The Group has delivered a strong performance in 2013, with our key financial metrics of IFRS operating profit, cash and new business profits all seeing double-digit growth. We have met all six of the 2013 ‘Growth and Cash’ objectives set in 2010, and the strength and sustainability of our performance have allowed the Board to recommend the rebase of our dividend upwards for the third time in four years.
The directors’ report of Prudential plc for the year ended 31 December 2013 is set out on pages 1 to 12, 63 to 87 and 333 to 374 and includes the sections of the Annual Report referred to in these pages.
Contents 1 Group overview 03–12 04 Chairman’s statement 06 Group Chief Executive’s report 2 Strategic report 13–61 14 Who we are 15 How our business works 16 Our strategy 17 Implementing our strategy 18 Measuring our performance 20 Our businesses and their performance 34 Chief Financial Officer’s report on our 2013 financial performance 46 Group Chief Risk Officer’s report on the risks facing our business and our capital strength 54 Corporate responsibility review 3 Governance 63–87 64 Board of directors 69 Corporate governance report 69 Board 73 Board committees 83 Corporate governance codes 84 Shareholders 86 Additional disclosures 87 Index to principal directors’
Our Group IFRS operating profit2 based on longer-term investment returns increased by 17 per cent during the year to £2,954 million (2012: £2,520 million). Asia life operating profit2 was up 17 per cent3 to just over a landmark £1 billion, with collective double-digit growth from our four largest operations of Hong Kong, Singapore, Indonesia and Malaysia and increasingly material contributions from some of our smaller but fast-growing businesses such as the Philippines, Thailand and Vietnam. On an underlying basis4, Asia life IFRS operating profit was up 20 per cent3. US life IFRS operating profit increased 29 per cent to £1,243 million
Free surplus generation2 from our life and asset management businesses, a key indicator of the actual cash generation from our life in-force book and from our large asset management activities, was 15 per cent higher at £3,099 million, before reinvestment in new business, reflecting the benefits we derive from the increased scale of our in-force life portfolio and a growing contribution from our asset management businesses. Investment in new business of £637 million (2012: £618 million) has increased far less rapidly than new business profits, highlighting the capital-efficient nature of our growth. Net cash remittances from our businesses to the Group increased by 12 per cent to £1,341 million (2012: £1,200 million).
The Group’s strategy remains unchanged and is focused on capturing three significant opportunities across our three geographic markets. Our disciplined execution of this strategy has continued to drive profitable growth and higher cash generation, underlining our commitment to delivering both ‘Growth and Cash’.
Our strategy is designed to create sustainable economic value for our customers and our shareholders. It is focused on three long-term opportunities: The significant protection gap in Asia; The transition of US baby boomers into retirement; and The UK ‘savings gap’ and ageing population in need of returns and income.
Controlling sales of US variable annuities in a manner which appropriately balances value, volume, capital generation and balance sheet risk.
We rigorously allocate capital to the highest-return product and geographical locations with the shortest payback periods, in line with our risk appetite. This has had a positive and significant impact, so that over the last five years, new business capital investment has declined by 6 per cent, while new business profits have increased by 77 per cent.
Distribution plays a key role in our ability to reach, attract and retain these valued customers across our regions. Building out and diversifying our distribution platform in order to reach a growing customer base will help ensure that we fully capitalise on the opportunities available to us in each of our regions.
Tidjane spent the first part of his professional career with McKinsey & Company in Paris and New York, serving insurance companies and banks. He then spent a number of years in Africa where he was Chief Executive and later Chairman of the National Bureau for Technical Studies and Development in Côte d’Ivoire and a cabinet member as Secretary of Planning and Development. Tidjane returned to France to become a partner with McKinsey & Company and one of the leaders of their Financial Institutions practice before joining Aviva in 2002. He worked at Aviva until 2008, holding successively the positions of Group Strategy and Development Director, Managing Director of Aviva International, Group Executive Director and Chief Executive Officer, Europe.
