets for the wider workforce. In order to strengthen the community of interest between executives and other shareholders, remuneration is linked to sustained performance over the longer term. For example, 40 per cent of Executive Directors’ bonus is deferred in shares for three years. The Remuneration Committee’s Terms of Reference were updated in 2019 to incorporate updates to the Corporate Governance Code and to reference the Hong Kong Insurance Authority’s remuneration requirements. More details on executive remuneration can be found in the Directors’ Remuneration Report on page 136.
Information security As consumers seek on-demand, 24-hour access to our products and services, loss of access has the potential to have a significant impact on our customer relationships and our brand reputation. Furthermore, many of the social benefits of new technology, such as financial inclusion and greater access to primary healthcare, may not be realised. In this context, information risk remains an area of prominent concern and focus for ourselves, regulators and businesses globally. For us, information security is rated as a principal risk, demonstrating our continued commitment to securely managing the information our customers entrust to us.
During 2019, we implemented a long-term shift from federated information security teams within each business unit to a single Group-wide team leveraging skills, experience and resource globally via a “centres of excellence” model. This new model will support collaboration and skills-sharing across the whole Group. Throughout 2019, the transition to the new model has been progressing under the newly appointed Group Chief Information Security Officer. To support the new model, we developed a new Global Information Security Policy, which came into force in 2020. The policy has been mapped to numerous international and local standards.
How we manage information security risk Effective risk management is key to the successful execution of our objectives and the newly formed Group-wide Information Security and Privacy Committee defines and provides governance and the risk management framework for information security risks across the Group. This Committee meets at least quarterly and is a sub-committee of the Group Executive Risk Committee (GERC), which is chaired by the Group Chief Risk and Compliance Officer and of which the Group Chief Information Security Officer is a standing member. The Information Security team also works closely with the Group Risk function to define information security as a risk within the business. The Information Security team regularly reports on security risk and performance to the Group Risk Committee and the GERC, demonstrating the priority and level of executive oversight assigned to information security risk and the management of these risks. We monitor our information security risks through our Group-wide key performance indicators, which map to the industry-leading National Institute of Standards and Technology Cyber Security Framework and other frameworks.Our Security function retains its overarching commitment to protect the business, comply with all applicable laws and regulations, and support the growth of the Group securely.
Training, awareness and Board oversight of information security risk Our staff are critical to protecting the information entrusted to us by our customers. Consequently, information security awareness training is integral to ensuring that our information and systems remain safe. All members of staff, including temporary staff, across all of our businesses are mandated to complete this training at least annually. Training is provided locally to support local languages and reflect any local regulatory and legal requirements. Completion is tracked within each business. This training is supplemented with simulated phishing campaigns quarterly to test how staff respond to these attacks in ‘real world’ scenarios. This focus extends to our Board and executives. Throughout the year our Non-executive Directors have access to one-to-one training, often delivered by the Group Chief Information Security Officer, on topics including cyber threat and privacy.
Prudential plc Annual Report 2019 prudentialplc.com84 based testing of these processes serves both to confirm the effectiveness of the plans and provide assurance that staff, including senior executives, are prepared for such an event.
Privacy and data protection In 2019, our focus was dedicated to maintaining awareness as well as enhancing and embedding activities that were implemented as part of the General Data Protection Regulation programme, in order to strengthen and sustain ongoing compliance. Our Group Privacy Office, which we established in 2018, continues to maintain oversight of privacy compliance. In addition, the Office works with Group businesses across Asia, Africa and the US to support and advise on ongoing privacy compliance as well as to provide a point of escalation for resolving data privacy issues.
Environment We are determined to minimise our impact on the environment in line with our purpose of improving the lives of our customers and their communities. We are responsible for understanding our impact on the environment and doing what we can to minimise any damaging effects. We measure our environmental performance and take action to ensure that we improve that performance year after year.
The highlights of our 2019 environmental performance are available below. These metrics cover the performance of the demerged Prudential Group for 2019 and form the new baseline data from which we will measure future environmental performance. The demerged Prudential Group is 24 per cent smaller (based on headcount) than the Prudential Group including M&G plc. Consequently, the reported figures are much lower than the values reported in 2018.
Our environmental performance 1 Energy and climate change – understanding our impacts, reducing our greenhouse gas emissions and developing longer-term actions In 2019, our global energy use (for the provision of small power, heating and cooling) across our occupied estate was 91,921 MWh. Across our occupied estate, our global absolute Scope 1 and 2 (market-based) greenhouse gas emissions were 56,421 tCO2e. When normalised against net lettable floor area, our Scope 1 and 2 emissions were 105 kg CO2e/m2.
2 Construction and refurbishment – delivering sustainable outcomes through property projects and improved wellbeing of our employees Refurbishment projects and new office builds provide an opportunity to improve the environmental performance of our estate. Each business unit has the autonomy to deliver sustainable building certification most relevant to its region and develop standards or guidelines considered most appropriate in its market. Our new London office, which we occupied in April 2019, is rated as BREEAM Excellent. In Malaysia we have consolidated our headquarters operations into a new LEED Gold building in the Tun Razak Exchange, part of Kuala Lumpur’s new business and international Financial District. In order to align and promote sustainable best practices throughout the life-cycle of our occupied estate, Prudential Corporation Asia developed a Smart Leasing Toolkit and an Environmental Design and Construction Guide.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 85 4 Water consumption – assessing and reducing our use of water In 2019, absolute use of water across our global occupied estate was 229,268 m3. When normalised against headcount, our use of water was 12.6 m3/employee. In the US, irrigation central control has been installed and activated for systems in part of Jackson’s Corporate Way campus.
Desktop software and mobile phone applications are being used to monitor water usage, providing automated shut-off capability should there be any breaks in water supply lines.
Data notes: Reporting period: 1 October 2018 to 30 September 2019. Baseline year: 1 October 2017 to 30 September 2018. Independent assurance: Deloitte LLP has provided limited assurance over selected environmental metrics in accordance with the International Auditing and Assurance Standards Board’s (ISAE3000 (Revised)) international standard. Consolidation (boundary) approach: Operational Control. Consistency with financial statements: The reporting period does not correspond with the Directors’ Report period (01 January 2019 to 31 December 2019) as it was brought forward by three months to improve the availability of invoice data and reduce reliance on estimated data. Prudential owns assets, which are held on its balance sheet in the financial statements, over which it does not have operational control. These are excluded from the data below. Assets not included on the balance sheet but held under an operating lease and where we have operational control are included. Emission factor: Scope 1 and 3 reporting uses the UK DEFRA 2019 GHG Conversion Factors. Scope 2 calculations use the IEA GHG 2019 Conversion Factors for location-based reporting. Market-based reporting uses supplier emission factors for our UK REGO-backed supply and RE-DISS factors where available. Accounting methodology: The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard. Materiality threshold: Five per cent. Data restatements: (1) 2018 figure restated as accurate data became available from suppliers.
