We generate value for shareholders through fee and other income for managing customers’ savings, and through insurance underwriting profits on financial protection products.
We generate value for shareholders through fee income from managing customers’ investments.
Front cover, clockwise from top left: Prudential customers Shane from the Philippines; Mike from the UK; Fung Yee from Hong Kong and Wie from Indonesia.
These pages, left to right: Prudential customers Kimlay from Cambodia; Mike from the UK; Charlie and Joanne from the US; Deniese from Malaysia; and Ian from the UK. Prudential staff volunteers in Indonesia and participants in Prudential RideLondon.
Our investors, employees and societies total shareholder return1 achieved since 2010 £509bn assets under management employees worldwide £4.8bn total investment2 in the economy
Our trusted brands and effective distribution channels help us understand customers’ needs, attract new monies and retain existing assets
Notes 1 Total shareholder return represents the growth in the value of a share plus the value of dividends paid, assuming that the dividends are reinvested in the Company’s shares on the ex‑dividend date. 2 Includes investment in business and infrastructure of £1.8 billion, total tax payments of £3.0 billion and total community investment of £21.7 million.
We provide protection and savings opportunities to our customers, social and economic benefits to the communities in which we operate, jobs and opportunities to our employees and long‑term value for our investors.
Our clear and consistent strategy utilises our capabilities, footprint and scale to serve the global savings and Asian protection needs of an increasingly self‑reliant middle class to create long‑term value for our customers and our shareholders.
To create sustainable economic value for our shareholders we focus on delivering growth and cash, while maintaining appropriate capital.
Chairman of the Remuneration Committee 104 Our executive remuneration at a glance 106 Summary of Directors’ remuneration policy 109 Annual report on remuneration 126 Supplementary information 05 Financial statements 131–296 06 European Embedded Value (EEV) basis results 297–330 07 Additional information 331–372 333 Additional unaudited financial information 358 Risk factors 364 Glossary 368 Shareholder information 371 How to contact us
The Directors’ Report of Prudential plc for the year ended 31 December 2015 is set out on pages 2 to 10, 69 to 100 and 333 to 372, and includes the sections of the Annual Report referred to in these pages.
While there are uncertainties in the global economy – and around Britain’s place in Europe – an area of increased clarity is around regulation, specifically with regard to Solvency II. This has been a project in which the entire European insurance sector has invested considerable resource and focus across more than a decade. We are pleased to have reached an outcome that underlines the strength and resilience of our company. We will continue to engage with policy makers as Solvency II is reviewed in the years ahead. Our capital position enables us to make our wider social and economic contribution.
We continue to make progress in achieving the 2017 objectives for the Group. These are not easy. Nor should they be. We are, however, pleased with the headway made so far.
In Mike Wells we have an outstanding Group Chief Executive who has already made strong progress. I was also pleased to welcome Penny James and John Foley to the Executive team on the Board as Group Chief Risk Officer and Chief Executive of Prudential UK & Europe, respectively. In addition, Tony Wilkey has become Chief Executive of Prudential Corporation Asia, succeeding Barry Stowe, who now leads Jackson. That these have all been internal appointments emphasises the pipeline of talent that has been developed at Prudential. We have long prided ourselves on the bench strength at our company. It will continue to be a focus for the business.
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I would like to conclude by recognising the contribution made by our employees around the world. It is their commitment and endeavour that makes possible the delivery of Prudential’s strategy. With their continued commitment to delivering for our customers, I am certain that we can look to the future with confidence.
Alongside the changes in the Executive, I have also been pleased to welcome David Law and Adair Turner to the Board as independent Non-executive Directors. They bring with them a depth of experience in business and regulation that I know will be a tremendous asset to our work. Alongside these changes, we are adjusting our subsidiary Board structure to include a number of independent directors. Finally, Alistair Johnston has announced that he will retire from the Board at the AGM to focus on the arts and his charitable activities. I want to thank him for his significant contribution to the Board over the last four and a half years.
Another vital relationship is with our regulators. Prudential engages with many regulators and supervisors here in the UK and around the world. We place great importance on having an effective and positive relationship with those who supervise us and our markets. Such relationships are the bedrock of a productive exchange that, we believe, ultimately allows us to serve our customers’ needs.
Prudential’s day-to-day business activities provide enormous value to the communities of which we are a part. We help provide security in retirement, contribute to financial peace of mind, invest in infrastructure and assist in growing economies and creating jobs. We do all this with an eye to the long term, because that is the very nature of our business.
Our strategy continues to serve us well, focusing on the three long-term opportunities across our geographic markets – (i) serving the protection and investment needs of the growing middle class in Asia; (ii) providing asset accumulation and retirement income products to US baby boomers and (iii) meeting the savings and retirement needs of an ageing British population.
We continue to comment on our international business performance in local currency terms (expressed on a constant exchange rate basis) to show the underlying business trends in a period of currency volatility. We have used this basis in discussions below for our Asian and US businesses to maintain comparability.
— M&G delivered operating profit of £442 million, broadly in line with 2014. Funds under management (including internal funds) were 7 per cent lower at £246.1 billion, reflecting retail outflows during 2015.
The Group is focused on delivering strong cash generation, which underpins both our strategic and financial flexibility. Underlying free surplus generation3, a key indicator of cash generation from our life and asset management businesses, was 15 per cent higher at £3,050 million after reinvestment in new business. In total, our businesses remitted cash to the corporate centre of £1,625 million, up 10 per cent on an actual exchange rate basis. Cash remittances of £467 million from Asia were 17 per cent higher while those from the US increased by 13 per cent to £470 million, both on an actual exchange rate basis. In the UK, our life operation remitted £331 million in line with last year and M&G delivered a 6 per cent increase in remittances to £302 million.
New business profit was up 20 per cent4 to £2,617 million, primarily reflecting higher overall volumes in Asia and the UK. All three of our life businesses contributed significantly to the total, with £1,490 million (up 28 per cent) of new business profit from
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Asia, £809 million (up 8 per cent) from the US and £318 million (up 23 per cent4) from the UK.
APE sales5 increased by 17 per cent4 to £5,607 million led by Asia where APE sales were 26 per cent higher at £2,853 million. In the US, APE sales were 3 per cent higher at £1,729 million as demand for our sales of variable annuities remained strong. In 2015, Jackson continued to proactively manage sales of variable annuities with living benefits while diversifying sales mix. In the UK, APE sales grew by 23 per cent4 to £1,025 million, based on our attractive with-profits product propositions sold through an expanding range of wrappers including income drawdown, individual pensions, ISAs and investment bonds. M&G experienced net outflows of £7.0 billion (2014: net inflows of £7.1 billion) driven by retail net outflows of £10.9 billion, due to redemptions from bond funds reflecting softer consumer sentiment on fixed income assets. Eastspring Investments, our Asia asset management business, delivered a strong performance in 2015, with third party net inflows of £6.0 billion (2014: net inflows of £5.4 billion).
We are continuing to make good progress towards our 2017 objectives announced in December 2013.
Our clear and consistent strategy utilises our capabilities, footprint and scale to serve the global savings and Asian protection needs of an increasingly self-reliant middle class to create long-term value for our customers and our shareholders.
a v in g s £2,617m EEV new business profit increase on 2014
Group Chief Executive’s report continued growth of 34 per cent in the fourth quarter and 29 per cent for the year. Furthermore, sales of health and protection business nearly doubled during the year, contributing over 42 per cent of our APE sales in China. We are well prepared for the implementation in 2016 of China’s Risk Oriented Solvency System (C-ROSS) and we do not expect this to cause any issues for our business.
Our joint venture with CITIC in China continues to perform well, with APE sales growth of 28 per cent and operations now in 64 cities. The second half of the year was marked by significantly higher levels of volatility in investment markets, which impacted single premium business through the bancassurance channel. However, regular premium sales remain strong, with 2017 objectives*
Group objective 3. Group cumulative underlying free surplus Cumulative Group underlying free surplus generation of at least £10 billion over the four-year period from 2014 to end-2017 2014-2017 objective £10bn £5.6bn
Key Expressed at December 2013 foreign exchange rates Comparative results on reported currency basis 2017 objective
Jackson achieved total retail APE sales of £1,606 million in 2015, broadly consistent with the levels in 2014. Including institutional sales, total APE sales increased 3 per cent to £1,729 million, driving an 8 per cent growth in new business profit to £809 million.
Despite significant volatility in capital markets, Eastspring Investments, our Asia asset management business, delivered strong results in 2015, with record third-party net inflows of £6.0 billion, up 11 per cent on 2014. The businesses benefited from robust inflows into equity funds, including Asian equity funds in Japan, good investment performance in Korea and India driving excellent domestic flows and healthy net inflows into bond funds from our joint ventures in China and India. Total funds under management at 31 December 2015 were a record £89.1 billion, up 16 per cent on the prior year as a result of net inflows from both our third-party and our life businesses.
The fundamentals of our Asian business remain compelling and we have the capabilities and market positions to be able to deliver long-term, profitable growth.
US Our US business delivered a strong performance in 2015, with total IFRS operating profit of £1,702 million, up 9 per cent (18 per cent on an actual exchange rate basis). Jackson’s life IFRS operating profit grew 10 per cent (18 per cent on an actual exchange rate basis) to £1,691 million, driven by increased fee income from higher levels of separate account assets. The growth in operating profit underpinned significant levels of capital generation in the year, enabling Jackson to remit a record £470 million of cash to the Group (2014: £415 million), while maintaining a healthy balance sheet. Jackson’s risk-based capital ratio at the end of 2015 was 481 per cent, compared to 456 per cent at the end of 2014.
The US economy experienced uneven performance during 2015, with a noticeable deceleration in consumer spending and a contraction in business investment in the fourth quarter. Employment data was more positive, with non-farm payrolls in the last two months of the year exceeding expectations. This contributed to the Federal Reserve decision to increase the Federal Funds’ target rate by 25 basis points in December. The S&P 500 Index ended the year roughly in line with year-end 2014 levels and the 10-year treasury rate rose 10 basis points to 2.28 per cent at the end of 2015.
Overall, in 2015 the US competitive landscape remained relatively stable, although the industry continued to adjust its products and benefits in reaction to regulatory developments and economic conditions. Within variable annuities, providers are mainly choosing to modify their product offerings through reductions in fund availability and increased fees. With a final fiduciary rule expected from the US Department of Labor in the first half of 2016, we are working on contingency plans distribution relationships with Maybank and Singpost, total APE sales were 13 per cent lower in 2015.
All our other markets have delivered good-quality growth. In the Philippines, we have continued to focus on the agency channel, with increased manpower and higher average case sizes driving APE sales growth of 20 per cent in this channel. Overall APE sales were up 9 per cent, reflecting our decision to be selective in how we participate in bancassurance. Thailand’s APE sales were up 12 per cent, driven by strong growth from our main bancassurance partners, United Overseas Bank and Thanachart. Vietnam had an excellent year, with APE sales growing 32 per cent on higher levels of agency activity. Our greenfield operations in Cambodia continue to move ahead well, with APE sales up 167 per cent. While our larger, more established markets are progressing well, our ability to execute across the spectrum, covering markets at different stages of development, is key to driving long-term, profitable growth in the region.
In Poland, our life business continues to grow steadily. The business now has 18 branches across the country and 597 financial planning consultants. Its success demonstrates our ability to build a new business franchise by transferring our existing product and distribution strengths to new markets.
Africa During 2015, we continued to develop our businesses in Sub-Sahara Africa. We entered the Uganda insurance market through the acquisition of Goldstar Life Assurance in June 2015 and established bank distribution agreements with Societe Generale and Fidelity Bank in Ghana, and with Standard Chartered in Kenya. In January 2016, we announced entry into Zambia via our acquisition of Professional Life Assurance. Once regulatory approval is received for the Zambia acquisition, our footprint in Africa will have expanded to four countries with access to nearly 1,300 agents and 200 bank branches.
M&G M&G’s focus on producing superior long-term investment returns, coupled with well established distribution in the UK and across Europe, underpins its financial results. IFRS operating profit of £442 million was broadly in line with 2014, with cash remittances to Group of £302 million, up 6 per cent. At the end of 2015 M&G’s total funds under management were 7 per cent lower at £246.1 billion (2014: £264 billion), with external funds under management of £126.4 billion accounting for 51 per cent of the total, compared with 45 per cent five years ago. Despite outflows in 2015, M&G’s total funds under management have grown from £198.3 billion at the end
Group Chief Executive’s report continued significant profitable growth across the cycle, and since 1 January 2008, has remitted nearly US$3.3 billion of cash to the Group. Our performance continues to demonstrate that Jackson’s approach has successfully translated into value for customers and into profits and cash for shareholders.
In 2015, APE sales grew 23 per cent4 to £1,025 million, with a consequent 23 per cent4 increase in new business profit to £318 million. These results demonstrate the strength of our customer propositions in retail risk-managed investment products, combined with our diversified distribution capability. In 2015 we continued to participate in the pensions de-risking market in a disciplined manner, and delivered a robust performance from this sector.
Our retail business achieved APE sales growth of 32 per cent to £874 million (2014: £663 million4) driven by a growing demand for our savings and retirement products and specifically the distinctive PruFund range, with momentum increasing through the year as additional products and services came online including PruFund ISA, Flexible Income Drawdown and our simplified non-advised drawdown Pension Choices Plan. Our capabilities in multiasset investing, the strength of our brand and diversified distribution, collectively position us well to meet evolving customer needs in a post-pension freedoms retirement market. Retail new business profit increased by 31 per cent4, benefiting from increased sales volumes partially offset by a lower contribution from individual annuity sales. APE sales of individual annuities decreased by 46 per cent from 2014 levels to £57 million and now represent 7 per cent of retail sales.
Demand for our PruFund multi-asset funds among our target customer base remains strong as customers continue to be attracted by both the performance track record and the benefits of a smoothed return in managing market volatility and reducing customer investment risk. Our successful launch in February 2015 of the PruFund range of investment funds within an ISA wrapper generated APE sales of £73 million, with assets under management totalling £674 million at the end of December 2015. In total across all products, PruFund APE sales of £574 million increased by 82 per cent, with total assets under management having increased 42 per cent since the start of the year to £16.5 billion.
Corporate pensions APE sales of £152 million were 3 per cent higher than in 2014. We remain the largest provider of additional voluntary contribution plans within the public sector, where we provide schemes for 73 of the 101 public sector authorities in the UK (2014: 72 of the 99).
Our bulk annuity business concluded four deals, generating APE sales of £151 million (2014: £171 million, seven deals), new business profit of £117 million (2014: £105 million) and IFRS operating profit of £89 million (2014: £105 million). In 2015, £3,050m underlying free surplus generation increase on 2014
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Authority of our internal model in December 2015, underscores the strength and resilience of the Group’s capital position. At 31 December 2015, Group Solvency II capital surplus8,9 was estimated at £9.7 billion, which is equivalent to a Group Solvency II capital ratio of 193 per cent.
The Board has decided to increase the full-year ordinary dividend by 5 per cent to 38.78 pence per share, reflecting the continued strong financial performance of the Group in 2015. In line with this, the directors have approved a second interim ordinary dividend of 26.47 pence per share (2014: final dividend of 25.74 pence), which brings the total ordinary dividend for the year to 38.78 pence (2014: 36.93 pence). In addition, the Board has decided to award a special dividend of 10 pence per share reflecting the additional contribution to earnings from the specific management actions taken to position the balance sheet more efficiently under the new Solvency II regime.
Although the Board has been able to approve a special dividend of 10 pence per 2015 across a diverse range of fixed income, real estate and alternative investment strategies that have yet to be invested. External institutional funds under management increased 5 per cent in 2015 to £65.6 billion (2014: £62.8 billion).
On 1 February 2016, Michael McLintock announced that he is retiring as Chief Executive of M&G Investments after 19 years in the role. I would like to thank Michael for his exceptional contribution to M&G over the last two decades. Under his leadership M&G has grown to become one of Europe’s largest fund managers by offering innovative investment solutions to meet the needs of our customers and clients. I wish him all the very best for the future. He will be succeeded later this year by Anne Richards, whose prior role was Chief Investment Officer and Head of EMEA at Aberdeen Asset Management. Anne joins the Board in June 2016.
Gross retail and institutional inflows amounted to £33.6 billion (2014: £38.0 billion). Redemptions in the retail business, however, resulted in overall net outflows of £7.0 billion in 2015. Retail net outflows of £10.9 billion (2014: net inflows of £6.7 billion) were partially offset by institutional net inflows of £3.9 billion (2014: £0.4 billion).
In the fourth quarter of 2015, M&G experienced net retail outflows of £3.5 billion, including £2.4 billion from Europe. This reflected the continuation of a market-wide change in investor sentiment away from fixed income, against a backdrop of high levels of volatility and macroeconomic uncertainties, conditions that have continued into the early part of 2016. Our strategy of diversification by asset class has helped attract good net inflows into several M&G multi-asset funds (totalling £2.0 billion) and into our retail property fund (£0.5 billion) in 2015.
At the end of 2015, retail funds under management were 18 per cent lower at £60.8 billion (2014: £74.3 billion). Retail funds under management from Continental Europe represent 39 per cent of total retail assets.
M&G had a multi-billion-pound pipeline of institutional commitments at the end of
Notes 1 The comparative results referenced above and elsewhere in this document have been prepared using constant exchange rates basis except where otherwise stated. Comparative results on an actual exchange rate basis are also shown in financial tables in the Chief Financial Officer’s report on our 2015 financial performance.
2 Recurring income from Asia in-force book represents external renewal gross earned premiums (including joint ventures).
3 Underlying free surplus generation comprises underlying free surplus released from long-term business (net of investment in new business) and that generated from asset management operations. The 2012 comparative is based on the retrospective application of new and amended accounting standards and excludes the 2012 one-off gain of £51 million from the sale of the Group’s holding in China Life Insurance Company of Taiwan.
4 Following the disposal of the Group’s 25 per cent interest in PruHealth and PruProtect in November 2014, the 2014 comparative results of UK insurance operations have been adjusted to exclude results of those businesses.
Mike Wells Group Chief Executive share in 2015, the Group’s dividend policy remains unchanged. The Board will maintain its focus on delivering a growing ordinary dividend, which will continue to be determined after taking into account the Group’s financial flexibility and our assessment of opportunities to generate attractive returns by investing in specific areas of the business. The Board believes that in the medium term a dividend cover of around two times is appropriate.