Skills and experience John Foley has been Group Investment Director since August 2013. He joined Prudential as Deputy Group Treasurer in 2000 before being appointed Managing Director, Prudential Capital (formerly Prudential Finance (UK)) and Group Treasurer in 2001. He was appointed Chief Executive of Prudential Capital and to the Group Executive Committee in 2007. John was appointed to the Board in January 2011 and held the position of Group Chief Risk Officer until July 2013. Prior to joining Prudential, John 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. Age 57.
From 2001 to 2008, Michael also served on the Board of Close Brothers Group plc as a nonexecutive director.
G ro u p overv iew 03 Prudential plc Annual Report 2013 04 Chairman’s statement 06 Group Chief Executive’s report
I t gives me great pleasure to introduce Prudential’s 2013 Annual Report. The Group has delivered an excellent performance, providing value to our customers and strong returns to our shareholders.
This performance is underpinned by a clear focus on our purpose as a Group. Our businesses stand or fall by the service that we provide to our customers and the wider contribution that we make to the communities and societies of which we are a part. It is this foundation that allows us to continue our track record of more than 165 years of creating value for our customers, our shareholders and, ultimately, the countries in which we operate. Moreover, this adherence to our founding principles of integrity, security and prudence, and our investment in building quality teams everywhere we are active, have helped us deliver one of the strongest performances in the FTSE over recent years.
By offering security to individuals and families, our products provide opportunities for customers to build better futures for themselves and their children. By pooling savings and investing capital in areas such as infrastructure, we help to stimulate the economic activity that drives growth and creates more savings and thus more investment, helping to propel a virtuous circle of growth and prosperity. Our commercial success is predicated on our ability to make a positive social and economic contribution.
It is this commitment to creating lasting value for customers that enables us to continue to deliver strong returns to our shareholders. I am delighted to report that all of our businesses have contributed to our excellent performance in 2013, with our Asia operations driving profitable growth, while our focused businesses in the US and the UK continue to make good contributions.
The year marked an important step for the Group. In 2010 we set ourselves six demanding objectives on growth and cash generation to reach by the end of 2013. Meeting these objectives is a significant milestone and a testament to our clear and well-understood strategy and to the efforts of our management team, led by Group Chief Executive Tidjane Thiam.
At our investor conference in London in December 2013, our executive team set themselves new objectives to reach by 2017. Like their predecessors, these are demanding objectives, but I am confident that, given our recent performance and the strength of our management team, we will achieve them.
We are a growing business and we live in a regulatory environment that has put financial services firms under increasing scrutiny in the wake of the financial crisis. We use the cash we generate both to fund our growth and to build the strength of our balance sheet, ensuring that we retain prudent capital levels on the various capital metrics that our regulators monitor. We also work hard to increase the return to our shareholders prudently in the form of dividends.
The Board applies strict affordability tests against a broad range of criteria before making its dividend recommendation. It is the results of these tests, combined with the Group’s exceptionally strong performance in the past five years, that has enabled the Board to take the unusual decision to recommend the rebase of the dividend in consecutive years, 2012 and 2013. The Board has proposed a final dividend of 23.84 pence per share, which brings the total dividend for the year to 33.57 pence per share, 4.38 pence or 15 per cent higher than the 2012 total dividend.
Since I became Chairman, I have been determined to ensure that we have a Board that provides a channel for discussion with shareholders, maintains a good relationship with regulators and sets the tone for everything the business does. A financial services board needs to be strong in relevant expertise, not only to support the management team, but also to provide
‘Meeting these objectives is a significant milestone and a testament to our clear and well-understood strategy and to the efforts of our management team.’
We also gained a new executive Board member in September when Jackie Hunt joined as Chief Executive of Prudential UK and Europe. She came to us from Standard Life plc, where she was Chief Financial Officer, bringing with her a proven record of delivery in the highly competitive UK insurance market.
I am confident that these additions will ensure that we have a Board that is well placed to seize the opportunities presented by returning global growth.
I am particularly proud of the fact that so many of our people are taking part in our corporate responsibility programmes. Last year 8,155 colleagues gave their time and expertise to help improve the lives of people around the world. This commitment makes a real and long-term difference to others and is a clear example of the important role we play in our communities.