Supporting our communities Our community investment strategy is closely aligned with our business purpose and with our stakeholders’ concerns and interests, and is focused around four principal themes: social inclusion, education and life skills, disaster preparedness and employee engagement. We take an active approach in helping tackle environmental and social challenges. Our strong contribution, harnessing the commitment of our people, continues to improve lives and build communities, wherever we work.
Understanding the issues faced by local communities is part of being a responsible business, and those best placed to manage community investment are our local businesses. In Asia and Africa this is done through the Prudence Foundation, a unified charitable organisation governed by a statutory board of directors, which maximises the impact of our community investment across these regions. In the US, a governance committee of Jackson and the Jackson Charitable Foundation board of directors regularly review our community investment activity, strategy and spend.
The plc Board reviews the Group’s community investment performance and approves our strategy annually, while our Material Subsidiary Boards oversee corporate responsibility initiatives undertaken by our business units. Paul Manduca, Chairman of Prudential plc, is the Board sponsor for corporate responsibility.
In 2019, the Group spent $29.1 million supporting community activities. Direct cash donations to charitable organisations amounted to $20.6 million. The balance includes in-kind donations as set out on the Group website at www.prudentialplc.com/
about-us/esg/performance/communityinvestment that are calculated in accordance with LBG guidelines. This included 10,834 employees who contributed 103,775 hours of volunteer service in their communities. Our 2019 community investment reporting is assured by Deloitte LLP. Further information and Deloitte’s assurance statement can be found on the Prudential plc website at www.prudentialplc.com/about-us/esg/ performance/external-assurance-ofresponsibility -reporting.
Cha-Ching – the first global financial education programme Developed by Prudential to address the gap in financial literacy, Cha-Ching is a global financial education and responsibility programme for children aged from seven to 12. Now in its ninth year, the programme has expanded from its origins in Asia to the US and Africa. It has been very positively received in all markets, with strong feedback from parents, teachers, children and government stakeholders.
Safe Schools During 2019, the Prudence Foundation continued to support the Safe Schools programme in partnership with Plan International and Save the Children in Cambodia, the Philippines and Thailand. This programme primarily focuses on disaster preparedness for students, teachers and local community members. Since 2013, almost 90,000 students and 43,000 adults have participated in the programme.
Jackson Career Exploration Centre In partnership with Junior Achievement of Middle Tennessee, Jackson has underwritten the Jackson Career Exploration Centre in JA Finance Park. This state-of-the-art programme serves seventh- to 12th-grade students across Middle Tennessee, combining hands-on classroom activities with real-world simulation, which allows students to put their money-management skills to the test, giving them a solid foundation for making intelligent personal finance decisions throughout their lives. The programme will host 10,000 students each school year, serving 22 counties in the region.
Prudential RideLondon Prudential RideLondon is a major mass-participation and charity fundraising event in the UK which has raised more than £77.5 million for charity in the last seven years. In 2019 it raised more than £11.5 million for over 980 charities. We have sponsored the event since its inception in 2013, and in 2019 our community engagement partnership, PruGOals, supported 273 young people from 21 schools across the UK to improve their self-esteem, aspiration and educational outcomes.
The demerger of M&G plc Following the announcement in 2018 of the Board’s intention to demerge M&G plc from the remainder of the Prudential Group, the demerger was completed on 21 October 2019 on an accelerated timetable. The effort by management and employees during the year to achieve this milestone should not be underestimated and the Board is grateful for the efforts of all those involved across the business.
During 2019, the Board has been focused on overseeing the execution of the demerger in a manner that promotes the long-term sustainable success of both groups. A number of workshops were held outside the usual cycle of meetings to facilitate more detailed discussions about the execution of the demerger, taking into account all stakeholder interests and ensuring the effective delivery of this complex transaction, and to consider the challenges and opportunities facing both groups post-demerger. The Board has found these workshops to be valuable and intends to continue this approach, as appropriate, when addressing key strategic matters, to ensure that additional time to discuss and challenge is available.
Time was spent ensuring M&G plc would have in place a suitable governance framework for a listed group at the point of demerger, including establishing a board with the desired skills and experience to progress M&G’s strategic aims. Consideration was also given to the allocation of capital and resources between the two groups. As part of these discussions the Board considered and managed potential conflicts of interests between the two groups in order to create a fair outcome.
Our purpose, culture and values Prudential has been delivering on its purpose throughout its 171 year history and we have taken the opportunity presented by the demerger of M&G plc to improve the articulation and communication of this purpose. We help people de-risk their lives and deal with their biggest financial concerns, providing them with the freedom to face the future with confidence. We deliver economic and social benefits for our customers, our employees and the communities in which we operate, while creating financial benefits and delivering growing returns for our investors. A description of how Prudential considers and delivers on this purpose is set out in the ESG report on pages 72 to 87.
We recognise that culture is an important contributor to long-term success and sustainable growth. The Board dedicated time in 2019 to reviewing Prudential’s culture, focusing as part of our preparations for the demerger on the transition to our new operating environment and challenges. We made progress in defining and communicating our culture, recognising and rewarding behaviours that embody our culture, and measuring progress.
Now that the demerger is complete, we are focusing in more detail on how to shape our culture to support our changing business model and embrace new ways of thinking, working and leading. It is one of our key objectives to ensure that Prudential continues to be guided by its values and behaviours and demonstrates ongoing commitment to our stakeholders and to innovation, performance and excellence in execution.
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We announced last year that my tenure as Chairman had been extended until May 2021 in order both to help oversee the demerger of M&G plc and to ensure continuing smooth governance afterwards. The early delivery of the demerger has focused the Board’s attention on succession planning. Following an extensive search which considered both internal and external candidates and which was led by Philip Remnant in his capacity as Senior Independent Director, we announced the appointment of Shriti Vadera as a Non-executive Director with effect from 1 May 2020. I intend to step down from the Board with effect from 31 December 2020 and Shriti is expected to succeed me and become Chair of the Board and Chair of the Nomination & Governance Committee on 1 January 2021. I believe that Shriti is an excellent choice and I look forward to working with her during the transition to her becoming Chair.
I would also like to welcome Amy Yip and Jeremy Anderson to the Board and to thank Howard Davies, who will step down from the Board at the conclusion of the 2020 Annual General Meeting, for his significant contribution during his tenure and his leadership of the Risk Committee since inception. As announced on 11 March 2020, Jeremy will succeed Howard Davies as Chair of the Risk Committee at the conclusion of the Annual General Meeting in May 2020.
Effective governance is based on the appropriate level of oversight and challenge. As such, the methodology and results of our 2019 Board evaluation are set out on pages 102 and 103 and I hope reading this report will demonstrate to you the work that we have done in ensuring that oversight and challenge continue to ensure that the Board is promoting the long-term success of the Company.
I hope that this report and the reports of my fellow Committee Chairs will demonstrate to you the work we have undertaken over the course of the year as well as the tangible and positive impact this has had on our business.