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28 United Kingdom – Insurance and investments 32 United Kingdom – Asset management 36 Chief Financial Officer’s report on our
our business and how these are managed 57 Corporate responsibility review
Prudential UK & Europe Founded in the UK in 1848, Prudential is a long-established leading provider of life and pensions, with a relentless focus on the needs of the age cohorts where wealth is most heavily concentrated. Our core strengths in with-profits and retirement are underpinned by our expertise in areas such as longevity, risk management and multi-asset investment, together with our financial strength and widely recognised brand. These attributes position Prudential UK well to meet customer needs in the UK’s evolving marketplace.
We consistently develop our product portfolio, designing it around our customers’ needs and providing them with peace of mind, whether that be in relation to saving for retirement or insuring against the risks of illness, death or critical life events. Satisfied customers become our advocates, recommending our products and services to their friends and families.
Leverage strength and scale, and proactively manage risk Balance sheet strength and proactive risk management enable us to make good our promises to customers and are therefore key drivers of long-term value creation and relative performance. In spite of the challenging macroeconomic environment we continue to strengthen our capital position through generation of organic earnings and specific management actions, which since 2010 include: — Controlling sales of US variable annuities in a manner that appropriately balances value, volume, capital generation and balance sheet risk; and
— Longevity reinsurance and asset portfolio optimisation in our UK life businesses.
Allocate capital with discipline, focusing on long-term returns We rigorously allocate capital to the highest-return products and geographical locations with the shortest payback periods, in line with our risk appetite. This has had a positive and significant impact on our capital generative growing in-force portfolio and, in turn, has transformed the capital dynamics of our Group. For example, the free capital generated from our in-force operations reached £3.8 billion in 2015 compared to £2.4 billion five years ago (on an actual exchange rate basis). This transformation enabled our business operations to remit £1,625 million to the Group in 2015, compared to £1,105 million in 2011.
Provide balanced metrics and disclosures We aim to have clarity and consistency internally and externally in the performance indicators that drive our businesses. Alongside this we develop our financial disclosures to enable our stakeholders to fairly assess our long-term performance. We have three main objectives: — To demonstrate how we generate profits under the different accounting regimes; — To show how we think about capital allocation via measures that highlight the returns we generate on capital invested in new business; and
In Asia there is a growing and increasingly affluent middle class which by 2020 is forecast to become 1.9 billion people and represent over half of the global middle class. This group is increasingly wealthy but largely uninsured and has significant and growing savings, accumulation, health and protection needs.
The UK has an ageing population which remains under-saved for the long term. This will drive increasing demand for savings products and retirement income solutions which will provide opportunities for both life insurers and asset management.
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Company’s shares on the ex-dividend date. 2 Includes investment in business and infrastructure of £1.8 billion, total tax payments of £3.0 billion and total community investment of £21.7 million.
Products Utilising our capabilities, footprints and scale wedesign innovative products that align with customer n eeds
Tr us te d br an ds an d effe ctive distribution ch an ne ls he lp u s u nderst and customers’
IFRS operating profit2 £m IFRS operating profit is our primary measure of profitability. This measure of profitability provides an underlying operating result based on longer-term investment returns and excludes nonoperating items.
+20% — Group IFRS operating profit in 2015 increased by 22 per cent on a constant exchange rate basis (26 per cent on an actual exchange rate basis), compared to 2014, reflecting strong growth in our life businesses, with Asia up 16 per cent, the US up 10 per cent and the UK up 60 per cent, on a constant exchange rate basis.
+16% — EEV new business profit in 2015 increased by 20 per cent on a constant exchange rate basis (24 per cent on an actual exchange rate basis), compared to 2014, driven by higher volumes.
+14% — Group EEV operating profit in 2015 increased by 16 per cent on a constant exchange rate basis (19 per cent on an actual exchange rate basis), compared to 2014, reflecting higher new business profits and higher contributions from the in-force business.
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IGD capital surplus5 £bn During 2015, Prudential was subject to the capital adequacy requirements of the European Union Insurance Groups Directive (IGD) as implemented by the Prudential Regulation Authority in the UK. The IGD capital surplus represents the aggregated surplus capital (on a Prudential Regulation Authority consistent basis) of the Group’s regulated subsidiaries less the Group’s borrowings6. No diversification benefit is recognised.
Group Solvency II capital surplus5,7 £bn Replacing the IGD capital regime, from 1 January 2016 Prudential will be subject to the risk-sensitive solvency framework required under European Solvency II Directives (Solvency II) as implemented by Prudential Regulation Authority in the UK. The Solvency II surplus represents the aggregated capital (own funds) held by the Group less solvency capital requirements.
— The Group has a strong Solvency II capital position, with an estimated Group Solvency II capital surplus of £9.7 billion5 and a solvency coverage ratio of 193 per cent.
We are making good progress towards the objectives we announced in December 2013: CAGR
Notes 1 The comparative results shown above have been prepared using actual exchange rate (AER) basis except where otherwise stated. Comparative results on a constant exchange rate (CER) basis are also shown in financial tables in the Chief Financial Officers’ report on our 2015 financial performance. CAGR is Compound Annual Growth Rate.
4 Free surplus generation comprises underlying free surplus released from long-term business (net of investment in new business) and that generated from asset management operations.
5 Estimated before allowing for second interim ordinary and special dividends. IGD Capital Surplus for 2014 and comparative years estimated before allowing for final dividend.
10 The 2012 comparative is based on the retrospective application of new and amended accounting standards and excludes the one-off gain of £51 million from the sale of the Group’s holdings in China Life Insurance Company in Taiwan.
— Continued delivery across key value creation metrics. On a constant exchange rate basis, new business profit up 28 per cent, total IFRS operating profits up 17 per cent and free surplus generation up 16 per cent
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The degree of state-sponsored financial provision for healthcare and other social services varies by market, but is typically very basic, and it is widely appreciated that the private sector has a very important complementary role. Protection gaps remain high and the regulators have tasked the industry with improving levels of financial literacy and addressing this issue. Consequently, the regulations governing the industry continue to evolve in largely positive ways with good outcomes for customers and shareholders.
Prudential has built a well diversified Asian platform that matches our distribution and product strengths to each market’s long-term opportunities in the life sector, and maximises our assetgathering capabilities in the region’s investment management industry.
Source: Based on IMF and includes China, Cambodia, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand and Vietnam.
Prudential Corporation Asia is a powerful franchise with a wide footprint in the right markets, established go-to market capabilities and superior brand strength.
— Top 3 position in nine out of the 12 life markets
Long-term industry leader — Strong presence in major cities and all 63 provinces
— 97 per cent brand recognition — 1.3 million customers — Circa 100,000 agents, one third of industry
— Access to 800 branches nationwide with partners – Standard Chartered Bank, United Overseas Bank and Thanachart Bank
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Successful joint venture — Operating in 64 cities — 50 per cent increase in number of active agents during 2015
— Focus on ‘value over volume’; agency new business profit up 7 per cent over prior year
— Pioneer in linked policies with riders for flexible savings and protection
— 2015 saw a 39 per cent increase in active manpower and a 27 per cent increase in productivity
Today, Prudential Corporation Asia is focused on leveraging this platform to grow in a disciplined way for the benefit of our customers, shareholders and communities. Success is defined by metrics that ensure we deliver volume, value and good service.
Strong demand for savings and protection products As people move into the middle class, their increased wealth and higher income give them the opportunity to make financial plans for the first time. Typically the priority is to provide protection for their families and establish a regular savings plan through a life insurance policy.
Once the savings and protection solutions are in place there is the opportunity to invest. Single premium insurance policies are also important in more developed markets and it is likely that customers will increasingly seek access to different asset classes through mutual funds as their wealth grows and their financial needs become more sophisticated.
Cash Equities Bonds 2x proportion of savings in cash higher than the US
Notes 1 Agency excluding India. 2 Prudential estimates based on IMF data
– October 2013. 3 Based on products launched over the past 24 months. 4 Top decile in five of seven countries in
South-east Asia and Hong Kong. 5 Prudential’s rank in insurance market by new business APE. Based on formal (competitors’ results releases, local regulators, insurance associations) and informal (industry exchange) market share data.
6 Market penetration sourced from Swiss Re – based on insurance premiums as a percentage of GDP in 2014 (estimated).
8 Asset management operations. 9 Any investors should note that the value of investments, and the income from them, will fluctuate, which will cause fund prices to fall as well as rise and they may not get back the original amount they invested. The customers’ circumstances and views are specific to them and should not be taken as a recommendation, advice or forecast.
Customers Prudential Corporation Asia has over 14 million life insurance customers and over 22 million in-force policies. We actively monitor customer satisfaction levels across multiple indicators, but key statistics are the numbers of customers who keep their policies (our retention rate is over 90 per cent), and the number of customers who buy more policies from us (in 2015 more than 38 per cent of APE sales were from existing customers), reflecting the success of our advice-driven approach and that customers appreciate the value of the products we provide.
Corporate social responsibility activities Prudential is a committed member of the communities where we operate, and through the Prudence Foundation we drive social responsibility activities, with a focus on providing disaster relief, promoting financial literacy and children’s education.
Launched in 2011, PRULink Exact Protector is an investment-linked life insurance plan that offers both insurance protection and savings, providing customers with peace of mind. An investment-linked plan, it allows customers to align their premium payments with their investment strategy and provides a choice of funds.9
— Total IFRS operating profit of £1,702 million, up 9 per cent from year-end 2014
— Awarded ‘World Class Certification’ by Service Quality Measurement Group, Inc. and ‘Highest Customer Satisfaction by Industry’ award – the tenth consecutive year of recognition for customer service performance in these two categories
United States Providing US baby boomers with solutions for a stable retirement
More recently, with the release of a US Department of Labor (DOL) proposal to introduce new fiduciary obligations for distributors of investment products to holders of regulated accounts, the industry is now dealing with a regulatory initiative that will significantly impact the delivery of advice to our customers. The rules related to this proposal are not yet final, but as a leader in the industry, we have spent many hours with a wide variety of stakeholders to highlight the issues and to ensure that lawmakers and regulators understand the impact of what is proposed and the consequences it will have on various segments of the retirement market.
Jackson has a good track record of navigating and, at times, benefiting from changes in the regulatory environment. This remains our mindset as we work to meet the needs of all of our stakeholders.
In December, the Federal Reserve raised the Federal Funds rate by 25 basis points, their first increase in almost 10 years. The S&P 500 returned approximately negative 1 per cent in 2015, after much stronger returns in 2013 and 2014, while the benchmark 10-year US Treasury note yield rose from 2.18 per cent at the end of 2014 to 2.28 per cent at 31 December 2015.
Barry Stowe Chairman and Chief Executive Officer, North America Business Unit
Prudential’s strategy in the US is well established and continues to focus on: — Capitalising on baby boomer retirement opportunities; — Maintaining a balanced product suite throughout the economic cycle; — Streamlining operating platforms, driving further operational efficiencies; and
U K Savings gap and ageing population in need of returns and income
Additionally, Jackson’s success with the development, launch and execution of Elite Access demonstrates the depth and strength of our creative and distribution capabilities in the industry. We now command a leading position in a market we were not operating in prior to 2012. Elite Access is the third best-selling variable annuity product in the US6. As of third quarter of 2015, Jackson offers three of the top 10 best-selling variable annuity products across the industry6.
We continue to balance proactively value, volume, capital and balance sheet strength across our suite of product offerings, which allows us to compete effectively throughout the economic cycle.
There continues to be strong consumer demand for our products. We continue to respond to this demand with product innovation and distribution strategies that meet the needs of a growing retirement population while generating shareholder value.
With a long-term focus on balancing the needs of multiple stakeholders, Jackson has forged a solid reputation and built strong relationships based upon its financial stability, innovative and creative products and market-leading adviser support.
Competitors continued to make product changes across many segments and we noted competitors evolving across product categories. In 2015, we saw more competitors join the fixed-index annuities space. In many cases they offered living benefits on their products in an attempt to compete with variable annuities. In addition, some insurers have made changes to the fund platforms within their variable annuity products, requiring managed volatility funds with a living benefit guarantee which purportedly protect annuity customers from downside market risks. There are now 17 Investment Only Variable Annuity (IOVA) products that compete directly with Elite Access, our variable annuity product with no guarantee benefits. The majority of those competitors have added guaranteed benefits to the IOVA products. Elite Access still commands a significant market share with sales of £3.1 billion in 2015.
Jackson is a leading provider of retirement solutions for industry professionals and their clients. The Company offers a diverse range of products including variable, fixed and fixed index annuities designed for tax-efficient accumulation and distribution of retirement income for retail customers, and fixed income products for institutional investors.8
High-quality information technology systems are critical for providing awardwinning customer service. We leverage technology to enhance processing quality and reduce the time required to process new business and commissions. The flexibility of our information technology systems contributes to our ability to manufacture, distribute and service an unbundled product design unique to the industry. The focus on our operational platforms, and the efficiencies achieved as a result, has provided us with among the lowest general and administration expense to asset ratio relative to competitors.
Our hedge philosophy has not changed in 2015. Jackson is able to aggregate financial risks across the Company, obtain a unified view of our risk positions, and actively manage net risks through an economically based hedging programme. A key element of our core strategy is to protect the Company from severe economic scenarios while maintaining adequate regulatory capital. We benefit from the fact that the competitive environment continues to favour companies with robust financial strength and a demonstrated track record of financial discipline, both key elements of our long-term strategy.
Notes 1 The 2015 EEV results of the Group are presented on a post-tax basis and, accordingly, prior years’ results are shown on a comparable basis.
2 LIMRA, Annuity US Individual Annuities Survey Participant’s Report (Q3 2015).
Individual Annuities Sales Survey (Q3 2015). Jackson is ranked first in total Variable Annuities sales out of 44 participating companies in LIMRA’s quarterly survey as of 3Q YTD 2015.
6 ©2015 Morningstar Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar Annuity Research Center 3QYTD15 variable annuity sales by contract.
7 Paikert, C. (2015). New Paths to Scale. Financial Planning. June 2015.
8 Any investors should note that the value of investments, and the income from them, will fluctuate, which will cause fund prices to fall as well as rise and they may not get back the original amount they invested. The customers’ circumstances and views are specific to them and should not be taken as a recommendation, advice or forecast.
Strength of distribution Our distribution teams set us apart from our competitors. Jackson’s wholesaling force is the largest in the industry, supporting thousands of advisers across multiple channels and distribution outlets.
Efficient operations We support our industry-leading product development and distribution teams with award-winning customer service. Jackson was awarded by Service Quality Measurement Group, Inc. World Class Certification in customer satisfaction and received the Highest Customer Satisfaction by Industry award, achieving the top rating for the financial industry for the tenth consecutive year.
— Retained two Five Star ratings for excellent service2, achieved for fifth consecutive year
— Diversified distribution model focusing on intermediaries, Prudential Financial Planning (our direct advice service) and individual customers via mail, email and telephone
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 29
Prudential is well placed in this evolving marketplace. This is evident in our new business profile relative to a few years ago. Where once bonds and annuities were the dominant components of new business, since the emergence of greater post-pension freedoms we have been writing more bond, ISA, pension saving and income drawdown business, and a significantly lower volume of annuity business, giving a better balance to our business portfolio.
Valuable customer franchise For over 167 years Prudential has been providing financial security to generations of UK customers through an unwavering focus on long-term value as evidenced by our longevity experience, multi-asset investment capabilities and our financial strength. Such attributes are highly sought after today by customers adjusting to pension freedoms and by financial advisers who require a brand they can trust to help secure dependable incomes in retirement for their clients. Our inherent brand strength, in combination with our range of market-leading with-profits and retirement income products, resonate more strongly than ever with customers and distributors. This is driving significant demand for our differentiated and market-leading retirement solutions.
‘The regulatory and government interventions we continued to witness in 2015 will benefit the well known, financially strong firms, such as Prudential, as more transparency and competition comes to the sector.
This changing environment creates opportunities that play to our strengths – great investment performance, access to a true multi-asset fund and a customer return less impacted by market fluctuations.’
Its distinct competitive advantage in with-profits and longevity management continues to provide market-leading returns to customers over the long term. Using this core capability it is attracting new customers with a range of new products designed to meet their retirement income and savings needs in a post-pension freedom market.
By optimising its in-force business and focusing on the areas of the market where it has a distinct competitive advantage, Prudential continues to deliver sustainable cash flows for the Group and its shareholders.
Strong investment track record, product capabilities and customer outcomes Prudential is a leader in its chosen markets, benefiting from a strong investment track record, a financially strong with-profits fund and a recognised reputation for developing innovative products.
Over the long term our with-profits fund has continued to perform strongly. Over a period spanning nearly 20 years, our asset share fund has outperformed the median investment return of our peer group by an average of just over 100 basis points per annum.
Our with-profits, or PruFund, platform gives us the ability to create products perfectly tailored for the customers of the pension freedoms world. In the past year we have made two significant enhancements that have broadened access to our proposition: making PruFund available through an ISA wrapper and through a drawdown product.
We continue to focus on meeting customer needs through the following actions: — Providing products and retirement solutions perfectly tailored to help customers take advantage of the new pension freedoms; — Broadening the ways in which customers can do business with us through financial adviser intermediaries, providing advice to customers in their homes through our 250 Prudential
Financial Planning partners, or by telephone and increasingly online; — Investing in technology that enables customers to engage more flexibly with us online; — Enhancing access to our market-leading PruFund investment range through an ISA wrapper; — Introducing income drawdown specifically designed for the pension freedoms market; and
— Strength of customer base; direct capability — Long track record of managing longevity
PruFund growth ABI fund comparator * ABI Mixed Investment 20%-60% Shares TR; performance from 31 December 2005 to 31 December 2015
Mike retired in 2014, and was introduced to the Prudential Flexible Retirement and Flexible Drawdown Plan by Prudential Financial Planning.
‘The PruFund range has allowed me to look forward to my retirement with total confidence. I was introduced to the Prudential Flexible Retirement and Flexible Drawdown Plan, and discovered that this gave me much more control over my financial planning over the coming years; I was able to consolidate all my pensions into one “pot” and the fund should grow modestly while still allowing a comfortable lifestyle. I am able to adjust my pension up or down depending on my circumstances, and also take a lump sum if needed. And the real bonus is that when I do head up the ”stairway to heaven”, the monies in the fund will pass on to my wife and then on to our children.’