Paul has held a number of senior leadership roles. Notable appointments include serving as chairman of the Association of Investment Companies (1991 to 1993), acting as founding CEO of Threadneedle Asset Management Limited (1994 to 1999), global CEO of Rothschild Asset Management (1999 to 2002), directorships of Eagle Star and Allied Dunbar, holding the offices of European CEO of Deutsche Asset Management (2002 to 2005), chairman of Bridgewell Group plc and a director of Henderson Smaller Companies Investment Trust plc.
Paul is the Chairman of the Board. He initially joined the Board in October 2010 as the Senior Independent Director and member of the Audit and Remuneration Committees, roles he held until his appointment as Chairman in July 2012. On becoming Chairman, Paul was also appointed Chair of the Nomination & Governance Committee, having been a member of the Committee since January 2011.
Relevant skills and experience Mike continues to develop the operational management of the Group on behalf of the Board, implementing Board decisions and leading the Executive Directors and senior executives in the management of all aspects of the day-to-day business of the Group.
As announced on 10 December 2019, Jeremy Anderson was appointed to the Board as a Non-executive Director and member of the Risk and Audit Committees with effect from 1 January 2020.
Executive Directors As announced on 28 February 2019, in preparation for the demerger of M&G plc, Michael Falcon, John Foley and Nic Nicandrou ceased to be Directors of Prudential plc at the conclusion of the 2019 AGM held on 16 May 2019. Michael Falcon and Nic Nicandrou maintained their positions as chief executives of their respective business units and as members of the Group Executive Committee. As the chief executive of M&G plc, John Foley ceased to be a member of the Group Executive Committee at demerger on 21 October 2019.
Relevant skills and experience Mark has a strong background across financial services, insurance and investment management, encompassing wide geographical experience relevant to the Group’s key markets.
Relevant skills and experience Having held senior positions at Prudential for a number of years, James has a wide-ranging understanding of the business and draws on previous experience across internal audit, finance and compliance, as well as technical knowledge, relevant to his role.
James has led internal audit teams in UBS in both the UK and Switzerland. Prior to joining Prudential, James was the deputy head of compliance for Barclays plc. He also held a number of senior internal audit roles across the Barclays group, leading teams that covered the UK, the US, Western Europe, Africa and Asia retail and commercial banking activities.
James joined the Board as an Executive Director and Group Chief Risk Officer in March 2018. Prior to the demerger of M&G plc, he led the discussions with Hong Kong IA on the revised capital framework for the Group and in July 2019 assumed responsibility for Group Compliance, becoming the Group Chief Risk and Compliance Officer, relocating to Hong Kong in August 2019.
Mark FitzPatrick CA Group Chief Financial Officer and Chief Operating Officer Appointment
Following the change of Group-wide supervisor in October 2019 to the Hong Kong Insurance Authority, the composition of the Prudential Corporation Asia Limited board of directors mirrors the Prudential Board.
Relevant skills and experience Jeremy contributes substantial leadership experience of the financial services sector across Asia and the US. He has extensive technical knowledge on audit and risk management, particularly concerning international companies.
Jeremy joined KPMG Consulting in 1985 and held the role of Chief Executive Officer in 2001 before being appointed as head of UK operations at Atos Origin and a member of the Management Board of Atos Origin SA in 2002. From 2006, following two years as head of financial services at KPMG UK, Jeremy held the role of KPMG’s head of financial services for Europe followed by head of clients & markets in 2008. He served as KPMG’s Chairman of Global Financial Services until 2017. Jeremy also served on the board of the UK Commission for Employment and Skills, and now serves as a non-executive director and chairman of the audit committee of UBS Group AG.
(chairman of audit committee) — The Productivity Group — The Kingham Hill Trust
Howard joined the Board in October 2010 as a Non-executive Director and Chair of the Risk Committee. He joined the Audit Committee in November 2010 and the Nomination & Governance Committee in July 2012.
Other appointments — Royal Bank of Scotland (chairman) — China Banking and Insurance Regulatory
Other appointments — Severn Trent plc — City of London Investment Trust (chairman) — Takeover Panel (deputy chairman)
David was the global leader of PricewaterhouseCoopers (PwC) insurance practice, a partner in PwC’s UK firm, and worked as the lead audit partner for multi-national insurance companies until his retirement in 2015. During his time at PwC David’s responsibilities also included leadership of PwC’s insurance and investment management assurance practice in London and the firm’s Scottish assurance division. David’s role as a director and CEO of L&F Holdings Limited and its subsidiaries (the professional indemnity captive insurance group which serves the PwC network and its member firms), ceased in July 2019.
Relevant skills and experience Kai has experience across some of the Group’s key international markets, particularly Hong Kong and the wider Asian market. In addition to his experience with listed groups, he contributes knowledge of the financial services sector.
Kai spent 19 years at Bank of America and was based in Hong Kong in roles as group executive vice president and head of the Asia Wholesale Banking Group from 1990 to 1995. He spent 10 years working for Standard Chartered PLC in Singapore as group executive director responsible for Asia governance and risk from 1998 to 2007. Kai was chief executive officer of the Asia Pacific Region of Credit Suisse AG from 2008 to 2010 and now serves as director and chairman of their remuneration committee.
Kai has served on a number of other boards, including Singapore Telecommunications and Tate and Lyle plc.
Relevant skills and experience Anthony has long executive experience of listed companies and, in particular, extensive knowledge of Asian markets.
Anthony joined the Board in June 2013 as a Non-executive Director and member of the Remuneration Committee. He became Chair of the Remuneration Committee and a member of the Nomination & Governance Committee in May 2015.
Board: January 2012 Rem : January 2012 Risk : January 2012
Other appointments — BNP Paribas — SCOR SE — Leaders’ Quest (partner)
In 1994 he was appointed executive vice president and chief financial officer of Provident Companies Inc.
Tom joined the Board in July 2017 as a Non-executive Director and member of the Remuneration Committee. He became a member of the Risk Committee in November 2018. Tom acts as a designated Non-executive Director for employee engagement matters as set out in the UK Code, for the Group’s workforce in the US and UK.
Relevant skills and experience Alice has experience across the insurance, asset management, technology and financial services industries in the US.
From 1993, she led teams of analysts specialising in property-casualty insurance as a managing director at CIBC Oppenheimer, PaineWebber (now UBS) and Morgan Stanley. Alice was also an independent board member of the Cetera Financial Group and held the office of CEO and chair of WebTuner (now Showfer Media LLC), until its sale in 2017. She was also a director of Bank of America Merrill Lynch International until December 2018.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 97
Amy started her career at Morgan Guaranty Trust of New York in 1978 before joining the Management Analysis Centre in Boston and Hong Kong as a consultant in 1986. She became executive director of Rothschild Asset Management in Hong Kong in 1988, vice president of Citibank Private Bank North Asia in 1991 and executive director (Reserves Management) of the Hong Kong Monetary Authority in 1996. She was group head of wealth management of DBS Bank, chair of DBS Asset Management and chief executive officer of DBS Bank Hong Kong between 2006 and 2010. Since 2011 she has been an adviser to Vita Green, a health supplements provider based in Hong Kong, and a founder and partner of RAYS Capital Partners, a Hong Kong investor in Asian equities.