Prudential UK’s PruFund4 offers customers the potential for growth alongside a degree of security against losing money. With its market-leading multi-asset fund offering, Prudential UK provides access to our fund management expertise. Our innovative funds spread risk through investing in many different assets, employ a smoothing process that offers potential growth in the value of the funds while helping to manage short-term volatility, and provide a range of guarantee options to tie in with customers’ future needs.
M&G external net flows £bn M&G external funds under management £bn *
Meeting customers’ needs A committed focus on long-term investment returns means that the interests of M&G and its customers are aligned, whether clients are individual savers, institutional investors or the funds of Prudential’s insurance operations.
Fixed income: M&G is one of Europe’s largest fixed income investors. Our fund managers benefit from one of the region’s largest and most experienced in-house credit research teams, whose knowledge covers the full range of fixed income investment, from the management of funds, 51 UK local authority pension schemes and a number of sovereign wealth funds. M&G Real Estate is one of the world’s largest international property investors enabling clients to access a wide range of investment opportunities in real estate across all the major sectors in the UK, Europe and Asia.
People Our investment edge is our people. We employ more than 2,000 people operating from offices across Europe, Asia and in southern Africa. We take pride in attracting, developing and retaining people of the highest calibre. In return, they are committed to working with us to meet the long-term needs of our customers.
Our investment teams are primarily based in our headquarters in London, where they benefit from the provision of high quality support staff and investment infrastructure: from analysts and dealers to operations, risk and compliance. Reflecting the need for local expertise in real estate,
Retail clients favour pooled funds such as open-ended investment companies which they buy directly from M&G or more typically through an intermediary such as an independent financial adviser or discretionary fund manager. By total UK assets under management, M&G is the second largest retail fund manager with £35.7 billion of assets under management, equivalent to a market share of 6.8 per cent3. In Europe, where M&G has distributed funds since 2002, it has over £23.5 billion of assets under management and a market share of 0.4 per cent4.
M&G’s institutional market position Institutional clients require investment strategies that help them meet future outgoings, from a pension scheme making payments to retired employees to a sovereign wealth fund that finances schools, transport and other infrastructure developments. M&G’s ability to design and commercialise investment strategies for such clients is founded on the quality of its people and their acknowledged expertise in the world’s credit and real estate markets.
Many of the innovative strategies developed for today’s institutional clients are long-term, illiquid investments – from infrastructure and housing to solar parks and corporate lending. Such investments often require a client to sign up for multiple years, creating long-term stability and security in the yields received by the client and the fees received by M&G.
Like many M&G direct customers, Ian prefers to invest in ‘income’ shares of M&G mutual funds, which pay out income regularly to help support his lifestyle throughout retirement. To spread his risk across geographies, asset classes and fund strategies, Ian holds shares in the M&G Property Portfolio (which mainly invests in commercial properties in the UK) and in a broad mix of equity funds invested in the UK, Europe, North America and Asia6.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 35 sovereign debt and public corporate bond portfolios through to private debt such as leveraged finance, real estate finance, direct lending and infrastructure. In a ranking of global private debt managers for 2015, M&G ranked third, with a book of over £20.7 billion5.
Real estate: M&G Real Estate is a leading global property investor and manager covering all major real estate sectors including business space, retail and leisure, residential and alternatives sectors. We actively manage our assets, drawing on our long heritage of expertise and knowledge and our extensive network of contacts. This approach enables the business to identify and capitalise on attractive investment opportunities. We also have a track record of identifying and exploiting real estate development opportunities and for the successful delivery of projects. M&G concluded 2015 with £4.2 billion of global property transactions. This included £2.6 billion of acquisitions with an average deal size of £56 million.
In the institutional market, pension funds, sovereign wealth funds and other large clients require stable, long-term cash flows that help meet their liabilities. Our reputation for innovation in the institutional market continues to grow, with M&G at the forefront of a number of specialist fixed income markets, including leveraged finance and infrastructure investment. The consistency of our institutional investment returns helped earn M&G the prestigious 2015 Financial News Institutional Asset Management Awards for Infrastructure Manager of the Year for our infrastructure investment arm, Infracapital.
Notes 1 Excludes Prudential Capital. 2 Based on data as at Q4 2015. European Fund &
Delivering a strong financial performance across our ‘growth and cash’ metrics
‘The Group’s financial performance and its resilience increasingly benefits from ongoing improvement in the quality of our income delivered through stronger growth in non-interest sensitive sources and from the balance of profit and cash across different geographies, currencies, products and distribution channels.’
Prudential aims to have clarity and consistency in the performance indicators that drive our businesses. Alongside this, we develop our financial disclosures to enable our external stakeholders to fairly assess our long-term performance. We have three objectives: — To demonstrate how we generate profits; — To show how we think about capital allocation; and
During 2015, investment markets have remained volatile, reflecting growing concerns on the outlook for global growth, the consequences of monetary policy actions and unease caused by the steep decline in commodities prices. The fourth quarter in particular saw weakening equity markets and widening credit spreads across most of the major global economies. Although we have taken steps to reduce the investment market sensitivity of our earnings and balance sheet in recent years, we remain significant long-term holders of financial assets. Short-term fluctuations in the value of these assets are reported outside the operating result, which is based on longer-term investment return assumptions.
2015 has been another year of progress, delivering a strong financial performance across our ‘growth and cash’ metrics of new business profit, IFRS operating profit and operating free surplus generation.
The key financial highlights of 2015 (on a constant exchange rate basis) were: — Group IFRS operating profit was 22 per cent higher at £4,007 million.
Operating profit before tax Long-term business: Long-term business operating profit2 4,067 3,210 27 3,312 23
Profit for the year attributable to shareholders 2,579 2,216 16 2,240 15
Life insurance operations: taken together, IFRS operating profit from our life insurance operations in Asia, the US and the UK
increased 23 per cent2 to £4,067 million. This increase reflects the growth in the scale of these operations, driven primarily by positive business inflows. We track the progress that we make in growing our life insurance business by reference to the scale of our obligations to our customers, which are referred to in the financial statements as policyholder liabilities. Each year these liabilities increase as we collect premiums and decrease as we pay claims and policies mature. The overall scale of these policyholder liabilities is relevant in evaluating our profit potential, in that it reflects, for example, our ability to earn fees on the unit-linked element and it sizes the risk that we carry on the insurance element, for which Prudential needs to be compensated.
Impact of specific management actions in second half of the year, ahead of Solvency II 339 – –
Operating profit based on longer-term investment returns 4,067 3,210 3,312 * The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholderbacked business.
UK life IFRS operating profit was 60 per cent higher than 2014 at £1,167 million (2014: £729 million). New annuity business contributed £123 million (2014: £162 million) including £89 million (2014: £105 million) from the four bulk transactions completed in 2015. The balance of £1,044 million (2014: £567 million), reflects a robust level of profit from our core annuity in-force and with-profits business and includes a £339 million benefit from specific management actions taken in the second half of the year to position the balance sheet more efficiently under the new Solvency II regime. Of this amount, £170 million related to profit on longevity reinsurance transactions executed in the second half of the year, with a further £169 million reflecting the effect of repositioning the fixed income asset portfolio and other actions. The non-recurring nature of these actions and our reduced appetite for annuities post-Solvency II will mean that, going forward, IFRS earnings from our UK life business will be predominantly driven by the contribution from core annuity in-force and with-profits business.
its larger scale and our regular premium health and protection-oriented product focus. Indonesia IFRS operating profit, our largest market on this measure, increased 21 per cent to £356 million, reflecting the addition of new savings and protection sales in the year to an already sizeable recurring premium in-force business. Hong Kong IFRS operating profit was 27 per cent higher at £150 million, mainly due to the increasing profit contribution from a growing customer base purchasing health and protection cover. Malaysia IFRS operating profit grew by 12 per cent to £120 million, reflecting a growing contribution from the in-force business. IFRS operating profit in Singapore declined 4 per cent to £204 million, the result of our deliberate decision to discontinue universal life sales as the returns of these products in the current interest rate environment are unattractive. We are also encouraged to see further progress among our fast- growing businesses in China, Thailand, the Philippines and Vietnam which collectively generated £220 million of Asia’s IFRS operating profit, up 28 per cent compared to the prior year, and now account for 18 per cent of the total life result compared to just 7 per cent only three years ago.
In the US, life IFRS operating profit increased by 10 per cent to £1,691 million, primarily as a result of an 11 per cent increase in fee income, which is now Jackson’s main income source, and efficient management of costs. The uplift in fee income reflects the growth in average separate account assets from £78.1 billion quality, resilience and balance of our earnings. Our share of returns from with-profits operations was up 5 per cent, providing a stable and reliable source of income for both shareholders and customers invested in these funds.
In the second half of 2015 and ahead of securing Solvency II internal model approval, a number of specific management actions were taken by our UK life business to position the balance sheet more efficiently under the new regime. These actions included extending the reinsurance of longevity risk to cover £8.7 billion of annuity liabilities by the end of 2015 (end 2014: programme covered £2.3 billion of liabilities). It also included repositioning of the fixed income asset portfolio, increasing to 95 per cent the proportion that would benefit from the matching adjustment under Solvency II. The combined effect of these and other actions generated a £339 million IFRS operating profit in the second half of 2015 and is not expected to recur going forward.
IFRS operating profit from our portfolio of life insurance operations in Asia was up 16 per cent to £1,209 million, driven by a 14 per cent increase in the contribution from the in-force business, reflecting both
Negative short-term fluctuations of £120 million in the UK reflected net unrealised losses on fixed income assets supporting the excess capital held within the shareholder-backed annuity business following a rise in interest rates during the year.
The 2015 effective tax rate on the total IFRS profit was 18 per cent (2014: 15 per cent), reflecting a larger overall contribution to the total profit from Jackson which attracts a higher rate of tax.
Total tax contribution The Group continues to make significant tax contributions in the countries in which it operates, with £3,004 million remitted to tax authorities in 2015. This was higher than the equivalent amount of £2,237 million in 2014, principally due to higher corporation tax payments. In the US, a change of basis for taxing derivatives which affects the timing but not the quantum of tax payable, has accelerated future tax payable into 2015. Tax payments in the UK in 2015, which relate to both the current and prior year, reflect positive investment returns in 2014.
revenue outpaced the increase in operating costs, resulting in a modestly improved cost-income ratio of 58 per cent (59 per cent on an actual exchange rate basis).
In the US, our non-insurance businesses collectively generated IFRS operating profit of £11 million (2014: £13 million). In July, Jackson announced that Curian would no longer accept new business effective from 31 July 2015. Curian continues to actively manage existing accounts into 2016 to allow for the transition of accounts, but is expected to exit the business around the end of the first quarter of 2016. Total IFRS operating losses in Curian in 2015 were £16 million and included £13 million of cost related to exiting the business.
Prudential Capital produced IFRS operating profit of £19 million in 2015 (2014: £42 million). During 2015, we started to refocus activity away from revenue generation towards internal treasury services and this reprioritisation will continue into 2016.
M&G delivered a broadly unchanged IFRS operating profit of £442 million (2014: £446 million), reflecting a 2 per cent rise in underlying profit to £406 million (2014: £400 million), lower performance-related fees of £22 million (2014: £33 million) and a similar level of earnings from associates of £14 million (2014: £13 million). While underlying revenues in the first half of 2015 benefited from higher levels of funds under management, the large net outflows from retail funds since May contributed to a 2 per cent decrease in underlying revenues for the year overall. Actions on costs mitigated the effect of lower overall revenues to deliver a modest increase in underlying profit compared to 2014. However, the lower level of assets under management at the end of 2015 will impact the revenue prospects for 2016 absent a meaningful recovery in M&G’s overall third party net flows or a significant uplift in the market value of assets.
Our Asia asset management business, Eastspring Investments, has benefited from significant growth in funds under management during 2015, with IFRS operating profit higher by 26 per cent at £115 million. An 11 per cent increase in third-party net inflows to £6.0 billion saw external funds managed rise by 20 per cent on an actual exchange rate basis to £30.3 billion at end 2015. Average total funds under management, including funds managed on behalf of Prudential’s life operations, increased by 25 per cent to £85.1 billion compared with 2014. Eastspring Investments’ growth in fee
Underlying free surplus generated from in-force life business and asset management2 3,795 3,177 19 3,263 16
Total movement in free surplus 1,707 1,091 Free surplus at 1 January 5,059 4,003 Effect of domestication of Hong Kong branch – (35)
For life insurance operations it represents amounts maturing from the in-force business during the year, net of amounts reinvested in writing new business. For asset management it equates to post-tax IFRS profit for the year. In 2015 underlying free surplus generation, after investment in new business, increased by 15 per cent to £3,050 million.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 43 premiums that customers directed towards the fixed account option. At just under 2 per cent of new single premiums, Jackson’s overall strain remains low, supporting the generation of significant returns on capital. New business investment in the UK remains at £65 million (2014: £65 million), despite higher new business volumes, reflecting capital-efficient growth in with-profits business and lower strain on bulk annuities (measured under the solvency regime applicable in 2015).
The internal rates of return achieved on new business remain attractive at over 20 per cent across all three business operations and the average payback period10 for business written in 2015 was three years for Asia, one year for the US and three years for the UK.
Cash remitted by the business units to the corporate centre in 2015 increased by 10 per cent to £1,625 million with significant contributions from each of our four major business operations. Asia’s remittances increased to £467 million and included the proceeds from the sale of the Japan life business of £42 million. The higher remittances from the US of £470 million reflect Jackson’s disciplined approach to growing this business and its effective risk management. The remittances from the UK are in line with 2014 and we continue to invest in upgrading our UK pre- and post- retirement customers propositions. M&G’s remittances of £302 million reflected the level of post-tax earnings delivered in the year.
Cash remitted to the Group in 2015 was used to meet central costs of £354 million (2014: £353 million), pay the dividends and finance the second of three up-front payments for the renewal of the distribution agreement with Standard Chartered Bank. The issue of hybrid debt in June 2015 raised £590 million. Reflecting these movements in the year, total holding company cash at the end of 2015 was £2,173 million compared to £1,480 million at the end of 2014.
Short-term fluctuations in investment returns: Effect of changes in economic assumptions 57 (369) 115 (389) 115
Actual exchange rate Constant exchange rate 2015 pence 2014 pence Change % 2014 pence Change %
Jackson’s EEV life operating profit increased by 10 per cent to £1,808 million, driven by growth in the scale of our in-force book and higher new business profit. In-force profit increased by 11 per cent to £999 million (20 per cent on an actual exchange rate basis), primarily reflecting higher unwind from the larger book of existing business. US new business profit was up 8 per cent to £809 million (17 per cent on an actual exchange rate basis), due to the 3 per cent (11 per cent on an actual exchange rate basis) increase in sales volume and a beneficial shift in business mix.
In the UK, EEV life operating profit increased by 17 per cent2 to £863 million (2014: £735 million). New business profit was 23 per cent2 higher at £318 million (2014: £259 million) and includes a contribution of £117 million (2014: £105 million) from four bulk annuity transactions in 2015. Retail new business profit was up 31 per cent2 at £201 million
(2014: £154 million), due to the positive effect of the 32 per cent increase in retail sales volumes offset by business mix effects. In-force profit was 14 per cent higher at £545 million (2014: £476 million) and includes a net charge of £13 million from the specific management actions taken in the second half of the year to position the balance sheet more efficiently under the new Solvency II regime.
EEV non-operating results EEV operating profit is based on longerterm investment returns and excludes the effect of short-term volatility arising from market movements and the effect of changes from economic assumptions. These items are captured in non-operating profit which reduced the 2015 results by a net £930 million (2014: net increase of £247 million on an actual exchange rate basis).
EEV short-term fluctuations Short-term fluctuations in investment returns reflect the element of nonoperating profit which relates to the effect
Short-term fluctuations in investment returns for life operations of negative £1,153 million include negative £206 million for Asia, negative £753 million for our US operations and negative £194 million in the UK.
In Asia and the UK, negative short-term fluctuations principally reflect unrealised movements on bond holdings in the year. They also reflect the effect on the embedded value of flat to negative equity market returns. In the US, the variance represents the impact of modestly negative market-related movements on separate account values in the year, and on the value movements on derivatives held to manage the Group’s equity and interest rates exposure.
Note IIc: Solvency II capital position at 31 December 2015 page 343
— A £1.4 billion reduction in surplus due to the negative impact of Solvency II rules for ‘contract boundaries’ and a reduction in the capital surplus of the Group’s Asian life operations, as agreed with the Prudential Regulation Authority.
Chief Financial Officer’s report on our 2015 financial performance continued surplus of £3.3 billion in respect of its shareholder business, equivalent to a ratio of 146 per cent. Separately, the UK with-profits funds remained well capitalised with an estate value of £7.6 billion15, covering its solvency capital requirements approximately 1.75 times.
Debt portfolio The Group continues to maintain a high-quality defensively positioned debt portfolio. Shareholders’ exposure to credit is concentrated in the UK annuity portfolio and the US general account, mainly attributable to Jackson’s fixed annuity portfolio. The credit exposure is well diversified and 98 per cent of our UK portfolio and 96 per cent of our US portfolio are investment grade. We experienced no default losses and reported impairments of £26 million (2014: £7 million) across these two fixed income securities portfolios.
Local statutory capital All our subsidiaries continue to hold appropriate capital positions on a local regulatory basis. Jackson’s risk-based capital ratio at the end of 2015 was 481 per cent, having remitted £470 million to Group earlier in the year. The Prudential Assurance Company Limited, our main UK operation, has an estimated Solvency II
Our financing and liquidity position remained strong throughout the year. Our central cash resources amounted to £2.2 billion at 31 December 2015, compared with £1.5 billion at the end of 2014, and we currently retain a further £2.6 billion of untapped committed liquidity facilities.
On an IFRS basis, the Group’s core structural borrowings at 31 December 2015 were £5,011 million (31 December 2014: £4,304 million on an actual exchange rate basis) and comprised £4,567 million
(31 December 2014: £3,869 million on an actual exchange rate basis) of debt held by the holding company, and £444 million (31 December 2014: £435 million on an actual exchange rate basis) of debt held by the Group’s subsidiaries, Prudential Capital and Jackson. In June 2015, Prudential issued £600 million 5.0 per cent tier 2 subordinated notes, increasing funds available for general corporate purposes.
In addition to its net core structural borrowings of shareholder-financed operations set out above, the Group also has access to funding via the money markets and has in place an unlimited global commercial paper programme. As at 31 December 2015, we had issued commercial paper under this programme, totalling £138 million and US$1,428 million, to finance non-core borrowings.
Prudential’s holding company currently has access to £2.6 billion of syndicated and bilateral committed revolving credit facilities, provided by 19 major international banks, expiring in 2020. Apart from small drawdowns to test the process, these
Jackson National Life Insurance Company’s financial strength is rated AA by Standard & Poor’s, A1 by Moody’s and AA by Fitch.
Prudential Assurance Co Singapore (Pte) Ltd’s (Prudential Singapore) financial strength is rated AA by Standard & Poor’s.
Entrance into Uganda life insurance market In June 2015 we completed the acquisition of Ugandan company Goldstar Life Assurance and signed a long-term cooperation agreement with Crane Bank of Uganda. In January 2016 we announced entry into Zambia via our acquisition of Professional Life Assurance, which is subject to regulatory approval.
The Group’s EEV shareholders’ funds also increased by 11 per cent to £32.4 billion (31 December 2014: £29.2 billion on an actual exchange rate basis). On a per share basis the Group’s embedded value at 31 December 2015 stood at 1,258 pence, up from 1,136 pence at 31 December 2014.
facilities have never been drawn, and there were no amounts outstanding at 31 December 2015. The medium-term note programme, the SEC-registered US shelf programme, the commercial paper programme and the committed revolving credit facilities are all available for general corporate purposes and to support the liquidity needs of Prudential’s holding company and are intended to maintain a strong and flexible funding capacity.
Prudential manages the Group’s core debt within a target level consistent with its current debt ratings. At 31 December 2015, the gearing ratio (debt, net of cash
Shareholders’ funds at end of the year 12,955 11,811 32,359 29,161
underlying free surplus released from long-term business (net of investment in new business) and that generated from asset management operations.
8 Net inflows exclude Asia Money Market Fund (MMF) inflows of £1,065 million (2014: net inflows £9 million). External funds under management exclude Asia MMF balances of £6,006 million (2014: £4,800 million).
10 Payback period, measured on an undiscounted basis, is the time in which the initial ‘cash’ outflow of investment is expected to be recovered from the ‘cash’ inflows generated by the investment. The ‘cash’ outflow is measured by our investment of free surplus in new business sales. The payback period equals the time taken for new business sales to generate free surplus to cover this investment.
11 The full holding company cash flow is disclosed in note II (a) of Additional unaudited IFRS financial information.
13 The methodology and assumptions used in calculating the Solvency II capital results are set out in note II (c) of Additional unaudited financial information. The Group Solvency II capital ratio is based on outputs from the Group’s Solvency II internal model, approved by Prudential Regulation Authority in
15 Representing Solvency II own funds of the UK with-profits funds.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 49
The organisational structures, reporting relationships, delegation of authority, and roles and responsibilities that Group Head Office and the business units establish to make decisions and control their activities on risk-related matters form the foundation of Prudential’s risk governance. Effective risk governance encompasses individuals, Group-wide functions and committees involved in the management of risk.
Our Group Risk Framework requires that all our businesses and functions establish processes for identifying, evaluating and managing the key risks faced by the Group and is based on the concept of the ‘three lines of defence’. These comprise risk-taking and management, risk control and oversight, and independent assurance.
From the shareholders’ perspective, we generate value by selectively taking exposures to risks that are adequately rewarded and that can be appropriately quantified and managed. The Group’s approach is to retain risks where doing so contributes to value creation, the Group is able to withstand the impact of an adverse outcome, and has the necessary capabilities, expertise, processes and controls to manage appropriately the risk.
The key risks inherent in the insurance and capital management operations of Prudential’s business: Risks from our investments Risks from our products Risks from our business operations
Operational risk As a group, we are dependent on the successful processing of a large number of transactions, utilising various IT systems and platforms across numerous and diverse products.
We also operate under the ever-evolving requirements set out by different regulatory and legal regimes (including tax), as well as utilising a significant number of third parties to distribute products and to support business operations; all of which add to the complexity of the operating model if not properly managed.
Risks from o u r in v e stm e n ts
R is k s fr o m o u r b u si n es s o perations
We manage our risk profile according to our desired acceptance of risk. To do this, Group Head Office and the business units maintain risk registers that include details of the risks identified and of the controls and mitigating actions used in managing them. Our identified keys risks are set out in the table below.
The risk of loss for our business, or of adverse change in the financial situation, resulting, directly or indirectly, from fluctuations in the level or volatility of market prices of assets and liabilities.
— Market risk policy — Risk appetite statements, limits and triggers in place — Monitoring and oversight of market risks through the reporting of regular management information
— Asset Liability Management programmes in place — Use of derivative programmes — Currency hedging of expected business unit remittances
The risk of loss for our business, or of adverse change in the financial situation, resulting from fluctuations in the credit standing of issuers of securities, counterparties and any debtors in the form of default or other significant credit event (eg downgrade or spread widening).
— Credit risk policy — Risk appetite statements and limits defined on an issuer/ counterparty/average credit quality of the portfolio basis
— Scenario analysis for operational risk capital requirements, which focus on extreme, yet plausible, events
— Board strategy sessions consider risk themes — Systemic Risk Management Plan which details the Group’s strategy and risk management framework
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 51 policies and invest in assets denominated in local currencies. Although this practice limits the effect of exchange rate fluctuations on local operating results, it can lead to significant fluctuations in our consolidated financial statements when results are expressed in UK sterling.
We retain revenues locally to support the growth of our business and capital is held in the local currency of the business to meet local regulatory and market requirements, accepting the accounting balance sheet translation risks this can produce. However, in cases where a surplus arising in an overseas operation supports Group capital or where a significant cash remittance is due from an overseas subsidiary to the Group, this exposure is hedged where we believe it is economically optimal to do so. We do not have appetite for significant shareholder exposure to foreign exchange risks in currencies outside the local territory. Where this arises, currency borrowings, swaps and other derivatives are used to manage exposures.
Debt and loan portfolio (Audited) Our UK business is primarily exposed to credit risk in the shareholder-backed portfolio, with fixed income assets of £32.1 billion. Credit risk arising from a further £44.5 billion of fixed income assets is largely borne by the with-profits fund, although, in extremis, shareholder support may be required should the with-profits fund become unable to meet its liabilities.
The drivers of each of the key risks vary by business unit, and depend primarily on the value of locally-held products.
In Jackson, investment risk arises in relation to the assets backing the policies. In the case of ‘spread business’, including fixed annuities, these assets are generally bonds and our shareholder exposure comes from the minimum asset return required to be generated to meet the guaranteed rates of return offered to policyholders. For the variable annuity business, these assets include equities as well as other assets such as bonds. In this case, the impact on the shareholder comes from the guarantees on return on investments embedded in variable annuity products. Shareholders’ exposure to these guarantees is mitigated through a hedging programme, as well as reinsurance. Further measures have been undertaken including re-pricing initiatives and the introduction of variable annuities without guarantees. Furthermore, it is our philosophy not to compete on price; rather, we seek to sell at a price sufficient to fund the cost incurred to hedge or reinsure the risks and to achieve an acceptable return.
Interest rate risk across the entire business is managed through the use of interest rate swaps, interest rate options and hybrid options (options protecting against simultaneous decreases in equity values and interest rates).
Morbidity risk is mitigated by appropriate underwriting when policies are issued and claims are received. Our morbidity assumptions reflect our recent experience and expectation of future trends for each relevant line of business.
In Asia, a key assumption is the rate of medical inflation, typically in excess of general price inflation. This is the risk that the expenses of medical treatment increase more than expected, so that the medical claim cost passed on to Prudential is much higher. Medical expense inflation risk is
The exposures held by the shareholderbacked business and with-profits funds in sovereign debt and bank debt securities at 31 December 2015 are given in note C3.3(f) of the Group’s IFRS financial statements.
We continue to conduct research into longevity risk using both experience from our annuity portfolio and industry data. Although the general consensus in recent years is that people are living longer, there remains considerable volatility in year-onyear longevity experience, which is why we need expert judgement in setting our longevity assumptions.
Financial Mortgage securities Utilities Government Consumer, non-cyclical Communications Industrial Energy Consumer, cyclical Asset-backed securities Real estate Others
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The International Association of Insurance Supervisors has various initiatives. On 18 July 2013, it published a methodology for identifying Global Systemically Important Insurers, and a set of policy measures that will apply to them, which the Financial Stability Board endorsed. Groups designated as a Global Systemically Important Insurer are subject to additional regulatory requirements, including enhanced group-wide supervision, effective resolution planning, development of a Systemic Risk Management Plan, a Recovery Plan and a Liquidity Risk Management Plan. Prudential’s designation as a Global Systemically Important Insurer was reaffirmed on 3 November 2015. Prudential is monitoring the development and potential impact of the policy measures and is continuing to engage with the Prudential Regulation Authority on the implications of the policy measures and Prudential’s designation as a Global Systemically Important Insurer.
The Global Systemically Important Insurer regime also introduces two types of capital requirements. The first, a Basic Capital Requirement, is designed to act as a minimum group capital requirement; and the second, a Higher Loss Absorption requirement reflects the drivers of the assessment of Global Systemically Important Insurer designation. The International Association of Insurance Supervisors best mitigated through retaining the right to re-price our products each year and by having suitable overall claim limits within our policies, either limits per type of claim or in aggregate across policies.
Liquidity risk (Audited) The Group has significant internal sources of liquidity which are sufficient to meet all of its expected requirements, for a period of at least 12 months from the date the financial statements are approved, without having to make use of external funding. In aggregate, the Group currently has £2.6 billion of undrawn committed facilities, expiring in 2020. In addition, the Group has access to liquidity via the debt capital markets. We also have in place an unlimited commercial paper programme and have maintained a consistent presence as an issuer in this market for the last decade.
Liquidity uses and sources have been assessed at the Group and at a business unit level under base case and stressed assumptions. The liquidity resources available and the subsequent Liquidity Coverage Ratio are regularly monitored and are assessed to be sufficient.
For each business unit, accountabilities for operational risk management and oversight are based on the principles of the ‘three lines of defence’ model of risk-taking and management, risk control and oversight, and independent assurance. The approach adopted is proportional to the size, nature and complexity of the business unit and the risks it manages.
We have an operational risk management framework in place that facilitates both the qualitative and quantitative analysis of operational risk exposures. The output of this framework, in particular management information on key operational risk and control assessments, scenario analysis, internal incidents and external incidents, is reported by the business units and presented to the Group Operational Risk Committee.
Top operational risks Key areas of focus within the operational risk framework are: — The risk of non-compliance due to the momentum of regulatory change in both our developed and developing markets, as well as recognising that Prudential’s designation as a Global Systemically Important Insurer which requires the Group to comply with additional policy measures including enhanced Group-wide supervision; — The risk of improper, or mis-selling of Prudential products and the resulting risk of censure from local regulators; — The risk of regulatory censure due to poor conduct or weaknesses in systems and controls; — The risk of censure for money laundering, sanctions or anti-bribery and corruption failures; — The risk that reliance on IT infrastructures which support core activities/processes of the business, could fail or otherwise negatively impact business continuity and scalability needed to support the growth and changing needs of the business; — The risk of a significant failure of a third-party provider impacting critical services; — The risk of trading, transacting or modelling errors having a material cost across Group; — The risk of the Group failing to attract and retain quality senior managers and other key employees; — The risk that key people, processes and systems are unable to operate (thus impacting the on-going operation of the business) due to a significant unexpected external event occurring (eg a pandemic, terrorist attack, natural disaster, political unrest); and
— The risk of losses resulting from damage to the firm’s reputation. This can be either real or perceived reputational damage but which could nevertheless diminish the standing of the organisation in the eyes of key stakeholders (eg customers, shareholders), destroy shareholder value, adversely impact revenues or result in significant costs to rectify.
Prudential plc Annual Report 2015 www.prudential.co.uk54 two years of development, the emerging risk identification process is now well-embedded across the Group.
The Group has also sought to maintain contacts with industry experts and peers to benchmark and refine the emerging risk-management process. For example, Prudential has been a member of the Emerging Risk Initiative at the CRO Forum for two years, and chaired this initiative for 2015.
Risk factors (Unaudited) Our disclosures covering risk factors can be found at the end of this document.
Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued intends for these requirements to take effect from January 2019, but Global Systemically Important Insurers will be expected to report privately to their group-wide supervisors in the interim.
The International Association of Insurance Supervisors’ Insurance Core Principles, which provide a globally accepted framework for the supervision of the insurance sector and ComFrame evolution, are expected to create continued development in both prudential and conduct regulations over the next two to three years, particularly in the emerging markets of Asia.
The European Union’s Solvency II Directive came into effect on 1 January 2016. The
Similar national and regional efforts to curb systemic risk and promote financial stability are also underway in certain jurisdictions in which Prudential operates, including the Dodd-Frank Wall Street Reform and Consumer Protection Act in the US, and other European Union legislation related to the financial services industry.
In the US, the implementation of the Department of Labor proposal to introduce new fiduciary obligations for distributors of investment products to holders of regulated accounts would dramatically reshape the distribution of retirement products. If approved, the final rule could be in place in 2016. Jackson’s strong relationships with distributors, history of product innovation and efficient operations should help mitigate any impacts.
Emerging risks (Unaudited) Generally, emerging risks are qualitative in nature and are not amenable to modelling using statistical techniques. The emerging risk identification process at Prudential seeks to leverage the expertise of the organisation through a combination of top-down and bottom-up assessments of risks. Following
Risk reports are provided to the Group Executive Risk Committee, Group Risk Committee and Board which include updates on exposure against Boardapproved risk appetite statements and limits.
Risk identification covers Group-wide: — Top-down risk identification — Bottom-up risk identification — Emerging risk identification
— Earnings (and cash flows) are managed properly across geographies and are consistent with funding strategies.
With the introduction of Solvency II, the existing European Union Insurance Group Directive’s risk appetite statement has been replaced with a Solvency II Pillar 1 risk appetite. As part of our annual business planning cycle the risk appetite framework plays an integral role. The Group Risk Committee is responsible for reviewing the risks inherent in the Group’s business plan and for providing the Board with input on the risk/reward trade-offs implicit therein. This review is supported by the Group Risk function, which uses submissions from our local business units to calculate the Group’s aggregated position (allowing for diversification effects between local business units) relative to the aggregate risk limits.
Risk identification (Unaudited) The Group’s risk profile is a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The risk profile is a key output from the risk identification and risk measurement processes, and is used as a basis for setting Group-wide limits, management information, assessment of solvency needs, and determining appropriate stress and scenario testing.
An annual ‘top-down’ identification of our key risks assesses the risks that have the greatest potential to impact the Group’s operating results and financial condition. The bottom-up approach of risk identification is more granular and refers to the processes by which the business units identify, assess and document risks, with the appropriate coordination and challenge from the risk functions.
The Group Own Risk and Solvency Assessment Report pulls together the analysis performed by a number of risk and capital management processes, which are embedded across the Group, and provides quantitative and qualitative assessments of the Group’s risk profile, risk management and solvency needs on a forward-looking basis. The scope of the Group Own Risk and Solvency Assessment Report covers the full known risk universe of the Group.
In accordance with provision C.2.1 of the UK Corporate Governance Code, the directors have performed robust assessment of the principal risks facing the Company, through the Group Own Risk and Solvency Assessment Report and the risk assessments completed as part of the business planning review including how they are managed and mitigated given in this Chief Risk Officer’s report.
Monitoring and reporting (Unaudited) The management information received by the Group Risk Committees and the Board is tailored around the risks identified in the annual ‘top-down’ process, and also covers ongoing developments in other key and emerging risks.
(Unaudited) The extent to which the Group is willing to take risk in the pursuit of its objective to create shareholder value is defined by a number of risk appetite statements, operationalised through measures such as limits, triggers and indicators.
The Group Risk function is responsible for reviewing the scope and operation of these measures at least annually, to determine that they remain relevant. On the recommendation of the Group Risk Committee, the Board approves all changes made to the Group’s risk appetite framework.
In addition to these considerations, the directors regularly consider strategic matters that may affect the longer-term prospects of the Group. Further, the Group as a whole, and each of its life assurance operations, are subject to extensive regulation and supervision, which are designed primarily to reinforce the Company’s management of its long-term solvency, liquidity and viability to ensure that it can continue to meet obligations to policyholders.
Risk policies (Unaudited) Risk policies set out specific requirements for the management of, and articulate the risk appetite for, key risk types. There are core risk policies for credit, market, insurance, liquidity and operational risks and a number of internal control policies covering, internal model risk, underwriting, dealing controls and tax risk management. They form part of the Group Governance Manual, which was developed to make a key contribution to the sound system of internal control that we maintain in line with the UK Corporate Governance Code and the Hong Kong Code on Corporate Governance Practices.
— By including risk management (through the balance of risk with profitability and growth) in the performance evaluation of individuals.
Senior management leadership Senior management promote a responsible culture of risk management by emphasising the importance of balancing risk with profitability and growth in decision making, while seeking to ensure compliance with regulatory requirements and internal policies. As part of this, they encourage all employees to be risk-aware and to take personal responsibility for identifying and helping to address risk issues.
Performance management The Group includes risk management measures that balance risk taken with profitability and growth achieved in the performance evaluation of key individuals, including both senior management and those directly responsible for risk management (objectives may be quantitative or qualitative as appropriate).
In making the assessment, the directors have taken into account the Group’s current position and the potential impact of the principal risks faced by the Group. The Group’s business activities and the factors likely to affect its future development, successful performance and position in the current economic climate are set out on pages 4 to 35. The risks facing the Group’s capital and liquidity positions and their sensitivities are referred to on pages 45 to 54. Notes 1 Representing Solvency II own funds of the UK with-profits funds.
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We seek to make a positive contribution to our communities through long-term partnerships with charitable organisations that make a real difference
Corporate responsibility review continued customers to accumulate wealth through regular premium contributions. Varying unit allocation and life protection coverage is available depending on the customers’ needs. This series allows customers who have protection needs to enjoy life protection coverage as high as 30 times the annual premium and still be able to benefit from the asset appreciation. To further strengthen the unit-linked platform, the fund choices have been expanded by offering foreign investment funds in order to better meet different customers’ needs and risk appetite.
US Prudential’s US operation develops and distributes products that seek to address the retirement needs of its more than four million contract-holders and provide them with security through the ups and downs of financial market cycles. Jackson offers a diverse range of variable, fixed and fixed-index annuity products, designed with a variety of custom options to fit different financial goals.