Amy became a non-executive director of AIG Insurance Hong Kong Limited in 2011 and chair of its audit committee in 2017, a non-executive director and member of the compensation and nomination committees of Temenos Group AG in 2014, a non-executive director and member of the Technology Committee of Deutsche Börse AG in 2015 and a non-executive director of Fidelity Funds in 2017. In August 2019, she became the chair of the Asia Pacific advisory board of EFG Bank International.
Amy joined the Board in September 2019 as a Non-executive Director and member of the Remuneration Committee.
Other appointments — AIG Insurance Hong Kong Limited — Deutsche Börse AG — Fidelity Funds — RAYS Capital Partners (founder partner) — Temenos Group AG
The Group Executive Committee (GEC) comprises the Executive Directors, the Chief Executive of each of Prudential Corporation Asia and Jackson Holdings LLC, the Group Human Resources Director and Group Chief Digital Officer. The GEC is a management committee constituted to support the Group Chief Executive, who also chairs the GEC. For the purposes of the Hong Kong Listing Rules, Senior Management is defined as the members of the GEC.
Michael Falcon Chief Executive Officer, Jackson Holdings LLC Appointment to the GEC: January 2019 Age: 57
Relevant skills and experience Michael is Chief Executive Officer of Jackson Holdings LLC, which includes Jackson’s US subsidiaries and affiliates. Before joining Prudential in January 2019, he was based in Hong Kong as chief executive officer of Asia Pacific for J.P. Morgan Asset Management, a role he held from 2015, and was head of Asia Pacific funds from 2014. Michael is also a director of a number of Group subsidiaries within Jackson.
Michael joined J.P. Morgan Asset Management in New York as head of retirement in 2010, before which he was at Merrill Lynch in a number of roles including as head of the retirement group. He has served as a trustee and executive committee member of the Employee Benefit Research Institute (EBRI) and was founding chairman of the Advisory Board of EBRI’s Center for Retirement Income Research.
Nicolaos Nicandrou Chief Executive, Prudential Corporation Asia Appointment to the GEC: October 2009 Age: 54
Relevant skills and experience Nic became Chief Executive of Prudential Corporation Asia in July 2017 and is responsible for Prudential Corporation Asia’s life insurance and asset management business across 14 markets in Asia. Nic is also the chairman of CITIC-Prudential Life Insurance Limited.
Al-Noor Ramji Group Chief Digital Officer Appointment to the GEC: January 2016 Age: 65
The Board confirms that, for the year under review, the Company has complied with the principles and provisions of the UK Code. In respect of provision 38 of the UK Code, Prudential has committed to aligning the level of pension contributions for newly appointed Executive Directors with that of the workforce. As recognised by the FRC’s Board Effectiveness Guidance, there are practical considerations in amending arrangements for incumbents. Accordingly, Executive Directors who were in office before the 2018 UK Code came into force will have their pension contributions reduced over time, as described on page 171 of the Directors’ remuneration report.
Our governance framework The Group has established a governance framework for the business, which is approved by the Board, and is designed to promote appropriate behaviours across the Group. The Nomination & Governance Committee reviews the Group Governance framework annually.
The Group Governance Manual (the Manual) sets out the policies and procedures under which the Group operates, taking into account statutory, regulatory and other relevant matters. The Manual includes the Group Code of Business Conduct which is regularly reviewed by the Board. The Audit Committee monitors compliance with the Manual and the Risk Committee approves the Group risk framework and monitors compliance with it across the Group.
Business units manage and report compliance with the Group-wide mandatory requirements set out in the Manual through annual attestations. This includes compliance with our risk management framework, details of which are set out on pages 108 and 109 of this report.
The content of the Manual is reviewed regularly, reflecting the developing nature of both the Group and the markets in which it operates, with significant changes on key policies reported to the relevant Board Committee.
Dialogue between the Group Chair, Group Risk Committee Chair and Group Audit Committee Chair and their counterparts at subsidiary level provided an effective information flow throughout the year and these arrangements continue where relevant. Each of the Group Chair, Group
Prior to demerger, Prudential undertook to maintain the Group-wide corporate governance framework for the Group post-demerger. This included maintaining appropriate internal controls for the oversight of the businesses, including in relation to conduct of business, the identification and mitigation of conflicts of interest and intra-group transactions. Prudential also undertook to maintain its group-wide risk management system and independent risk management function.
Individual regulated entities within the Group continue to be subject to entity-level regulatory requirements in the relevant jurisdictions in which they carry on business.
Interactions with regulators shape the Group’s governance framework and the Chairman and Group Chief Executive play a leading role in representing the Group to regulators and ensuring our dialogue with them is constructive.
Terms of reference for each of the Board’s principal Committees have been updated to ensure their duties align with the post- demerger business and regulatory regime.
Stakeholder engagement The Board has identified the Group’s key stakeholders as including customers, investors, employees, regulators, civil society and suppliers. Examples of Board
This section tells you more about the Group’s governance, operation of the Board and Board roles.
The Board received an initial update in December 2019 on activities undertaken during the year. The framework will be expanded in 2020 to provide the designated Non-executive Directors with further opportunities for interactions with the workforce and includes regular reporting to the Board on a six-monthly basis. This will include updates on activities undertaken and themes arising for the Board to consider. If necessary, key items will be escalated outside of the six-monthly reporting cycle and in addition, Kai Nargolwala and Tom Watjen will offer their insight to Board discussions and decisions as part of the Board’s consideration of the workforce as key stakeholders. They will also continue to work with the Group HR Director and the Company Secretary to identify key issues requiring engagement with the workforce, the most appropriate means of doing so and reporting on these activities.
Throughout 2019, Prudential engaged with institutional shareholders, focusing primarily on matters relating to the demerger of M&G plc and strategic direction following the demerger. The executive management team of the Group, Prudential Corporation Asia and Jackson met with key target investors as part of a demerger marketing programme. In October 2019, a General Meeting was convened to allow shareholders to consider and approve the demerger of M&G plc. Shareholders demonstrated their overwhelming support for the demerger resolution which received 99.4 per cent of votes in favour.
These demerger-related activities were held in addition to the Group’s usual full global programme of engagement with shareholders, potential investors and analysts, in the UK and overseas, which is conducted each year by the Group Chief Executive and the Group Chief Financial Officer and Chief Operating Officer, led by the Investor Relations team. The Group intends to maintain its regular engagement with investors and analysts which provides opportunity for the executive team to communicate progress and strategy outside of the financial reporting cycle. Going forward, this may include investor conferences or more specific events focused on particular aspects of our business.