Many Americans are approaching retirement with inadequate resources. Private defined-benefit pension plans are disappearing, government defined-benefit plans are underfunded, and social security, whose long-term status is in question, was never intended to be the primary retirement plan. At the same time, increasing life expectancy and the difficulty for individual investors in capturing market returns have added to the pressure on retirement resources. The low interest-rate environment presents extra challenges, hindering the growth of savings and the ability to generate income from savings.
Retirees need access to equity market growth, protection of their principal, a way of converting savings into retirement income and a degree of certainty. The variable annuities that Jackson offers can provide both guaranteed income and access to market growth. They are a way for investors to access guaranteed income for life, making them in effect a definedbenefit plan for the 21st century.
Our Group approach to corporate responsibility is underpinned by four global principles: — Serving our customers: we aim to provide fair and transparent products that meet our customers’ needs; — Valuing our people: we aspire to retain and develop highly engaged employees; — Supporting local communities: we seek to make a positive contribution to our communities through long-term partnerships with charitable organisations that make a real difference; and
— Protecting the environment: we take responsibility for the environment in which we operate.
These principles provide a framework within which our businesses shape their own individual corporate responsibility goals – our strong belief is that corporate responsibility is best managed and delivered by those closest to the customer and local stakeholders.
This review gives an overview of our activities and progress in 2015. More detailed information is available online at www.prudential.co.uk/corporateresponsibility
We offer solutions for customers as they face the biggest financial challenges of their lives. Those issues vary in different parts of the world, and in each of our businesses we are focused on providing for a distinct set of customers’ needs. Those are: the significant and growing demand for saving and protection of the middle class in Asia, the retirement income needs of baby boomers in the US, the financial requirements of the UK’s ageing population, which needs both to save more and to access secure income in retirement, and the growing needs of customers in our new markets in Africa.
Before launching any initiative, we always listen to and understand our customers’ needs. This allows us to propose financial solutions customised for different groups, whether that is young parents or middleaged people providing for their extended family, for example. Prudential Corporation Asia introduced a number of tailored products and services to meet our customers’ changing needs in 2015.
With cancer survival rates increasing in Hong Kong and the region, PRUhealth cancer multi-care was launched to address anxieties about the financial impacts of multiple cancer strikes. This plan serves customers with the right support exactly when they need it most.
Prudential Thailand introduced a new series of unit-linked plans that allow
Diversity and inclusion Prudential believes that a diversity of skill sets and backgrounds enriches the organisation. Given the diverse nature of our business and our stakeholders, we are committed to making diversity and inclusion a competitive advantage for our organisation. By continuing to ensure diversity among senior leadership teams and pipelines, as well as across the entire employee population, we aim to further increase the positive impact of diversity on our commercial success and ability to successfully compete in an increasingly complex and dynamic business environment.
We believe in respecting human rights, acting responsibly and with integrity. Our policies are guided by the principles of the UN’s Universal Declaration of Human Rights and the International Labour Organisation’s core labour standards. These are also incorporated into our Group Code of Business Conduct, which sets out the Group values and expected standards of behaviour for all employees, and in our Group Outsourcing and Third Party Supply Policy.
From the moment an adviser or investor engages with the video, they are met with a user experience that is focused entirely on them, which is what makes this tool unique. It is centred on meeting the needs of the audience and providing an experience that is led by the individual. The business is proactively strengthening relationships and creating a distinctive presence in the market.
UK and Europe The UK’s pension and retirement income system underwent significant reform during 2015. Known as pension freedoms, the reforms give consumers greater flexibility to access their pension savings in retirement. Prudential reacted quickly when the reforms were announced in the March 2014 Budget, committing significant resources to ensure that our processes facilitated the new regime when it launched just over a year later in April 2015.
Asset management M&G, Prudential’s UK and European asset management business, is a long-term, active investor that takes seriously its responsibilities as a steward of clients’ assets, often working closely with the management of the companies in which we invest. M&G’s investment teams incorporate environmental, social and governance (ESG) factors into investment analysis and decision-making processes, wherever they have a meaningful impact on risk or return. Active voting is an integral part of the investment approach, both adding value and protecting our interests as shareholders. The M&G website provides an overview of voting history: www.mandg.com/corporate/about-mg/ investment-philosophy/corporategovernance /voting-history/
University provides a highly customisable approach for associates’ personal development and professional learning; and Prudential UK provides a fully differentiated management development offering, distinguishing the requirements of aspiring managers and experienced leaders. M&G Real Estate supports career development through a fund manager job shadowing programme; and Group Head Office provides innovative programmes (designed in partnership with top academic institutions such as the London Business School and Cambridge Judge), which offer leadership development and the opportunity to gain valuable experience through relevant business projects.
Employee engagement An array of initiatives are in place within our different businesses to drive employee engagement. Depending on the business this engagement can start as soon as a new employee joins us, with an induction programme to learn about the history and strategy of the Group. Throughout the employee’s career, additional opportunities may include being offered a number of high-impact training sessions as well as workshops on resilience, managing energy and enhancing productivity.
Some of our businesses hold regular employee open forums with senior management, conduct yearly engagement surveys or organise awaydays to discuss the business, our performance and internal management. Any highlighted issues are then used to improve the way in which we work. In addition, there are informal opportunities to meet senior managers and facilities to network with both peers and or part-time/fixed-term work. As such, we give full and fair consideration and encouragement to all applicants with suitable aptitude and abilities. For those employees and applicants with disabilities, we make appropriate disability adjustments as required, and ensure that we can provide training and career development opportunities for all.
We monitor the diversity of our leadership and our leadership pipeline, with diversity and inclusion KPIs reported to the Board annually.
Gender diversity across Prudential as of 31 December 2015 is shown below.
Individually tailored development offerings are provided for our most senior executives so they are well prepared to deliver the long-term ambitions of the Group. In addition, in 2015 more than 180 senior high-potential individuals participated in our Group-wide leadership development programmes Impact, Agility and in our new programme for emerging talent, Next Generation. These programmes have been developed in partnership and co-delivered with world-leading academic institutions such as Duke Corporate Education, the Oxford Saïd Business School, and the London School of Economics.
Within our businesses there are many examples of our continuing commitment to talent development. Prudential Corporation Asia develops CEOs with targeted high-touch programmes, such as cross-company experience and industry expectations, for them to stay relevant and gain new insights. In the US, Jackson
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 61 well-being so they can benefit from future schooling and prevent repetition of grades and dropping out of school, which is a significant issue in both countries. First Read also supports and collaborates closely with local book publishers, helping to develop and create new books written in local languages. Since inception, the programme has benefited almost 190,000 adults and children up to the age of six. In addition, First Read has indirectly benefited over 440,000 community members through the sharing of knowledge and resources.
Prudence Foundation launched Cha-Ching, a multi-media programme built around a series of three-minute animated music videos, in 2011 to help parents instill ‘money-smart skills’ in children aged seven to 12. This was developed with Cartoon Network and Dr Alice Wilder, an awardwinning children’s education specialist, to help children learn the fundamental money management concepts of earn, save, spend and donate. The programme has gained international recognition for promoting financial literacy, and won several industry awards. Over the past few years it has grown to become one of the top-rated children’s television programmes in Asia. Today Cha-Ching is available in 10 languages in Asia, reaching 51 million households a day across Asia through the Cartoon Network. The Cha-Ching website has more than 73 million page views, and YouTube music videos have two million views. The Cha-Ching School Contact Programme, which brings Cha-Ching directly to schoolchildren across Asia, continues to develop and expand. To date it has reached more than 200,000 school children in nine countries. The Foundation has also started to work with Junior Achievement to develop a standardised school curriculum for Cha-Ching, which will be launched in 2016. This will further help meet the need for stronger financial literacy capabilities in students across Asia.
In the US, Jackson has pledged to support a new Teen Center at the Boys & Girls Club of Lansing, Michigan. The commitment is from the business and individual employees who will contribute toward the total investment needed to complete the project. The new Jackson Teen Zone will be added onto the existing Boys & Girls Club facility and will provide a much-needed quiet space for homework, college prep and Money Matters, a financial literacy curriculum designed by Boys & Girls Club of America. Every day more than 250 young people go to the Boys & Girls Club of Lansing.
Our community programmes are grouped around the broad theme of ‘Strong Foundations’. This reflects our focus on helping communities establish those fundamental building blocks essential for their long-term futures. Our three ‘building blocks’ represent areas of primary need: Strengthening numeracy, financial literacy and employment training
Providing long-term support to help prevent disasters and deal with their impact
The inherent long-term social value of our business is complemented by community investments in each of the markets in which we operate. We provide support to charitable organisations through both funding, and the experience and expertise of our employees.
Education and life skills In Asia, Prudence Foundation – the charitable arm of Prudential Corporation Asia – aims to maximise the impact of our community investment efforts in the countries where we have a presence. Its mission is to make a lasting contribution to societies across Asia through sustainable initiatives focused on three pillars: Children, Education, and Disaster Preparedness and Recovery.
The First Read programme was launched in 2013 in partnership with Save the Children in Cambodia and the Philippines. It works closely with parents of pre-school children to promote home-based early childhood care and development (ECCD) and address the issue of literacy. The programme enables parents to help develop their children’s early literacy skills and overall senior leaders across functions; and well-being programmes to support sustainable high performance. We also have policies to encourage and support volunteering for charitable causes. The success of our efforts has again been recognised internally and externally. In 2015, engagement surveys in various business units showed excellent results. We have also received prestigious awards. For example, M&G was the highestranking asset manager in the Glassdoor survey of Best Places to Work in Consulting and Finance, and seventh in the Rate-MyApprenticeship Top 60 Employers 2014-15. The ranking is based on anonymous reviews of current and former staff.
In addition, our businesses in the UK have a longstanding relationship with the union Unite.
We encourage volunteering, through which our employees can support our communities and acquire new skills.
There are recognition initiatives running across our businesses, such as the Prudential Stars awards at Group Head Office, which are made to individuals nominated by their colleagues for outstanding examples of execution, impact and engagement.
We believe in the importance of enabling our employees to have the opportunity to benefit from the Group’s success through share ownership, and operate employee share plans across the UK and Asia. This includes PruSharePlus which first launched in 2014 and is open to all employees of Prudential in Asia. PruSharePlus enables Prudential’s employees to share in the longer-term success of the business, and actively encourages share ownership and engagement with the business by providing a market-competitive sharematching plan. We were delighted that PruSharePlus recently received an award from the Global Equity Organization in recognition of its innovative and creative plan design.
Corporate responsibility review continued initiative to enhance disaster preparedness and awareness through the dissemination of educational survival tips for natural disasters. It is a multi-platform programme including on-air video messages, an informative website and educational collateral that can be shared among communities. Core to the programme is a series of 60-second educational videos which advise individuals and households what they should do when disasters strike. Together with on-air television distribution and through our partnerships with governments, NGOs and the private sector, Safe Steps has the potential to reach over 100 million people every day.
As a form of advocacy, Prudence Foundation partners with CSR Asia to host an annual Disaster Preparedness Forum in one selected city in Asia. We firmly believe the private sector has an important role to play in strengthening community disaster resilience, and this Forum provides a unique platform for dialogue and exchange of ideas between government, NGO, humanitarian and private-sector participants. We have held three forums to date, in highly regarded apprenticeship programme, gaining important work and life skills as well as achieving recognised vocational and professional qualifications.
M&G continues to fund a literacy centre at a primary school in the London Borough of Lambeth by funding the work of Springboard for Children, a charity that provides support to children whose reading age is significantly below their national average reading age.
In our new markets in Africa we have committed to provide support for academically able but financially disadvantaged high school students, and to help build capacity for training in actuarial sciences at local universities. Working with Plan International, the Prudential Scholarship scheme, started in Ghana, has now been extended to Kenya and the two schemes will help more than 700 students to complete their secondary school education. Throughout 2016 we will work with Plan Uganda to build new classrooms and latrines and provide up-to-date learning equipment as well as financial support for vulnerable students. The potential reach will be 5,267 girls and boys in six secondary schools in northern Uganda. In addition we have established the Prudential Actuarial Support System awards for actuarial science in universities in Ghana and Kenya to support the top 10 graduating students for three years.
The Foundation has a strategic approach to its efforts in disaster preparedness, focusing on three key areas: mass education and awareness, capacity building and advocacy. In each area we have programmes that serve a vital need to help communities in the region become more disaster-resilient.
As part of a mass education initiative, the Foundation launched Safe Steps in May 2014, in partnership with National Geographic Channel and endorsed by the International Federation of the Red Cross and Red Crescent Societies. Safe Steps is a first-of-its-kind pan-Asian public-service
Every Saturday for six weeks, volunteers from Prudential worked with Prestasi Junior Indonesia to regenerate vacant wasteland and promote healthy living in a lowincome, densely populated area of South Jakarta.
The project involved clearing rubbish and educating residents on appropriate waste management.
The Chairman’s Challenge and employee volunteering Many of our employees play an active role in their communities through volunteering, charitable donations and fundraising. In the UK, the US and Asia we offer our employees the opportunity to support charities through payroll giving.
In 2015, employees across the Group volunteered in their communities on a range of projects, providing a total of 51,979 hours of volunteering. We recognise that employee volunteering brings benefit not only to the charities but also to the development of our people, and we actively encourage colleagues to participate in our programmes.
More than 7,000 employees volunteered through Prudential’s flagship international programme, the Chairman’s Challenge, which encourages people from across the Group to volunteer on projects initiated by our global charity partners, including Plan International, Help Age International and Junior Achievement. Each volunteering project focuses on one or more of our Strong Foundations themes and allows us to support both large, well-established charities and innovative, smaller-scale activities with volunteers as well as financial support. Prudential donates £150 to our charity partners for every employee who
Committee and the employee-nominated matching programme. The Jackson National Community Fund supports charities that help the elderly and children through quarterly grants in communities where Jackson’s four largest offices are located. Jackson’s matching programme offers a two-to-one match on all employee donations made to approved charities. This programme ensures that causes important to employees are given charitable consideration and ensures Jackson’s support is received by responsible organisations where funding will create a significant impact.
In 2015, M&G Investments continued to provide support to some of the most deprived and disadvantaged communities located near its offices. A total of 228 charities and community organisations
As part of our focus on disaster relief and recovery, Prudence Foundation provided financial donations for emergency relief efforts in Malaysia following the severe floods in January 2015, in Nepal after the devastating earthquake in April 2015, and in Myanmar after the floods in August 2015. In Malaysia we were also able to provide support for long-term rehousing efforts, partnering with Epic Homes, a local NGO, to fund and build 14 new houses for a remote village in Kelantan state. Similar to our efforts in Bantayan Island, the Philippines, Prudence Foundation sponsored a month-long 500-volunteer effort to complete construction of the houses, which also included 100 Prudential volunteers from across Asia.
As a Group, Prudential has been a partner of Save the Children’s Emergency Fund for a number of years and has committed in 2016 to a further three years. The Children’s Emergency Fund enables the charity to respond immediately to emergencies in countries where there is the greatest need and where children are most at risk. Save the Children has been able to use the Children’s Emergency Fund to respond to 124 disasters across 49 countries in 2015, which demonstrates the scale of the need and the power of the emergency fund as a resource for their response work.
Wellbeing and protection We help to provide the resources that are essential to secure a healthy, thriving future for our customers, our people and our communities. We work with local communities to develop strong, sustainable projects that meet local needs. For example, Jackson employees are actively engaged in our commitment to communities by taking part in programmes such as the Jackson National Community Fund Advisory
The Board Corps programme consists of a series of classes and group work led by philanthropy experts, along with non-profit site visits. The classes and group work allow employees to further develop their leadership skills, while the site visits help participants explore what type of charity and mission resonate with them personally.
The new building has been built to minimise long-term environmental impact and is connected to Jackson’s existing office through a glass-enclosed walkway, providing employees with a feeling of being in the midst of the natural landscape. The conference centre features a living-grass roof which reduces energy consumption while blending in with the surrounding landscape. The building is expected to qualify for an Energy Star rating that places it in the top 20 per cent of the most energy-efficient buildings in the US. This focus on integrating its buildings with the natural beauty of its corporate campus, along with an energy-efficient design, allows Jackson to operate on a very cost-efficient basis while providing an environmentally-conscious and healthy working environment for employees.
Political donations It is the Group’s policy neither to make donations to political parties nor to incur political expenditure, within the meaning of those expressions as defined in the Political Parties, Elections and Referendums Act 2000. The Group did not make any such donations or incur any such expenditure in 2015.
In addition to our own internal reduction targets, we also participate in the Carbon Disclosure Project. This survey captures data on a whole range of different aspects of an organisation’s impact on the global environment. Over the last three years we have been able to provide increasing levels of detail and this has improved our disclosure score from 70 per cent in 2013 to 97 per cent in 2015, and our performance rating from D to B.
Prudential RideLondon The 2015 Prudential RideLondon, the world’s biggest festival of cycling, was a great success. This was the third RideLondon sponsored by Prudential and raised more than £12 million for charity, promoting health and providing a memorable occasion for participants and spectators and an opportunity for Prudential staff from around the world to take part. Around 70,000 people took to the streets of London on 1 August to enjoy cycling on traffic-free roads in the Prudential RideLondon FreeCycle. The following day, 25,000 people took on the challenge of cycling 100 miles through London and the hilly country to the south- west in the Prudential RideLondon-Surrey 100, with more than 180 cyclists from across the Group, including colleagues from Group Head Office, Prudential UK & Europe, M&G, Jackson and Prudential Corporation Asia.
In its first three years, Prudential RideLondon participants have raised more than £29 million for good causes throughout the UK. We have renewed our sponsorship for a further three years to 2018 and will focus on maximising funds raised for charity by the organisers and through the development of new and existing Prudential charitable partnerships.
In 2015, the Group spent £21.7 million supporting community activities, an increase of 10.7 per cent on 2014.
The direct cash donations to charitable organisations amounted to £18.8 million, of which approximately £5.8 million came from our UK and EU operations, which are principally our UK insurance operation and M&G. The remaining £13 million was contributed to charitable organisations by Jackson National Life Insurance Company, Prudential Corporation Asia and Prudential Africa.
The balance of the amount includes in-kind donations as set out in our corporate responsibility report and prepared in accordance with London Benchmarking Group (LBG) guidelines.
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As a financial services business we recognise that one of the most significant direct impacts on the environment results from the operation of the properties we occupy and invest in.
Reducing our direct impact: occupied properties We monitor and publish Group performance data for our CO2e emissions, water and energy use in over 400 sites across 24 countries.
We have strategies in place to reduce energy, waste generated, water consumption and paper use. In the past year, Prudential sourced 27 per cent of electricity from renewable or non-fossil fuel sources.
Scope 2 Electricity, heat, steam and cooling purchased for own use (Tonnes CO2-e)
Normalised Scope 1, 2 and 3 (kg CO2-e/m2) Occupied Estate 157 154 157
Code of Business Conduct Consideration of environmental, social and community matters is integrated in our Code of Business Conduct. Our code is reviewed by the Board on an annual basis.
Local governance In M&G, Jackson and Prudential UK there are governance committees in place – with senior management representation – that agree strategy and spend. In Asia, the Prudence Foundation has been established as a unified charitable platform to align and maximise the impact of community efforts across the region.
Procurement practices in Prudential UK have been successfully accredited with the Chartered Institute of Purchasing and Supply certification, an industry benchmark of recognised good practice.
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To achieve all these aims means that managing the development of the Board is vital, and as Chairman that duty falls to me. I have sought to cast the Board so that its composition and balance best supports the business in delivering sustainable long-term value. This means ensuring that we have the right skill sets and experience, and ensuring that succession planning is supported by a strong bench with a depth of talent.
Our stakeholders not only expect high-quality governance, they also expect to be able to see that it is being delivered. As such, we remain committed to clarity and transparency in our reporting.
Dear Shareholder As Chairman of the Board, I am pleased to report on our governance and stewardship throughout the year.
Appointment: October 2010 Chairman: July 2012 Committee: Nomination (Chair) Age: 64
Paul is the Chairman of the Board. He initially joined the Board as the Senior Independent Director and member of the Audit and Remuneration Committees, and latterly, the Nomination Committee.
Relevant skills and experience Paul retired as Chairman of JPM European Smaller Companies Investment Trust Plc in December 2012 and was the Chairman of Aon UK Limited until September 2012. He was also a non-executive director and Chairman of the Audit Committee of KazMunaiGas Exploration & Production until the end of September 2012. From September 2005 until March 2011, Paul was a non-executive director of Wm Morrison Supermarkets Plc. During his tenure, he was the Senior Independent Director, the first Audit Committee Chairman and Chair of the Remuneration Committee. Paul was the Senior Independent Director and Chairman of the Audit Committee of Development Securities plc until March 2010, Chairman of Bridgewell Group plc until 2007 and a director of Henderson Smaller Companies Investment Trust plc until 2006. Prior to that, he was European CEO of Deutsche Asset Management from 2002 to 2005, global CEO of Rothschild Asset Management from 1999 to 2002 and founding CEO of Threadneedle Asset Management Limited from 1994 to 1999 when he was also a director of Eagle Star and Allied Dunbar. Paul has also served as Chairman of the Association of Investment Companies from 1991 to 1993 and is a former member of the Takeover Panel.
Other appointments Paul is a member of the Securities Institute and Chairman of Henderson Diversified Income Limited. In 2015, Paul became Chairman of TheCityUK’s Advisory Council and Chairman of the Templeton Emerging Markets Investment Trust (TEMIT).
Mike began his career at the brokerage house Dean Witter going on to become a managing director at Smith Barney Shearson. At Jackson, Mike was responsible for the establishment of the broker-dealer network National Planning Holdings and the development of Jackson’s market-leading range of variable annuities. He was also part of the Jackson teams that purchased and successfully integrated a savings institute, three broker dealers and two life companies.
Penny is the Group Chief Risk Officer, a position she has held since September 2015.
Penny qualified as a chartered accountant with Coopers & Lybrand Deloitte (now part of PwC) prior to joining Zurich.
Relevant skills and experience John joined Prudential as Deputy Group Treasurer in 2000, before being appointed Managing Director, Prudential Capital, and Group Treasurer in 2001. He was appointed Chief Executive, Prudential Capital, and to the Group Executive Committee in 2007. John was appointed Group Chief Risk Officer and joined the Prudential plc Board in 2011. In 2013, he was appointed to the new role of Group Investment Director, leaving the Board but remaining a member of the Group Executive Committee. He was appointed as Interim Chief Executive of Prudential UK & Europe in October 2015. Before joining Prudential, he spent three years with National Australia Bank as General Manager, Global Capital Markets. John began his career at Hill Samuel & Co. Limited where, over a 20-year period, he worked in every division of the bank, culminating in senior roles in risk, capital markets and treasury of the combined TSB and Hill Samuel Bank.
Barry is Chairman and Chief Executive Officer of the North American Business Unit, a position he has held since June 2015. The North American Business Unit comprises Jackson, Curian Capital, Jackson National Asset Management, PPM America and National Planning Holdings.
Relevant skills and experience Barry was the Chief Executive of Prudential Corporation Asia from October 2006 to June 2015. Before joining Prudential, Barry was President, Accident & Health Worldwide for AIG Life Companies. He joined AIG in 1995 after having held senior positions at Pan-American Life and Willis in the United States.
Tony is Chief Executive of Prudential Corporation Asia, a position he has held since June 2015.
Relevant skills and experience Tony joined Prudential in 2006 as Chief Executive of Prudential Corporation Asia’s network of life insurance operations in Asia across 12 markets, a position he held until his appointment to the Board. Under Tony’s leadership, Prudential’s life insurance operations grew into significant market-leading positions.
Before he joined Prudential, Tony served as Chief Operating Officer of American International Assurance (AIA), based in Hong Kong, overseeing AIA’s life companies in South-east Asia.
Other appointments Philip is a Deputy Chairman of the Takeover Panel, a nonexecutive director of Severn Trent plc (since March 2014) and Senior Independent Director of UK Financial Investments Limited. Philip is also Chairman of City of London Investment Trust plc (since 2011).
Other appointments Anthony is now a non-executive director of Jardine Matheson Holdings and of other Jardine Matheson group companies. These include Dairy Farm, Hongkong Land, Jardine Cycle & Carriage, Jardine Strategic and Mandarin Oriental. Anthony is also a commissioner of Astra International and a non-executive director of Schindler Holding Limited, Vitasoy International Holdings Limited and Shui On Land Limited. He is a Hong Kong representative to the APEC Business Advisory Council and Chairman of The Hong Kong -APEC
Relevant skills and experience Alice began her career as a qualified accountant at Ernst & Young in 1980 where she worked for 11 years before leaving to join the Financial Accounting Standards Board as a manager.
Relevant skills and experience Lord Turner began his career with McKinsey & Co, where he advised companies across a range of industries. He has served as Director-General of the Confederation of British Industry,
Further information relating to Directors can be found on pages 82 and 83
Mike Wells The Group Chief Executive is responsible for the operational management of the Group on behalf of the Board and for ensuring the implementation of the Board’s decisions. The Group Chief Executive leads the Executive Directors and other senior executives in the management of all aspects of the day to day business of the Group. The Group Chief Executive ensures that the Chairman is kept informed of all key issues.
The Board is collectively responsible for the long-term success of the Group and for providing leadership within a framework of effective controls. The control environment enables the Board to identify significant risks and apply appropriate measures to manage and mitigate them. The Board is responsible for approving the Group strategy and for ensuring that the Group is suitably resourced to achieve it. In doing so, the Board takes account of its responsibilities to the Group’s stakeholders, including its shareholders, employees, suppliers and the communities in which Prudential operates.
The Non-executive Directors are responsible for constructively challenging, and helping to develop, proposals on Group strategy, offering input based on individual and collective experience. They scrutinise the performance of management in meeting agreed goals and objectives and take on specific duties as members of the Board’s principal Committees.
Authority for the operational management of the Group’s businesses has been delegated to the Group Chief Executive for execution or further delegation by him in respect of matters which are necessary for the effective day-to-day running and management of the business. The chief executive of each business unit has responsibility for the management of that business unit.
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— Lord Turnbull stepped down as Chairman of the Remuneration Committee, member of the Nomination Committee and Non-executive Director (May 2015).
— Pierre-Olivier Bouée stepped down as Executive Director (May 2015) and as Group Chief Risk Officer (June 2015).
— Tony Wilkey, previously Chief Executive of Prudential Corporation Asia’s network of life insurance operations, was appointed as Executive Director of Prudential plc and Chief Executive, Prudential Corporation Asia (June 2015).
— Anthony Nightingale took on the role of the Chair of the Remuneration Committee and was appointed as a member of the Nomination Committee, continuing in his role as Non-executive Director (May 2015).
— Barry Stowe, previously Chief Executive of Prudential Corporation Asia, became Chairman and Chief Executive Officer of the North American Business Unit, continuing in his role as Executive Director (June 2015).
The current Directors’ biographies, including the skills and experience they bring to the Board, can be found on pages 71 to 76.
Mr McLintock has indicated his intention to retire from the Board in 2016. We have announced that Mr McLintock will be succeeded by Anne Richards, who will join Prudential from Aberdeen Asset Management PLC, where she held the position of Chief Investment Officer and was responsible for operations in Europe, the Middle East and Africa. She has held senior roles at JP Morgan Investment Management, Mercury Asset Management and Edinburgh Fund Managers.
Mr Johnston will retire at the end of the 2016 Annual General Meeting.
Ann Godbehere The Audit Committee monitors the integrity of the Group’s financial reporting, including the effectiveness of internal control and risk management systems and the effectiveness of internal and external auditors.
Anthony Nightingale The Remuneration Committee determines the overall remuneration policy for the Group, including the individual remuneration packages of the Chairman and Executive Directors, and oversees the remuneration arrangements of senior management.
Meetings The Board met on 10 occasions during the year, which included two overseas meetings held at the Group’s operations in the US and Hong Kong. The Board also held a separate strategy event during the year. Individual Directors’ attendance at meetings throughout the year is set out in the table below.
During the year, the Chairman met with the Non-executive Directors without the Executive Directors being present on five occasions.
Lord Turner7 3/3 – – – 2/2 n/a Lord Turnbull9 4/4 – 0/1 3/3 3/3 1
Diversity Given the global reach of the Group’s operations, the Board makes every effort to ensure it is able to recruit directors from different backgrounds, with diverse experience, perspectives and skills. This diversity not only contributes towards Board effectiveness but is essential for successfully delivering the strategy of an international group. The Board is committed to recruiting the best available talent and appointing the most appropriate candidate for each role. This approach, including due consideration of gender, is followed as part of the Nomination Committee’s ongoing activities carried out during 2015 in respect of succession planning for Executive and Non-executive Directors.
The Board does not endorse quotas, but continues to commit to having an increasing representation of women in senior positions in the Group and on the Board.
On appointment, Non-executive Directors embark upon a wide-ranging induction programme covering, among other things, the principal bases of accounting for the Group’s results, the role of the Board and its principal Committees, the Group’s key risks and the risk management framework, as well as the compliance environment in which the Group operates.
The programme also includes detailed briefings on the Group’s business units, its product range, the markets in which it operates and the overall competitive environment.
Both Mr Law and Lord Turner started their induction programme in 2015, which included sessions with key management in the Group’s businesses.
The Chairman is also responsible for ensuring that all Directors continually update their skills, knowledge and familiarity with the Group. Directors regularly receive reports on the Group’s businesses and the regulatory and industry-specific environments in which it operates.
Throughout the year, the Board focused on regulatory developments, particularly Solvency II, and the introduction of a new regulatory responsibility framework for the industry, applicable to Senior Insurance Managers. A separate session was held updating the Board on risk and capital models. In addition, Directors were provided with updates at each Board meeting on other legal and regulatory changes and developments that could impact the industry and the Group.
Committee members received updates at Committee meetings on areas of particular relevance to the respective committees and were kept updated on ongoing developments in these areas, as well as the impact these have on the Group. In 2015, the Audit Committee and Risk Committee held two joint sessions in which they were provided with an update on Solvency II and related disclosures.
Directors may request individual in-depth briefings from time to time, which is valuable to Non-executive Directors wishing to improve their knowledge of particular developments affecting the Group or particular parts of the business.
The performance of the Non-executive Directors and the Group Chief Executive was evaluated by the Chairman in individual meetings. Philip Remnant, the Senior Independent Director, led the Non-executive Directors in a performance evaluation of the Chairman.
The review confirmed that the Board continued to operate effectively during the year and no major areas requiring improvement were highlighted. Progress has been made on the actions identified in 2014 and addressed in 2015, as reported above.
Board composition Prioritise operational experience, gender balance and relevant geographical representation where possible in making new appointments to the Board. Keep the balance of Executive and Non-executive Directors under review.
This is an ongoing focus of the work of the Nomination Committee on succession planning and is one of the key criteria included when identifying and recommending individuals for Board succession.
The appointment of Penny James as Group Chief Risk Officer and Executive Director, effective 1 September 2015, maintains gender balance at Board level.
Both the Audit and Risk Committees widened the pool of attendees at their meetings during 2015, including senior management from business units presenting updates where relevant.
The Chairman continued to ensure that the Board was updated as early as possible on potential candidates.
As part of the selection process leading to the appointment of David Law and Lord Turner, individual meetings with a number of Directors took place and the Board was kept updated on the appointment process throughout.
The following themes were identified as areas for focus in 2016: Governance of subsidiary boards The Board evaluation recognised that, following agreement with the PRA to appoint independent non-executive directors to certain of the Group’s larger subsidiaries, more formal oversight of the governance arrangements for their boards would be required. In addition, a process for appointing the subsidiary independent directors and the relationship between them and the Chairman and chairs of the Group Audit and Risk Committees would need to be implemented.
Board papers On Board processes, the feedback highlighted progress made during the year, in particular improvements in clarity of papers. This is another area we will continue to focus on during 2016 to ensure that the right balance is struck regarding the level of detail provided in papers, especially for technically complex matters. This will continue to assist the Board in managing a growing agenda and keeping regulatory and strategic issues balanced appropriately.
The Group maintains a corporate website containing a wide range of relevant information for private and institutional investors, including the Group’s financial calendar. The Company’s Registrar, Equiniti, operates an internet access facility for registered shareholders, providing details of their shareholdings at www.shareview.co.uk
Company’s shareholders. In 2015, as part of the investor relations programme, over 440 meetings were held with approximately 700 individual institutional investors across the UK, in continental Europe, US and Asia.
Products and customers The Board intends to continue holding in-depth focus sessions on products and customers of the Group, including using Board visits to the business units in the UK, Asia and the US as a key opportunity to do this.
Information on a number of regulations and processes relevant to directors and how these are addressed by Prudential is given below.
— Their appointment and removal is also governed by other provisions in the Articles, the UK Corporate Governance Code (the UK Code), the Hong Kong Corporate Governance Code (HK Code) as appended to the Hong Kong Listing Rules (HK Listing Rules), and the Companies Act 2006.
— After six years, Non-executive Directors may be appointed for a further year, up to a maximum of three years in total, subject to rigorous review and re-election by shareholders.
— The Directors’ remuneration report sets out the terms of the Non-executive Directors’ letters of appointment on page 123.
— The Directors’ remuneration report sets out the terms of Executive Directors’ service contracts on page 122.
Independence of the Non-executive Directors — Prudential is one of the UK’s largest institutional investors and the Board does not believe that this compromises the independence of those Non-executive Directors who are on the boards of companies in which the Group has a shareholding. The Board also believes that such shareholdings should not preclude the Company from having the most appropriate and highest calibre Non-executive Directors.
— For the HK Listing Rules purposes, the Company will consider Mr Law independent from 1 July 2016, the date one year after his retirement from PwC. The Company has received confirmation of independence from each of the other Non-executive Directors as required by the HK Listing Rules.
— There were no other material factors which were deemed to affect the Non-executive Directors’ independence.
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— Directors may hold directorships or other significant interests in companies outside the Group which may have business relationships with the Group.
— Non-executive Directors may hold positions on a number of external company boards or other bodies provided that they are able to demonstrate satisfactory time commitment to their role at Prudential and that they discuss any new appointment with the Chairman prior to accepting. This ensures that they do not compromise their independence and that any potential conflicts of interest or possible issues arising out of the time commitments required by the new role can be identified and addressed appropriately.
— The major commitments of the Non-executive Directors are detailed in their biographies on pages 74 and 75.
— Executive Directors may accept external directorships and retain any fees earned from those directorships subject to prior discussion with either the Chairman or Group Chief Executive and, where necessary, consideration by the Nomination Committee. Permission is granted provided that the appointments do not lead to any conflicts of interest.
— Directors have a statutory duty to avoid conflicts of interest with the Company. The Company’s Articles allow its Directors to authorise conflicts of interest, and the Board has adopted a policy and effective procedures to manage and, where appropriate, approve conflicts or potential conflicts of interest.
— The Chairman and the Group General Counsel and Company Secretary assess new appointments which Board members are considering, in order to identify any conflicts or potential conflicts. Where a conflict or potential conflict is identified, the Nomination Committee, or the Board where appropriate, considers, and if thought fit, approves each such situation individually.
— The Company’s Articles permit the Directors and Officers of the Company to be indemnified in respect of liabilities incurred as a result of their office.
— This includes qualifying third-party indemnity provisions for the benefit of the Directors of the Company and other such persons in their capacity as Directors of other companies within the Group.
— These indemnities were in force during 2015 and remain so.
— Prudential has adopted share dealing rules relating to securities transactions by Directors on terms no less exacting than required by Appendix 10 to the HK Listing Rules and by the UK Model Code. The Directors have complied with this code of conduct throughout the period. Relevant controls are applied to the handling and dissemination of inside information which form part of the Group’s internal governance framework.
— The Company’s policy on loss-of-office payments for Directors forms part of the Directors’ remuneration policy which was approved by shareholders at the 2014 Annual General Meeting. A copy of the policy is available on the Company’s corporate website www.prudential.co.uk
— Manages the business to ensure full compliance with the Group risk management framework as set out in the Group Governance Manual, which includes the Group risk framework and risk policies as well as approvals requirements, among other requirements.
— Assists the Board to formulate and then implements the approved risk appetite and limit framework, risk-management plans, risk policies, risk reporting and risk identification processes; and
Internal controls and processes, based on the provisions established in the Group Governance Manual, are in place across the Group. These include controls for the preparation of financial reporting. The operation of these controls and processes facilitates the preparation of reliable financial reporting and the preparation of local and consolidated financial statements in accordance with the applicable accounting standards and requirements of the Sarbanes-Oxley Act. These controls include certifications by the Chief Executive and Chief Financial Officer of each business unit regarding the accuracy of information provided for use in preparation of the Group’s consolidated financial reporting and the assurance work carried out in respect of US reporting requirements.