In 2019, as part of the investor relations and demerger marketing programme, over 320 meetings were held with around 300 individual institutional investors in the UK, continental Europe, the US and Asia.
The Group holds an ongoing programme of regular contact with major shareholders, conducted by the Chairman, to discuss their views on the Group’s governance. The Senior Independent Director offers meetings to major shareholders as needed. Engagement with institutional investors on the Directors’ Remuneration Policy and implementation is led by the Remuneration Committee Chair on an annual basis. This has allowed key investors to provide feedback on the Directors’ Remuneration
Policy prior to its adoption proposed to shareholders at the 2020 Annual General Meeting. All Non-executive Directors, and in particular Committee Chairs, are available to meet with major shareholders on request.
Shareholder feedback and key issues from these meetings are communicated to the Board.
The Annual General Meeting is an opportunity for further shareholder engagement, for the Chairman to explain the Company’s progress and, along with other members of the Board, to answer any questions. The Committee Chairs each attend the Annual General Meeting and are available for shareholders who wish to ask questions on the activities of their respective Committees.
Further information, including aggregate shareholdings, details of the 2019 Annual General Meeting and General Meeting as well as the 2020 Annual General Meeting, dividend payment dates, and confirmation of sufficiency of public float can be found in the shareholder information section on pages 400 to 402.
Operation of the Board How the Board leads the Group The Group is headed by a Board led by the Chairman.
The Board is collectively responsible to shareholders for the long-term sustainable success of the business through: — Approving the Group’s long-term strategic objectives, annual budgets and business plans, as recommended by the Group Chief Executive, and any material changes to them; — Monitoring the implementation of strategic objectives, annual budgets and business plans; — Establishing the Company’s purpose, values and strategy and satisfying itself that these are aligned with the Group’s culture; and
Strategic projects2 l l l l l l l l l
Group Chief Risk and Compliance Officer’s report l l l l l l
Notes 1 The Board held two meetings in March 2019. 2 Strategic projects considered during the year included the demerger of M&G plc, the acquisition of fund manager Thanachart in Thailand, entering into an exclusive bancassurance arrangement with Southeast Asia Commercial Joint Stock Bank, an IT outsourcing project as well as other confidential matters. 3 The effective date of the demerger of M&G plc was 21 October 2019.
March 2019 was to consider the Group’s 2018 full-year report only and the meeting in August 2019 was primarily to consider the Group’s 2019 half-year report and accounts. In addition to the March Board meeting, the Board received a separate in-depth update from the management team of Prudential Corporation Asia covering progress against strategic priorities, key risks facing the business in Asia, future opportunities, customerorientated initiatives, brand, culture, the Eastspring business and the activities of the Prudence Foundation.
Board and Committee meeting attendance throughout 2019 Individual Directors’ attendance at meetings throughout the year is set out in the table below.
Notes 1 In addition to the Annual General Meeting held in May each year, a General Meeting of shareholders was held on 15 October 2019. The purpose of the General Meeting was for shareholders to vote on the proposed demerger of M&G plc and election of Amy Yip as a Director of the Company. The nature of the business of the meeting meant that it was not considered necessary for the entire Board to be present. In addition to the Chairman and Senior Independent Director, each of the Executive Directors was present at the General Meeting and available to answer questions from shareholders about the business of the meeting.
2 Paul Manduca recused himself from a meeting of the Nomination & Governance Committee which was convened to discuss his succession plans. Further information about Paul Manduca’s succession may be found in the Nomination & Governance Committee report.
— During the year, Amy Yip joined the Board, strengthening the overall diversity of skills, gender and experience.
— Diversity remains a key factor in ongoing succession planning. The Nomination & Governance Committee reviews the diversity policy and how diversity initiatives align with strategic objectives.
— Management is considering whether paper volumes can be further decreased as part of changes to the meeting structure post-demerger.
— A cyber risk update was provided to a joint meeting of the Risk and Audit Committees in April 2019, to which all Board members were invited.
Stakeholders — Review of stakeholder groups. — Review of workforce voice and its representation at Board level.
— The Board received an update on key initiatives to promote diversity and invest in talent for the long-term success of the Company.
— The Nomination & Governance Committee will receive more reporting in this area going forward given its extended remit.
— Continue to use workshops, as appropriate, to support discussions. — Monitor Board meeting arrangements in the post-demerger context and ensure strategic focus areas, including culture and values, continue to receive appropriate agenda time.
— Keep Board training in this area under review and schedule additional sessions as appropriate.
Stakeholders — Continue to develop and embed reporting by the designated Non-executive Directors on workforce engagement.
People — Continue to develop reporting on talent management, succession pipeline and Diversity & Inclusion, utilising the expanded role of the Nomination & Governance Committee.
Committee effectiveness and evaluation Committee Chairs have responsibility for ensuring each Committee operates effectively. In order for Committees to provide effective challenge to management, the Committee Chairs each encourage open debate and contributions from all Committee members.
Director evaluation The performance of the Non-executive Directors and the Group Chief Executive during 2019 was evaluated by the Chairman in individual meetings.
Philip Remnant, the Senior Independent Director, led the Non-executive Directors in a performance evaluation of the Chairman.
Executive Directors are subject to regular review and the Group Chief Executive individually appraised the performance of each of the Executive Directors as part of the annual Group-wide performance evaluation of all employees. The Chair of the Risk Committee provides feedback to the Group Chief Executive on the performance of the Group Chief Risk and Compliance Officer.
The outcome of each of these evaluation processes is reported to the Nomination & Governance Committee in February each year in order to inform the Committee’s recommendation for Board members to be put forward for re-election by shareholders.
Executive Director performance is also reviewed by the Remuneration Committee as part of its deliberations on bonus payments.