The Board has delegated authority to the Audit Committee to review the framework and effectiveness of the Group’s systems of internal control. The Audit Committee is supported in this responsibility by the assurance work carried out by Group-wide Internal Audit and the work of the business unit audit committees, which oversee the effectiveness of controls in each respective business unit. Details of how the Audit Committee oversees the framework of controls and their effectiveness on an ongoing basis, is set out more fully in the report on pages 89 to 94.
The Board determines the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. It has delegated authority to the Risk Committee to review the Group Risk Framework and to approve the risk policies, standards and limits within the overall Board approved risk appetite. The Risk Committee monitors the effectiveness of the Group Risk Framework and ongoing compliance with it through its regular activities detailed in the report on pages 95 to 97.
In accordance with provision C.2.3 of the UK Code and provision C.2.1 of the HK Code, the Board has reviewed the effectiveness and performance of the system of risk management and internal control during 2015. This review covered all material controls, including financial, operational and compliance controls, risk-management systems and the adequacy of the resources, qualifications and experience of staff of the Group’s accounting and financial reporting function.
The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period and up to the date of this report and confirms that the system remains effective.
As part of the evaluation, the Chief Executive and Chief Financial Officer of each business unit, including Group Head Office, certify compliance with the Group’s governance policies and the internal control and risk management requirements. The Group Risk function facilitates a review of the matters identified by this certification process. This includes the assessment of any risk and control issues reported during the year, risk and control matters identified and reported by the other Group oversight functions and the findings from the reviews undertaken by Group-wide Internal Audit, which carries out risk-based audit plans across the Group. Issues arising from any external regulatory engagement are also taken into account.
For the purposes of the effectiveness review, the Group has followed the 2014 FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. In line with this guidance, the certification provided 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.
CEC Chief Executive’s Committee GEC Group Executive Committee BSCMC Balance Sheet & Capital Management Committee GERC Group Executive Risk Committee TAC Technical Actuarial Committee GCRC Group Credit Risk Committee GORC Group Operational Risk Committee GwIRC Group-wide Information Risk Committee GABCSC Group Anti-Bribery and Corruption Steering Committee STOC Solvency II Technical Oversight Committee
As Chairman of the Nomination Committee, I am pleased to report on the Committee’s activities and focus during 2015.
The Nomination Committee ensures that the Group has appropriate diversity and balance of skills and experience on the Board and its committees and that suitable succession planning is in place.
During 2015, the Committee carried out a robust process in selecting and recommending a number of key executives and non-executives for appointment or role change, namely Mike Wells as Group Chief Executive, Penny James as Group Chief Risk Officer, Barry Stowe and Tony Wilkey as business unit Chief Executives and Lord Turner and David Law as Non-executive Directors.
The Committee continues to refresh its succession planning on an ongoing basis.
— Paul Manduca (Chairman) — Howard Davies — Ann Godbehere — Anthony Nightingale (from May 2015) — Philip Remnant — Lord Turnbull (until May 2015)
The principal Committees of the Board are the Nomination, Audit, Risk and Remuneration Committees. These Committees form a key element of the Group governance framework, facilitating effective independent oversight of the Group’s activities by the Non-executive Directors.
During 2015, the Committee led a search for additional candidates to be appointed to the Board as Non-executive Directors, in order to ensure Board composition was progressively refreshed, assisted by Egon Zehnder as the search consultant.
The Committee recommended the appointment of Mr Law and Lord Turner to the Board for approval.
Initial longlists of potential internal and external candidates were considered. After a review of the longlists, shortlisted candidates met the Chairman, the Group Chief Executive and other members of the Committee, including the Senior Independent Director and key management where appropriate. Additionally, candidates were assessed by Egon Zehnder against the role specification requirements. The outcomes of these searches are set out below.
Mr Stowe was selected as Chairman and Chief Executive of the North American business unit. He had served on the Board since November 2006 as Chief Executive of Prudential Corporation Asia and altogether has 35 years of experience of leading life insurance organisations in the US and Asia.
Ms James was selected as Group Chief Risk Officer. She previously served as Director of Group Finance, responsible for the delivery of the Group’s financial results, business planning and performance monitoring. In that role, she also led Prudential’s Solvency II programme and was a member of the Group Executive Risk Committee.
Mr Foley was selected as Chief Executive, UK & Europe in January 2016. He has more than 35 years’ experience and an in-depth knowledge of Prudential UK & Europe. Mr Foley acted as Interim Chief Executive of the UK & Europe business from October 2015 in addition to his duties as Group Investment Director. Between 2011 and 2013, he served on the Company’s Board as Group Chief Risk Officer.
The Board was kept informed throughout the process and the Committee recommended the appointment of Mr Wells, Mr Stowe, Mr Foley, Mr Wilkey, Ms James and Ms Richards to the Board for approval.
— Re-election of directors As part of its ongoing work on Board succession planning, the Committee considered the terms of appointment for the Chairman, Committee Chairmen and Non-executive Directors taking into account time commitment and the general balance of skills, experience and knowledge on the Board and assessing length of service in their roles. Having reviewed the performance of relevant Non-executive Directors in office at the time, the Committee recommended to the Board that those Non-executive Directors should stand for re-election at the 2015 Annual General Meeting.
The Chairman was appointed by the Board in July 2012 for an initial three-year term, which expired in 2015. The performance of the Chairman is reviewed annually through a process led by the Senior Independent Director. Following review in 2015, the Committee, led by the Senior Independent Director, recommended to the Board that the Chairman be appointed for a further term of three years expiring in 2018, subject to re-election by shareholders.
Independence The Committee considered the independence of the Non-executive Directors against relevant requirements as outlined on page 82.
New positions were reviewed during the year as they arose and conflicts authorised as relevant.
The Audit Committee plays a vital role in Prudential’s governance, one that is becoming increasingly important as the Group continues to grow in size and complexity. The Committee’s responsibility for overseeing financial reporting, supervising the effectiveness of internal control systems and monitoring the independence of the auditor, places it at the centre of our ongoing drive to ensure that the Group’s governance is as rigorous, transparent and effective as possible.
During 2015, the Committee continued to focus closely on its core responsibilities around financial reporting, internal controls and oversight of assurance work, including Sarbanes-Oxley certifications. At the same time, we addressed the implications for the Group of emerging regulatory requirements, among them the implementation of the Solvency II regime, the new guidance affecting going concern and the requirement for a statement on longer-term viability as well as the forthcoming new rules governing audit rotation and tender.
The Committee has continued to ensure that the Group’s financial reporting remains clear, accurate and informative. We have worked closely with the Risk Committee to provide an integrated approach to risk assurance and management.
During the year, we welcomed David Law as an additional member of the Audit Committee.
The Committee assessed whether appropriate accounting policies had been adopted throughout the accounting period and whether management had made appropriate estimates and judgements over recognition, measurement and presentation of the financial results. There were no new or altered accounting standards in 2015 that had a material effect on the Group’s financial statements.
The Committee reviewed the key assumptions and judgements made in valuing the Group’s investments, insurance liabilities and deferred acquisition costs under IFRS, together with reports on the operation of internal controls to derive these amounts. It also reviewed the assumptions underpinning the Group’s European Embedded Value (EEV) metrics. The Committee considered information, including peer comparisons if relevant and available, on the following key assumptions: — Persistency, mortality, morbidity and expense assumptions within the Asia life businesses; — Economic and policyholder behaviour assumptions affecting the measurement of Jackson guarantee liabilities and amortisation of deferred acquisition costs; and
The Committee also received information on the nature of goodwill and intangible asset values and the carrying value of investments in the Group’s balance sheet. In relation to investments, this included the results of independent valuations by the external auditor.
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 the disclosures on the Group’s longer-term viability were both reasonable and appropriate.
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The Committee considered the effects of volatility in equity market movements, and changes in interest and foreign currency translation rates on the Group’s results. The impact of these marketdriven effects on the accounting, presentation and disclosure of the Group’s longer-term investment return assumptions and short-term fluctuations in investment return was an area of focus. No significant issues arose in respect of these items.
In addition to these reporting matters, the Committee also received and considered regular updates from management on the status and implications for the Group of financial reporting developments, including updates on discussions by the International Accounting Standards Board on the development of the Phase II Insurance Standard and proposed ‘Overlay’ and ‘Temporary Exemption’ options to permit altered presentation of the profit and loss account or deferral of IFRS 9 by insurers.
Having considered the review, the Committee made recommendations to the Board regarding the effectiveness of the internal control and risk management systems in place. The Board’s statement regarding effectiveness of these systems can be found on page 84.
The feedback provided was reviewed and compiled into a report for the Committee which covered areas such as the knowledge and expertise of the partners and team members, their understanding of the Group, the resourcing applied to the audit and continuity of the team, liaison with Group-wide internal audit and approach to resolution of issues, as well as factors such as their coordination across the Group’s multiple jurisdictions and quality of their written and oral communication. The degree of challenge and robustness of approach to the audit were key components of the evaluation.
— Fees paid to the auditor The fees paid to KPMG for the year ended 31 December 2015 amounted to £16.6 million (2014: £16.6 million) of which £4.3 million (2014: £5.1 million) was payable in respect of non-audit services. Non-audit services accounted for 26 per cent of total fees payable (2014: 31 per cent).
A breakdown of the fees paid to KPMG can be found in Note B3.4 to the financial statements on page 171.
Of the £4.3 million of non-audit services, the principal types of non-audit engagements approved for 2015 were tax compliance services of £0.7 million, other assurance services of £2.2 million (mainly in connection with Solvency II reporting and disclosures), corporate finance services of £0.2 million and other non-audit services of £1.2 million (which mainly consist of risk management services and Solvency II internal model validation work). Total Solvency II assurance and validation fees payable for the year to KPMG were £1.9 million (2014: £1.4 million). The Committee considered that the Solvency II assurance work is most appropriately completed by the auditor as it builds on the expertise gained from KPMG’s core audit work from their insight into the Group’s systems, processes and controls, driving significant synergies.
— Re-appointment Based on the outcome of the effectiveness evaluation and all other considerations, the Committee recommended to the Board that KPMG be re-appointed as the auditor. A resolution to this effect will be proposed to shareholders at the 2016 Annual General Meeting.
— Audit tender The external audit was last put out to competitive re-tender in 1999 when the present auditor, KPMG, was appointed. Since 2005, the Committee has annually considered the need to re-tender the external audit service and it again considered this in February 2016, concluding that there was nothing in the performance of the auditor which required such a tender.
The Committee acknowledges the provisions contained in the UK Code in respect of audit tendering, along with European rules on mandatory audit rotation and audit tendering. In light of this, and conforming to the requirements of the EU rules, the Company will be required to change auditor no later than for the 2023 financial year end. The Committee also recognises that the industry is in a period of unprecedented change with the introduction of Solvency II from this January and the IASB expecting to issue a new insurance accounting standard for implementation not before 2019. The Committee currently believes any change of auditor should be scheduled to limit operational disruption during such a period of change and, as a consequence, is not currently planning to re-tender the audit ahead of 2019, subject to the Committee’s normal annual review.
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The independent assurance provided by Group-wide Internal Audit formed a fundamental part of the Committee’s deliberations on the Group’s overall control environment. The Committee received regular updates on audits conducted and management’s progress in addressing audit findings.
Each of the Group’s business units has an internal audit team, the heads of which report to the Director of Group-wide Internal Audit. The function also has a Quality Assurance Director, whose primary role is to monitor and evaluate adherence to industry practice guidelines and Group-wide Internal Audit’s own standards and methodology. Internal audit resources, plans, budgets and its work are overseen by both the Committee and the relevant business unit audit committee. The Director of Group-wide Internal Audit reports functionally to the Chairman of the Committee and, for management purposes, to the Group Chief Executive.
The Committee approved the half-year update of the 2015 plan. It also considered and approved the Internal Audit plan, resource and budget for 2016.
In addition to the periodic external effectiveness review required every five years (last conducted in 2012), the Committee annually assesses the performance and effectiveness of the internal audit function. A 2015 internal effectiveness review, performed by the Group-wide Internal Audit Quality Assurance Director, was conducted in accordance with the professional practice standards of the Chartered Institute of Internal Auditors (CIIA). The review concluded that Group-wide Internal Audit continues to comply with the requirements of internal audit policies, procedures and practices, and standards in all material respects relating to audit planning and execution, and continued to be aligned with its mandated objectives and maintained general conformance with the CIIA guidance for Effective Internal Audit in the Financial Services Sector.
Having considered the findings of the 2015 internal effectiveness review, the Committee concluded that Group-wide Internal Audit had continued to operate in compliance with the requirements of Group-wide Internal Audit policies, procedures and practice standards in all material respects and remained aligned to mandated objectives during 2015.
The Committee is supported by the work carried out by the business unit audit committees and annually reviews the effectiveness of these committees. These committees provide oversight of the respective business units. During the year, membership comprised senior management who were independent of the Business Unit and in some cases included independent Non-executive Directors. The minutes of these committees were provided to the Committee and their meetings were attended by the external auditor as well as senior management from the business unit (including the Business Unit Chief Executive, heads of Finance, Risk, Compliance and Group-wide Internal Audit).
The Committee’s assessment of the Business Unit audit committees was carried out by local teams from Group-wide Internal Audit and considered whether each of the committees fulfilled the responsibilities documented in their terms of reference. Attendance rates by committee members and evidence of the committees’ coverage of key business unit issues, as well as the appropriate escalation of concerns to the Committee, formed part of the criteria used for the evaluation.
The Committee approved the Group’s standard terms of reference for business unit audit committees, which were updated to reflect changes in the Committee’s own responsibilities to align them with best practice. These were adopted by the business unit audit committees with minor variations to address local regulations or the particular requirements of the business.
In 2016, Group Compliance intends to take forward the policy initiatives developed in 2015 and to review and refresh the Group Compliance Policy standards against which Business Units are assessed.
— Terms of reference The Committee considered and made recommendations to the Board regarding its terms of reference during the year. The terms of reference, which are reviewed annually, can be found on the Company’s website www.prudential.co.uk These recommendations reflected the Committee’s new responsibilities regarding the longer-term viability statement and auditor rotation.
— Howard Davies (Chairman) — Ann Godbehere — Kai Nargolwala — Lord Turner (from September 2015) — Lord Turnbull (until May 2015)
As Chairman of the Risk Committee, I am pleased to report on the Committee’s activities and focus during 2015.
Alongside regular monitoring of the application of, and compliance with, the Group Risk Framework, we ensured that the Group was fully prepared for the introduction of Solvency II. This included reviewing the methodology and calibration of the internal model, receiving reports on the independent validation of the model, monitoring progress towards the Prudential Regulation Authority’s approval of the model, reviewing the Group’s Own Risk and Solvency Assessment, progress towards wider Solvency II compliance and the governance framework for approving disclosures.
We have worked closely with the Audit Committee to provide risk oversight throughout the Group to ensure an integrated approach.
The Group Risk Development Plan for the year was considered and approved by the Committee. The Plan underpins the ongoing enhancement of the Group Risk Framework and drives the development of the Group Risk function’s capability across the Group. The Plan included recommendations aimed at further embedding the Economic Capital model in risk processes and decision making, enhancing the understanding and interpretation of the Group Risk Framework and the review of the appropriateness of the limit framework, the development of the risk appetite to reflect the introduction of Solvency II and certain enhancements to the limit framework.
Group top risks The Committee evaluated the Group’s top risks, considering recommendations for promoting additional risks, expanding the scope of existing risks and removing those risks no longer requiring particular focus from the Committee. The Committee received regular reporting on these risks and mitigating actions.
The Group Chief Risk Officer regularly provided the Committee with updates on market conditions likely to have an impact on Group and policyholder investments, such as the implications of a sustained low-interest-rate environment and falling oil prices.
The Group Chief Risk Officer regularly reported to the Committee on compliance with the Group Risk Framework and the composition of the Group’s ‘Watch Lists’ of credit counterparties.
— Terms of reference The Committee considered and made recommendations to the Board regarding its terms of reference during the year. The terms of reference, which are reviewed annually, can be found on the Company’s website www.prudential.co.uk These recommendations incorporated changes to reflect the Committee’s role in assessing the effectiveness of the Group’s Internal Model and making recommendations to the Board regarding proposed changes to the Group’s Internal Model.
The Directors have a duty to report to shareholders on the performance and financial position of the Group and are responsible for preparing the financial statements on pages 132 to 291 and the supplementary information on pages 298 to 328. It is the responsibility of the auditor to form independent opinions, based on its audit of the financial statements and its audit of the EEV basis supplementary information, and to report its opinions to the Company’s shareholders and to the Company. Its opinions are given on pages 293 to 296 and page 330.
The Directors are further required to confirm that the Strategic report includes a fair review of the development and performance of the business, with a description of the principal risks and uncertainties. Such confirmation is included in the statement of Directors’ responsibilities on page 292 and page 329.
The Strategic report provides, on pages 45 to 47, a description of the Group’s capital position, financing and liquidity. The risks facing the Group’s business and how these are managed are discussed in the audited sections of the Group Chief Risk Officer’s report on pages 49 to 56.
In line with the principles of the UK Code, fees for the Non-executive Directors are determined by the Board. The UK Code, issued in 2012, and revised in 2014, can be viewed on the FRC’s website, with the HK Code available on the website of the HK Stock Exchange.
In line with its primary listings on the London and Hong Kong Stock Exchanges, the Company has applied the main principles and all relevant provisions of the UK and HK Codes throughout the 2015 financial year as set out in the Governance report on pages 70 to 100 and also in the Directors’ remuneration report, which can be found on pages 102 to 129.
As a result of its listing on the New York Stock Exchange, the Company is required to comply with the relevant provisions of the Sarbanes-Oxley Act 2002 as they apply to foreign private issuers and has adopted procedures to ensure such compliance.
Under the agreements governing Prudential Corporation Holdings Limited’s life insurance and fund management joint ventures with China International Trust & Investment Corporation (CITIC), if there is a change of control of the Company, CITIC may terminate the agreements and either (i) purchase the Company’s entire interest in the joint venture or require the Company to sell its interest to a third party designated by CITIC, or (ii) require the Company to purchase all of CITIC’s interest in the joint venture. The price of such purchase or sale is to be the fair value of the shares to be transferred, as determined by the auditor of the joint venture.
The five largest customers of the Group constituted in aggregate less than 30 per cent of its total sales for each of 2015 and 2014.