— Facilitating open, honest and constructive debate among Directors. When chairing meetings, ensuring there is sufficient time to consider all topics, all views are heard and all Board members, and in particular Non-executive Directors, have an opportunity to constructively challenge management
— Meeting with Non-executive Directors throughout the year. In 2019, the Chairman met with Non-executive Directors without Executive Directors being present on four occasions and also met with each Non-executive Director individually
— Promoting effective reporting of Board Committee business at Board meetings through regular Committee Chair updates
— Maintaining an effective dialogue with the Non-executive Directors to encourage engagement and maximise their contributions
— Acting as key contact for independent chairs of Material Subsidiaries1
— Playing a major role in the Group’s engagement with regulators
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 105
The Group Chief Executive leads the Executive Directors and senior executives and is responsible for the operational management of the Group on behalf of the Board on a day-to-day basis: — Responsible for the implementation of Board decisions
— Establishes processes to ensure operations are compliant with regulatory requirements
— Sets policies, provides day-to-day leadership and makes decisions on matters affecting the operation, performance and strategy of the Group, seeking Board approval for matters reserved to the Board
— Supported by the Group Executive Committee which he chairs and which receives reports on performance and implementation of strategy for each business unit and discusses major projects and other activities related to the attainment of strategy
— Chairs the Chief Executive’s Committee meetings which are held weekly to review matters requiring approval under the Group’s framework of delegated authorities
The Senior Independent Director acts as an alternative conduit to the Board for shareholder concerns and leads the evaluation of the Chairman: — Acts as a sounding board for the Chairman, providing support in the delivery of the Chairman’s objectives
— Leads the Non-executive Directors in conducting the Chairman’s annual evaluation and leads the Chairman’s succession planning
— Holds meetings with Non-executive Directors without management being present, typically at least once a year to evaluate the performance of the Chairman
— Offers meetings to major shareholders to provide them with an additional communication point on request and is generally available to any shareholder to address concerns not resolved through normal channels
— Reports to the Board on the activities of each Committee meeting and the business considered, including, where appropriate, seeking Board approval for actions in accordance with the Committees’ terms of reference
All of the Non-executive Directors are deemed to be independent and together have a wide range of experience which can be applied to attain the strategic aims of the Group through: — Constructive and effective challenge
Terms of reference for the principal Committees can be accessed at www.prudentialplc.com/investors/ governance-and-policies/board-andcommittees -governance
The Board has established a Standing Committee which can meet as required to assist with any business of the Board. It is typically used for ad hoc or urgent matters which cannot be delayed until the next scheduled Board meeting.
All Directors are members of the Standing Committee and have the right to attend all meetings and receive papers.
This governance structure allows for fast decision-making where necessary, while ensuring that the full Board has oversight of all matters under consideration and all Non-executives can contribute. Over 2019, the Company held three meetings of the Standing Committee.
Note 1 Following the demerger of M&G plc, the Group is reviewing subsidiary governance to ensure this remains appropriate to the business and regulatory environment in which the Group operates.
— Keeps leadership needs under review in support of the Group’s strategic objectives
— Recommends appointments to the Board, its principal Committees and appointments of non-executive chairs to the boards of Material Subsidiaries1
— Oversees the governance of Material Subsidiaries1 and the Group’s overall governance framework
— Approves individual remuneration packages of the Chairman, Executive Directors, senior executives and Material Subsidiary1 non-executive directors
— Reviews workforce remuneration practices and policies when setting executive remuneration
— From 2020 the Committee has full responsibility for all aspects of compliance
Building Directors’ knowledge Induction – new Directors Amy Yip received a comprehensive induction, tailored to reflect her experience and position as a Non-executive Director. A summary of the general and specific induction programme for Amy Yip is set out below: General induction programme relevant to new Non-executive Directors
— Training as needed on the rules and governance requirements of the London and Hong Kong Stock Exchanges and on fulfilling the statutory duties of a Director
— Tailored meetings with all Group functions — Comprehensive briefings on the regulatory environment in which the Group operates
Continuing development of knowledge and skills During 2019, the Board and its Committees received a number of technical and business updates as part of their scheduled meetings, providing information on external developments relevant to the Group and on particular products or operations. Below is an overview of how Directors are kept up to date: — The Board holds an annual strategy session, which allows for detailed updates on each of the business units and deep dives on strategic direction and objectives for the Group. In 2019, these included a particular focus on the demerger of M&G plc and updates on the views of investors and other stakeholders; — The Board receives updates on brand, environment, health and safety, culture, diversity and inclusion and employee engagement activities, usually once a year; — The Board receives updates on corporate governance, political and regulatory developments in the US, UK, Europe and Asia and the dynamics of equity and currency markets at every scheduled meeting. Governance topics included gender pay gap reporting, the BEIS committee report on the future of audit and the Government’s response to it, the Hampton-Alexander review publication, guidelines from investment institutions, the Financial Reporting Council’s Lab report on climate-related corporate reporting and the publication of the updated Stewardship Code. The Board was also updated on the impact of the discontinuation of LIBOR; — In April 2019, the Group ran a focused cyber security and information security update for members of the Risk and Audit Committees, which was particularly aimed at developing the knowledge of the Non-executive Directors; — The Board reviews each business unit in depth at least once a year and conducts periodic site visits as part of this. In 2019, the Board received a presentation on Jackson Holdings. Other training included an overview of Jackson’s distribution and products; — The Nomination & Governance Committee received updates on the Climate Change and TCFD implementation as part of its expanded ESG remit; — The Board and the Risk Committee receive regular updates on market developments and key risks. The Risk Committee reviews top risks on an annual basis and deep dives into specific topics in response to the identification of key risks. This review covers the financial, operational and strategic risks, whilst also identifying and addressing business environment and insurance risks within the Group; — The Risk Committee received updates on regulatory developments focusing on the supervision of the Prudential Regulation Authority and discussions with the Hong Kong IA on the new Group-wide regulatory framework. A deep-dive review of artificial intelligence and digital transformation was undertaken as well as updates on civil unrest in Hong Kong; — The Audit Committee received updates on developments affecting financial reporting and the work of audit committees more widely. In 2019, this included financial reporting disclosure developments and audit industry updates. These updates included consideration of the accounting treatment of the M&G Group, information security, financial crime and fraud prevention, working capital arrangements and the implementation of IFRS 17; and
The Board is responsible for ensuring that an appropriate and effective system of risk management and internal control is in place across the Group. The framework of risk management and internal control centres on clear delegated authorities to ensure Board oversight and control of important decisions. The framework is underpinned by the Group Code of Business Conduct, which sets out the ethical standards the Board requires of itself, employees, agents and others working on behalf of the Group. The framework is designed to monitor and manage, rather than eliminate, the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.
Internal control The Group Governance Manual (the Manual) sets out delegated authorities and establishes the requirements for subsidiaries to seek approvals from, or report to, Group Head Office. Group-wide policies are included within the Manual, and standards are established through these policies and other governance arrangements. Internal controls and processes, based on the provisions established in the Manual, are in place across the Group. These include controls covering the preparation of financial reporting. The operation of these controls and processes facilitates the preparation of reliable financial reporting and the preparation of local and consolidated financial statements in accordance with the applicable accounting standards, and requirements of the Sarbanes-Oxley Act. These controls include certifications by the Chief Executive and Chief Financial Officer of each business unit with respect to the accuracy of information provided for use in preparation of the Group’s consolidated financial reporting, and the assurance work carried out in respect of US reporting requirements.
— Reviews and assesses the risk-taking activities of the first line of defence, providing risk opinions and where appropriate challenging the actions being taken to manage and control risks.
Third line of defence (independent assurance) — Provides independent assurance on the design, effectiveness and implementation of the overall system of internal control, including risk management and compliance.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 109
For the purposes of the effectiveness review, the Group has followed the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. In line with this guidance, the certification outlined above does not apply to certain material joint ventures where the Group does not exercise full management control. In these cases, the Group satisfies itself that suitable governance and risk management arrangements are in place to protect the Group’s interests. However, the relevant Group company which is party to the joint venture must, in respect of any services it provides in support of the joint venture, comply with the requirements of the Group’s internal governance framework.