Directors in office during the year Board of Directors 71 to 75
Employment policies and employee involvement Corporate responsibility review 59 to 61
Post-balance sheet events Note D3 of the Notes on the Group financial statements
In addition, the risk factors set out on pages 358 to 363 and the additional unaudited financial information set out on pages 332 to 357, are incorporated by reference into this report.
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102 Annual statement from the Chairman of the Remuneration Committee 104 Our executive remuneration at a glance 106 Summary of Directors’ remuneration policy 109 Annual report on remuneration 126 Supplementary information
The following sections were subject to audit: salary information table in section entitled Base salary, Annual bonus, Long Term Incentive Plans with performance periods ending on 31 December 2015; Pension entitlements; table of 2015 and 2014 Executive Director total remuneration ‘The Single Figure’ and related notes; Long-term incentives awarded in 2015; Non-executive Director remuneration in 2015; Statement of Directors’ shareholdings; Outstanding share options; Recruitment arrangements; and Payments to past directors and payments for loss of office.
The Committee’s report is presented in the following sections: — An ‘at a glance’ summary of the Group’s remuneration arrangements on pages 104 and 105; — Our Directors’ remuneration policy on pages 106 to 108 which describes how we pay directors. This policy was approved by shareholders at the 2014 AGM; — Our annual report on remuneration on pages 109 to 125 which describes how the Committee applied the remuneration policy in 2015 and the decisions it has made in respect of 2016; and
By way of preface, I would like to share the context for the key decisions the Committee took during 2015, in particular the remuneration arrangements for those joining and stepping down from the Board, how we rewarded the performance achieved in 2015 and the decisions relating to remuneration arrangements for 2016.
As set out overleaf, the strong performance of the Group has been sustained over a number of years, notwithstanding the external challenges faced by the Group during this time. The Group delivered total IFRS operating profits of £10,147 million in the 2013, 2014 and 2015 financial years, exceeding the stretching targets established by the Committee.
No changes to Prudential’s remuneration architecture are proposed for 2016. We will continue to operate all elements of
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The Committee believes these enhanced disclosures will provide shareholders with additional clarity.
As you will be aware, there have been a number of changes to Prudential’s executive team during 2015, including the appointment of Mike Wells as Group Chief Executive. The remuneration decisions arising from these changes were disclosed in stock exchange and website announcements when they took place. Further information can be found in the ‘Recruitment arrangements’ and ‘Payments to past directors’ sections of this report.
I trust that you will find this report a clear account of the way in which the Committee has implemented the Directors’ remuneration policy during 2015.
The Committee has enhanced the Annual Incentive Plan (‘AIP’) reporting this year, a development which I trust you will find welcome. In addition to the information on bonus disclosure familiar to shareholders from last year’s report, which provides an illustrative view of 2015 performance against Group and business unit targets, we have also given more detailed information on the Group financial performance range (threshold and maximum) and the results achieved for the 2014 performance year. These disclosures can be found in the annual report on remuneration.
Reward must be: — Determined by delivery of the Group’s annual and longer-term business objectives; — Aligned with shareholder value creation; and — Consistent with the Group’s risk appetite so that the delivery of the business plan can be sustained.
Aligned with our long-term business strategy and delivery of shareholder value, vesting is currently subject to: — Relative TSR; and — Group IFRS profit; or — Business unit IFRS profit.
The Group Chief Executive has a maximum AIP opportunity of 200% of salary. For other executives the maximum is 180% or less.
2015 bonuses were paid based on performance measures related to profit, cash flow and capital adequacy, as well as personal objectives. Clawback provisions allow amounts to be recouped.4
Awards in 2015 were, and awards in 2016 will be, below plan limits: — Group Chief Executive: 400%
Notes 1 CEO, JNL also shares in the JNL bonus pool; and CEO, M&G retains separate arrangements. 2 The Chief Executive Officer, Prudential Corporation Asia received an increase of 5 per cent. 3 Progress against the share ownership guidelines is detailed in the 'Statement of directors’ shareholdings'
section of the annual report on remuneration. 4 More detail on how we implemented the policy is set out in the annual report on remuneration.
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In particular, the long-term incentives awarded to Executive Directors in 2013 had stretching performance conditions attached to vesting and were denominated in shares or ADRs. The value generated for shareholders through share price growth and dividends paid over the last three years is therefore reflected in the value of the 2015 long-term incentive plan (‘LTIP’) releases.
The value of these performance-related elements of remuneration are added to the fixed packages provided to Executive Directors to calculate the 2015 ‘single figure’ of total remuneration. The values for the current Executive Directors who were directors during the year are outlined in the table below: Executive Director Role
Notes 1 Penny James was appointed to the Board on 1 September 2015. The remuneration above was paid in respect of her service as an Executive Director. 2 Tony Wilkey was appointed to the Board on 1 June 2015. The remuneration above was paid in respect of his service as an Executive Director. 3 NABU is an abbreviation of North American Business Unit.
The Remuneration Committee awarded salary increases to Executive Directors for 2016 of 1 per cent which was below the salary increase budget for the wider workforce. No other changes have been made as we believe remuneration packages remain strongly aligned with performance over both the short and the long term.
The resultant remuneration packages for 2016 are set out in detail in the annual report on remuneration and summarised in the table below: Executive Director Role 2016 Salary
The Company’s Directors’ remuneration policy was approved by shareholders at the 2014 AGM. This policy came into effect following the AGM on 15 May 2014 and will apply for a period of three years unless shareholders approve a revised policy within that time.
The pages that follow present a summary of the remuneration policy. The complete policy can be found on our website at www.prudential.co.uk/site-services/governance-and-policies/directors-remuneration-policy
Salary The Committee reviews salaries annually, considering factors such as: — Salary increases for all employees; — The performance and experience of the executive; — Group or business unit financial performance; — Internal relativities; and — Economic factors such as inflation.
Current executives have the option to: — Receive payments into a defined contribution scheme; and/or — Take a cash supplement in lieu of contributions.
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding deferred award in specific circumstances. From 2015 and future awards, the Committee also has the power to recover all, or a portion of, amounts already paid in specific circumstances and within a defined timeframe (clawback).
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding award in specific circumstances. For 2015 and future awards, the Committee also has the power to recover all, or a portion of, amounts already paid in specific circumstances and within a defined timeframe (clawback).
Awards made in a particular year are usually significantly below this limit and are disclosed in the relevant annual report on remuneration. The Committee would consult with major shareholders before increasing award levels during the life of this policy.
The Chief Executive, M&G currently receives awards under this plan. He receives an annual award of phantom shares each with a notional starting share price of £1. The phantom share price at vesting is currently determined by M&G’s profitability, with profit and investment performance adjustments, over the three-year performance period. Awards are settled in cash.
The full policy sets out the Committee’s powers in respect of Executive Directors joining or leaving the Board, where a change in performance conditions is appropriate or in the case of corporate transactions (such as a takeover, merger or Rights Issue). The policy also describes legacy long-term incentive plans under which some Executive Directors continue to hold awards.
The Chairman is not eligible to participate in annual bonus plans or long-term incentive plans.
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The principal responsibilities of the Committee are: — Determining and recommending to the Board for approval, the framework and policy for the remuneration of the Chairman and Executive Directors; — Approving the design of performance-related pay schemes operated for the Executive Directors and determining the targets and individual payouts under such schemes; — Reviewing the design and development of all share plans requiring approval by the Board and/or the Company’s shareholders; — Approving the share ownership guidelines for the Chairman and Executive Directors and monitoring compliance; — Reviewing and approving individual packages for the Executive Directors and the fees of the Chairman and other independent chairs of the Group’s material subsidiaries; — Reviewing and approving packages to be offered to newly recruited Executive Directors; — Reviewing and approving the structure and quantum of any severance package for Executive Directors; — Ensuring the process for establishing remuneration policy is transparent and consistent with the Group’s risk appetite, encourages strong risk-management and solvency-management practices and takes account of remuneration practices across the Group; — Monitoring the remuneration and risk-management implications of remuneration of senior executives across the Group, senior staff in the risk, control and governance functions, and those with an opportunity to earn in excess of £1 million in a particular year; and
May 2015 Approve separation arrangements for executives who were stepping down from the Board.
June 2015 Consider performance for outstanding long-term incentive awards, based on the half-year results; review the remuneration of senior executives across the Group, senior risk staff and of employees with a remuneration opportunity over £1 million per annum; review the application of the loss-of-office policy; and consider and review progress towards share ownership guidelines by the Chairman, Executive Directors and Group Executive Committee members.
Review the level of participation in the Company’s all-employee share plans; consider feedback received from shareholders about executive remuneration in 2016; approve new and existing Executive Directors’ 2016 salaries and incentive opportunities; consider the annual bonus and long-term incentive measures and targets to be used in 2016 (including Ecap surplus and Solvency II surplus metrics and targets to be used for 2016 bonuses); review an initial draft of the 2015 Directors’ remuneration report; approve the implementation of the remuneration requirements of Solvency II; and approve the Committee’s 2016 work plan.
Additionally, a number of resolutions in writing were approved by the Committee between these meetings relating to new and promoted Executive Directors’ remuneration arrangements and separation arrangements for those Executive Directors who stepped down from the Board.
During the year, the Company has complied with the appropriate provisions of the UK Corporate Governance Code regarding directors’ remuneration.
Base salary Executive Directors’ salaries were reviewed in 2014 with changes effective from 1 January 2015. When the Committee took these decisions it considered: — The salary increases awarded to other employees; — The performance and experience of each executive; — The relative size of each director’s role; and
Jackie Hunt Chief Executive, UK & Europe FTSE 40 International Insurance Companies
Notes 1 Barry Stowe was appointed Chairman & CEO, NABU on 1 June 2015. The annualised 2015 salary above was paid in respect of his service as Chief Executive, PCA. 2 Mike Wells was appointed Group Chief Executive on 1 June 2015. The annualised 2015 salary above was paid in respect of his service as President & CEO, JNL.
Director. 3 Penny James was appointed to the Board on 1 September 2015. The maximum bonus opportunity shown represents her annual opportunity as an Executive
6 Tidjane Thiam stepped down from the Board on 31 May 2015. The maximum bonus opportunity shown represents his annual opportunity as an Executive Director – this was pro-rated for the portion of the year for which he was an Executive Director.
8 Tony Wilkey was appointed to the Board on 1 June 2015. The maximum bonus opportunity shown represents his annual opportunity as an Executive Director – this was pro-rated for the portion of the year for which he was an Executive Director.
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Personal performance As set out in the Directors' remuneration policy, a proportion of the annual bonus for each Executive Director is based on the achievement of personal objectives. These objectives include the executive’s contribution to Group strategy as a member of the Board and specific goals related to their functional and/or business unit role. Performance against these objectives was assessed by the Committee at its meeting in February 2016.
2015 Annual Incentive Plan payments On the basis of the strong performance of the Group and its business units, and the Committee’s assessment of each executive’s personal performance, the Committee determined the following 2015 AIP payments: Executive Role 2015 salary* Maximum 2015 AIP
Pierre-Olivier Bouée1 Group Chief Risk Officer £649,000 160% 0% £nil Jackie Hunt2 Chief Executive, UK & Europe £664,000 175% 89.4% £1,039,160 Penny James Group Chief Risk Officer £600,000 160% 99.3% £317,740 Michael McLintock Chief Executive, M&G £394,000 600% 90.0% £2,127,600 Nic Nicandrou Chief Financial Officer £703,000 175% 99.5% £1,223,782 Barry Stowe Chairman & CEO, NABU US$1,100,000 160% 99.5% US$1,021,277
3 Tidjane Thiam stepped down from the Board on 31 May 2015. The bonus shown above was paid in respect of his service as an Executive Director. Please see the ‘Payments to past directors’ section for details.
The Group’s financial performance range and the results achieved in respect of the 2014 Annual Incentive Plan are disclosed below. The Board believe that, due to the commercial sensitivity of the business unit targets, disclosing further details of these targets may damage the competitive position of the Group.
Notes 1 Group TSR is measured on a ranked basis over three years relative to peers. 2 IFRS profit is measured on a cumulative basis over three years.
Under the Group TSR measure, 25 per cent of the award vests for TSR at the median of the peer group increasing to full vesting for performance within the upper quartile. The peer group for the awards is: Aegon Aflac AIA AIG Allianz Aviva AXA Generali Legal & General Manulife MetLife Munich Re Old Mutual Prudential Financial Standard Life Sun Life Financial Swiss Re Zurich Insurance Group
The Committee determined that the cumulative IFRS operating profit target established for the PLTIP should be expressed using exchange rates consistent with our reported disclosures. All the individual business units exceeded their stretch performance target and achieved 100 per cent vesting, other than Asia which exceeded plan performance, but not stretch performance, and therefore vested at 95 per cent. The individual business unit IFRS targets have not been disclosed as the Committee considers that these are commercially sensitive and disclosure of targets at such a granular level would put the Company at a disadvantage compared to its competitors. The Committee will keep this disclosure policy under review based on whether, in its view, disclosure would compromise the Company’s competitive position.
M&G Executive Long-Term Incentive Plan The phantom share price at vesting for the 2013 M&G Executive Long-Term Incentive Plan award is determined by the increase or decrease in M&G’s profitability over the three-year performance period with adjustments for the investment performance of its funds. M&G performance and the resulting phantom share price for Michael McLintock are shown below: Award 3-year profit growth of M&G 3-year investment performance share price Value of awards vesting 2013 M&G Executive LTIP 36% 2nd quartile £1.79 £1,991,196
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Prudential Corporation Asia Long-Term Incentive Plan Tony Wilkey received awards under the Prudential Corporation Asia Long-Term Incentive Plan before he was appointed to the Board, which vested during 2015. The Prudential Corporation Asia Long-Term Incentive Plan does not have performance conditions.
Malus (applies in respect of any annual bonus or long-term incentive award).
Allows unvested shares awarded under deferred bonus and LTIP plans to be forfeited in certain circumstances.
Clawback (applies in respect of any annual bonuses paid in respect of performance in 2015 and subsequent years, and the deferred portions of these bonuses. Also applies to long-term incentive awards made on or after 1 January 2015).
Allows cash and share awards to be recovered before or after release in certain circumstances.
Where at any time before the fifth anniversary of the start of the performance period, either (i) there is a materially adverse restatement of the Company’s published accounts in respect of any financial year which (in whole or part) comprised part of the performance period; or (ii) it becomes apparent that a material breach of a law or regulation took place during the performance period which resulted in significant harm to the Company or its reputation.
Pension entitlements Pension provisions in 2015 were: Executive 2015 pension arrangement Life assurance provision
Tony Wilkey Pension supplement in lieu of pension of 25 per cent of salary and a HK$10,500 payment to the Hong Kong Mandatory Provident Fund.
As Group Chief Executive: pension supplement in lieu of pension of 25 per cent of salary.
As Group Chief Executive, four times salary plus a dependants’ pension.
Pension supplement in lieu of pension of 25 per cent of salary. Up to four times salary plus a dependants’ pension.
At the end of 2015 the transfer value of this entitlement was £1,462,621. This equates to an annual pension of £59,686 which will increase broadly in line with inflation in the period before Mr McLintock’s retirement.
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* Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits. † The deferred part of the bonus is subject to malus and clawback in accordance with the Malus and Clawback policies. ‡ In line with the regulations, the estimated value of LTIP releases in 2016 has been calculated based on the average share/ADR price over the last three months of 2015
(£15.12/£30.05). The actual value of LTIPs, based on the share price on the date awards are released, will be shown in the 2016 report. § 2015 pension benefits include cash supplements for pension purposes and contributions into DC schemes as outlined on the previous page. ¶ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of the Companies Act.
Notes 1 Pierre-Olivier Bouée stepped down from the Board on 31 May 2015. The remuneration above was paid in respect of his service as an Executive Director. 2 Jackie Hunt stepped down from the Board on 3 November 2015. The remuneration shown above was paid in respect of her service as an Executive Director. 3 Penny James was appointed to the Board on 1 September 2015. The remuneration above was paid in respect of her service as an Executive Director, other than the LTIP releases which related to her previous role. 4 Nic Nicandrou’s 2015 benefits relate primarily to a legacy relocation clause in his contract agreed on his appointment and disclosed in the 2009 Annual Report.
The figure includes costs of £243,750 to cover stamp duty. 5 Barry Stowe’s 2015 benefits relate primarily to his expatriate status while he was located in Hong Kong in his previous role as Chief Executive, PCA, including costs of £139,405 for housing, £62,586 home leave and a £152,978 Executive Director Location Allowance. In addition, to facilitate his move back to the US, his benefits include relocation support including costs of £110,101 for relocation, shipping and tax return preparation. His bonus figure excludes a contribution of £10,404 from a profit sharing plan which has been made into a 401(k) retirement plan in respect of his role as Chairman & CEO, NABU. This is included under 2015 pension benefits.
6 Tidjane Thiam stepped down from the Board on 31 May 2015. The remuneration shown above was paid in respect of his service as an Executive Director. 7 To facilitate his move to the UK, Mike Wells’s benefits include relocation support including an allowance of £200,000 for relocation and shipping, £177,890 for temporary accommodation, £513,750 to cover stamp duty and £56,604 to cover mortgage interest. 8 Tony Wilkey was appointed to the Board on 1 June 2015. The remuneration above was paid in respect of his service as an Executive Director, other than the LTIP
Pierre-Olivier Bouée1 473 75 752 451 301 886 118 2,304 John Foley2 162 24 255 153 102 3,740 41 4,222 Jackie Hunt 644 163 1,016 610 406 1,687 161 3,671 Michael McLintock 382 94 2,292 1,375 917 2,865 96 5,729 Nic Nicandrou 682 96 1,186 712 474 3,488 171 5,623 Barry Stowe3 665 710 1,046 628 418 3,394 169 5,984 Tidjane Thiam 1,061 132 2,122 1,273 849 9,838 265 13,418 Mike Wells4 676 58 4,348 2,609 1,739 7,292 19 12,393 * Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits. † The deferred part of the bonus is subject to malus in accordance with the Malus and Clawback policies. ‡ In line with the regulations, the value of the LTIP releases has been recalculated based on the closing share/ADR price on the date awards were released, 30 March 2015
(£16.97/£33.09). The value also includes the cash payment relating to the final dividend declared in March 2015, approved at the AGM and paid after the vesting date. § 2014 pension benefits include cash supplements for pension purposes and contributions into DC schemes. ¶ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of the Companies Act.