The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, including the demerged M&G plc business prior to 21 October 2019, which has been in place throughout the period and up to the date of this report, and confirms that the system remains effective.
Balance Sheet and Capital Management Committee nd line of d efence 3rd line of d efence
Diversity Improving gender diversity at Board level continues to receive considerable attention from the Committee and diversity in its wider sense is an important factor in identifying candidates for Board level succession. The Committee considers this when making recommendations and talent search agencies are briefed on the Group’s requirements in this respect when identifying candidates. Gender representation has improved at Board level during 2019, however there remains scope for improvement in this important area. Progress has been made via the appointment of Non-executive Directors and there is a continuing focus on the executive talent pipeline in order to increase diversity, in its widest sense, on both the Group Executive Committee and ultimately the Board. The Board exceeds the recommendation of the Parker review in respect of ethnic diversity. The Committee also considers the diversity of experience on the Board, including expertise across the geographical markets in which the post-demerger Group operates.
The Committee continues to oversee governance arrangements for the Group’s subsidiaries to ensure they remain appropriate for the post-demerger Group.
Subsidiary governance arrangements, board composition, non-executive succession planning and appointments l
In February 2020, the Committee concluded that each of the Directors in office at the time continued to perform effectively and was able to devote appropriate time to fulfil their duties and that collectively, the Board had an appropriate mix of skills and experience.
The Committee considered the Non-executive Directors continued to demonstrate the desired attributes, contributing effectively to decision-making and exercising sound independent judgement in holding management to account.
Accordingly, the Committee recommended to the Board those Directors standing for election at the 2020 Annual General Meeting.
As announced on 30 January 2020, Shriti Vadera will join the Board with effect from 1 May 2020 as a Nonexecutive Director and member of the Nomination & Governance Committee, and is expected to succeed Paul Manduca as Chair of the Board and Chair of the Nomination & Governance Committee on 1 January 2021. Paul will step down as Chair and as a Director with effect from 31 December 2020.
Paul was first appointed to the Board in October 2010, meaning that the UK Code would have prescribed his retirement in October 2019. As I reported last year, the Board considered that it would have been disruptive for Paul to step down as Chair during a time of substantial change associated with the oversight and execution of the demerger itself and also for a period afterwards. It was expected that a search for a suitable successor to Paul would commence in 2020, with the intention that he would not stand for re-election at Prudential’s Annual General Meeting in May 2021.
However, the accelerated completion of the demerger meant it was considered appropriate to bring this timing forward.
The search for suitable candidates was influenced by the views of the Board, taking account of the strategic needs of the post-demerger Group. Paul provided his views on the scope of the role and the individual attributes required. However, he recused himself from further discussions about the selection process.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 113
During the year, the Committee recommended the appointment of Amy Yip as a Non-executive Director and member of the Remuneration Committee with effect from 2 September 2019.
The Committee also recommended the appointment of Jeremy Anderson to the Board as a Non-executive Director and member of the Audit and Risk Committees with effect from 1 January 2020.
Biographical details for Amy Yip and Jeremy Anderson are set out on pages 94 and 97.
When making recommendations, the Committee takes account of the current composition of each of the principal Committees, the skills and experience of the members and the strategic objectives of the Group.
The appointment of Amy Yip to the Remuneration Committee and Jeremy Anderson to the Audit and Risk Committees helped to refresh the membership of these Committees.
Given his extensive experience in risk management, the Committee recommended that Jeremy Anderson succeed Howard Davies as Chair of the Risk Committee with effect from the conclusion of the 2020 Annual General Meeting.
The Committee reviews the succession plans in place for the Group Chief Executive, other Executive Directors and Group Executive Committee roles annually.
Succession plans for the Group Executive Committee were discussed with the Group Chief Executive to identify business requirements and to plan for future succession needs.
Succession planning for Executive Directors and the Group Executive Committee includes both longer-term planning and emergency cover. External mapping is undertaken for Executive Directors to identify possible external candidates. Planning for emergency cover for Executive Directors is assisted by a broad annual review of talent across the Group and recognises the possible difficulties in identifying and attracting suitable talent on potentially short notice.
The Committee discussed the changes to the Group Executive Committee roles brought about by the demerger and consequent shift in priorities and operating model, and agreed updates to succession plans as a result.
The Committee considered succession planning for senior management below Group Executive Committee level which is supported by an annual update on talent and diversity at different levels of the organisation and includes consideration of risk retention mitigation initiatives such as leadership development programmes. This review is usually undertaken and reported on in the fourth quarter of each year and prior to 2019, was undertaken by the Board. Reporting on activities in 2019 was moved to February 2020 in order to allow for a fuller review of talent succession planning across the post-demerger business.
The focus was on building new capabilities to support the changing business model and future direction of the business. The internal pipeline was being rebuilt in support of new roles, new capability and increased complexity.
The Group’s Diversity and Inclusion policy applies at all levels of the business including the Board and Group Executive Committee.
The Board does not endorse quotas but is committed to recruiting the best available talent and appointing the most suitable candidate for each role, while at the same time aiming for appropriate diversity on the Board.
Succession plans are based on merit against clear objective criteria and promote diversity across gender, social and ethnic background and cognitive and personal strengths.
An element of Executive Directors’ remuneration is based on achieving a diversity target. Further information is set out in the Directors’ remuneration report.
The Committee keeps this under review across all its succession planning.
A description of the Group’s activities on Diversity and Inclusion can be found in the ESG summary.
As part of the Group’s commitment to diversity, Prudential is a signatory to the HM Treasury ‘Women in Finance Charter’ which aims to increase the number of women working in senior management in financial services companies. We have set a gender diversity target of 30 per cent women in senior management by the end of 2021.
The Committee considers the independence of the Non-executive Directors as required by the UK Code and HK Listing Rules as part of any recommendation of the appointment of new Non-executive Directors and when recommending Non-executive Directors for election.
The Committee considered Jeremy Anderson’s independence with reference to the UK Code and HK Listing Rules, alongside relevant auditor independence and ethical guidance applicable in the UK and the US which generally recommend that independence of an external auditor is maintained by prohibiting a former partner from becoming a Director of an audit client for a period of two years after their employment has ceased.
Prudential also deems Jeremy Anderson to be independent in accordance with the UK and HK Codes, notwithstanding his former position as a partner at KPMG, having taken account of all circumstances set out in the UK Code and other applicable guidance in other jurisdictions. On balance, the Committee and the Board concluded that Jeremy Anderson could be expected to demonstrate objectivity and independence of judgement noting that two years had elapsed since his position at KPMG (including any financial interest) ended.
The Committee reviews the time commitment required of the Non-executive Directors. Time requirements take account of preparation for and attendance at Board meetings and other regular commitments, as well as additional time that may be required for unforeseen events or future projects.
All Non-executive Directors currently serve on at least one of the Board’s principal Committees, which requires an additional commitment of time dependent on the Committee and role.
The Committee considers the external commitments of Non-executive candidates and on appointment, all Non-executive Directors confirm they are able to devote sufficient time to the Group’s affairs to meet the demands of the role.
Terms of appointment It is important that the Non-executive Directors have clear terms of appointment which set out their duties towards Prudential and that their tenure is considered as part of ongoing succession activities.
Non-executive Directors are appointed for an initial term of three years.
Subject to review by the Committee and re-election by shareholders, it is expected that Non-executive Directors serve a second term of three years. After six years, Non-executive Directors may be appointed for a further year, up to a maximum of three years in total. Reappointment is subject to rigorous review as well as re-election by shareholders.
The Directors’ remuneration report sets out the terms of the Non-executive Directors’ letters of appointment and the terms of Executive Directors’ service contracts.
Both Amy Yip and Jeremy Anderson were provided with letters of appointment confirming their duties and obligations. These letters are on standard terms applicable to all Non-executive Directors.
Conflicts of interest Directors have a statutory duty to exercise independent judgement when carrying out their role and to avoid conflicts of interests.
The Company has in place procedures to identify and, where necessary, mitigate potential conflicts of interest.
The Board considers that the procedures for dealing with conflicts of interests operate effectively.
During the year, the Committee carried out various activities relating to subsidiary governance, which encompassed M&G Group Limited, The Prudential Assurance Company Limited, Jackson National Life Insurance Company, and Prudential Corporation Asia Limited until demerger, including: — Reviewing succession planning arrangements for non-executive directors of the Group’s main subsidiaries; — Considering the outputs of the 2018 performance review of the Group’s main subsidiary boards, chairs and directors. The effectiveness of the subsidiary boards were assessed using an internal process utilising questionnaires; and
In 2019, the Committee considered the outcomes of the board effectiveness reviews and individual non-executive director evaluations for each of Jackson National Life Insurance Company, Prudential Corporation Asia Limited, M&G Group Limited and The Prudential Assurance Company Limited. The Committee concluded that each of these boards remained effective and also approved the continued appointments of the nonexecutive directors.
Regular attendees — Chairman of the Board — Group Chief Executive — Group Chief Financial Officer and Chief Operating Officer
— Company Secretary — Director of Group Compliance (until January 2020)
Number of meetings in 2019: Twelve. (Nine regular meetings were held, including four shorter meetings to discuss full-year and half-year reporting matters, and three additional meetings to consider demerger related activities. A joint meeting was also held with the Risk Committee.)
The effectiveness of GwIA was assessed in 2019, together with a review of progress against suggested enhancements identified by the external review undertaken by Deloitte in 2017. I have met regularly with the Group Chief Internal Auditor and the Group-wide Quality Assurance Audit Director to discuss internal audit work and matters arising. The Committee has also asked that management responsible for rectifying some of the issues identified attend the Committee to ensure that appropriate action was being taken. The Committee also approved the 2019 and 2020 internal audit plans, which have taken account of the business and organisational changes arising from the demerger.
Compliance The Committee received updates on matters arising from the annual Compliance Plan throughout 2019. The plan focused on a number of areas to help strengthen the compliance framework, which is intended to aid the Group in meeting regulatory obligations, including monitoring compliance with key elements of the compliance framework such as conflicts of interest, anti-money laundering and anti-bribery and corruption policies. Following a change in management responsibility, Howard Davies and I agreed that, the Risk Committee should take on responsibility for all aspects of overseeing the compliance function with effect from 1 January 2020.
In advance of each of the main Committee meetings, I speak to the chairs of our main subsidiary audit committees and update the Committee on important points raised. I also report to the full Board after each Committee meeting on the main matters discussed.
The effectiveness of the Committee was reviewed as part of the annual Board evaluation, which confirmed that the Committee continued to operate effectively during the year and no major areas requiring improvement were highlighted.
Financial crime prevention and whistleblowing – regular updates l l l l l
Updates from main subsidiary level audit committees l l l l l l
Internal governance framework including effectiveness l l l l l l
Note 1 Two meetings were held in each of February and March 2019.
In reviewing these and other items, the Committee received reports from management and, as appropriate, reports from internal and external assurance providers, which in some cases were provided at the explicit request of the Committee.
When considering financial reporting, the Committee assesses compliance with relevant accounting standards, regulations and governance codes. During 2019, the Group adopted IFRS 16 ‘Leases’ and, as described in note A3, this resulted in a recognition of $895 million right-of-use asset and an equivalent amount of lease liabilities on the balance sheet on day one. The Committee continued to receive updates on the Group’s plans to implement IFRS 9 ‘Financial Instruments’ and IFRS 17 ‘Insurance Contracts’, which are not expected to be effective before 2022. The approach to adopting these standards is further discussed in note A3.
The Committee was satisfied that the assumptions adopted by management were appropriate. Further information on the effects of material changes to insurance assets and liabilities is included in note B3 to the IFRS financial statements and in the EEV basis results.
Valuation of investments The Committee received information on the carrying value of investments in the Group’s balance sheet including information on how those values were calculated for those investments which require more judgement (for example private placement loans). Further information on the valuation of assets is contained in note C3 of the IFRS financial statements. The Committee satisfied itself that overall investments were valued appropriately.
Demerger of M&G plc The Committee reviewed the Class 1 Shareholder Circular prepared by management in accordance with the UK’s Listing Rules for the demerger of M&G plc in October 2019. Assurance was sought from external parties including the Group’s reporting accountant and financial advisers. The Committee reviewed the procedures undertaken to support the verification of material statements made in the Circular. The Committee reviewed drafts of documents throughout 2019 and so were able to comment on the approach and content throughout the process.
Change in presentation currency of the Group financial statements Following the demerger of M&G plc, the Audit Committee approved management’s proposal to change the Group’s presentation currency in these financial statements from pounds sterling to US dollars. Given that a significant majority of the Group’s earnings post demerger are denominated in US dollars, the Group believes that the presentation currency change will give investors and other stakeholders a clearer understanding of Prudential’s performance over time. The Committee reviewed the methodology and process for the currency conversion as explained in note A1 of the IFRS financial statements. It also reviewed and agreed that, from 31 December 2019, the functional currency of the parent company had changed to US dollars from pounds sterling given the change to loans and dividend payments arising at that date.
Going concern and viability statements The Committee considered various analyses from management regarding Group and subsidiary capital and liquidity prior to recommending to the Board that it could conclude that the financial statements should continue to be prepared on the going-concern basis and that the disclosures on the Group’s longer-term viability were both reasonable and appropriate. The Committee considered information on the risks to the Group’s liquidity and capital position when making this assessment.
After completion of its detailed review, the Committee was satisfied that, taken as a whole, the Group’s Annual Report and Accounts were fair, balanced and understandable.