It is a record of which I think we can be justifiably proud. However, it is not one upon which we can rest. I, together with others, will continue to work with our outstanding corporate responsibility teams to ensure people think of Prudential when they look for best practice in this area.
I would like to thank all our employees for their contribution to another successful year for Prudential. With their commitment, our strong management and our clear strategy, I am confident that we can continue to provide our customers with value and our shareholders with growing returns into the future, and further strengthen the communities we serve.
APE sales increased by 5 per cent to £4,423 million (2012: £4,195 million), led mainly by our Asian business, which saw double-digit sales growth on a constant exchange rate basis in eight markets: Thailand up 79 per cent, China up 41 per cent, Hong Kong up 21 per cent, Vietnam up 20 per cent, Singapore, Indonesia and the Philippines up 18 per cent and Korea up 14 per cent. Jackson APE sales were higher at £1,573 million (2012: £1,462 million), reflecting the excellent progress achieved
‘I am pleased to report a strong performance in 2013. This performance has enabled us to deliver all of our six 2013 ‘Growth and Cash’ objectives.’
Our balance sheet continues to be defensively positioned and at the end of the period our IGD surplus6 was estimated at £5.1 billion, equating to coverage of 2.8 times.
The successful delivery of all of our 2013 ‘Growth and Cash’ objectives highlights the continued disciplined implementation of the Group’s strategy.
2017 objectives Looking ahead, confident in the future prospects of the Group, we announced new objectives7 for 2017 at our investor conference in December 2013 in London. These objectives are: (i) Asia underlying free surplus generation8 of £0.9 billion to £1.1 billion in 2017 (2012: £484 million); (ii) Asia life and asset management pre-tax IFRS operating profit to grow at a compound annual rate of at least 15 per cent over the period 2012 to 2017 to reach at least £1,858 million in 2017 (2012: £924 million9); and
At the end of 2013, we have made an encouraging start towards achieving two of these 2017 objectives. We have grown Asia life and asset management pre-tax IFRS operating profit by 16 per cent3 over 2012 and we have also delivered an 18 per cent3 increase in underlying free surplus from Asia to £573 million in 2013. We will regularly update the market on our progress on all three objectives.
In 2013 our Asia business delivered a 14 per cent increase in APE sales on a constant exchange rate basis (12 per cent on actual exchange rate) to £2,125 million. In times of currency volatility, comparison of results using constant exchange rates provides a better measure of underlying performance. In this paragraph, unless otherwise stated, movements are expressed on a constant exchange rate basis. Sales performance has been strong throughout the year, achieving doubledigit growth in every quarter. Sales through the agency channel were 16 per cent higher, with increases in active manpower and improvements in productivity contributing broadly equally. Sales through bank partnerships grew by 18 per cent, excluding those from E-Sun, where we have chosen not to provide low-margin guaranteed products. Looking at our performance within the region, in Hong Kong our agency force continues to excel. We delivered a 30 per cent increase in agent productivity, with our with-profits and enhanced protection products proving to be especially popular. As a result, sales in Hong Kong grew by 21 per cent (up 23 per cent on actual exchange rate). Our multi-channel distribution in Singapore is particularly effective, with increases in active agency numbers (up 9 per cent) and productivity (up 10 per cent), coupled with very strong bancassurance partners in Standard Chartered Bank (SCB), United Overseas Bank (UOB) and Maybank, resulting in overall APE sales growth of 18 per cent (up 20 per cent on actual exchange rate). We continue to expand our agency force rapidly in Indonesia, with overall sales increasing by 18 per cent (up 7 per cent on actual exchange rate). As expected, we have seen average case sizes decline as we extend our reach outside Jakarta. However, over time, with increasing urbanisation, our first-mover advantage driven by our continued distribution expansion in upcoming cities and towns will drive long-term profitable growth. Malaysia APE sales were up 8 per cent excluding top-up products (up 7 per cent on actual exchange rate), which we have decided to de-emphasise deliberately. The 14 per cent increase (on actual exchange rate) in bancassurance sales from SCB and UOB in this market was particularly encouraging.
EEV life operating profit increased by 38 per cent to £2,221 million (2012: £1,610 million), reflecting higher new business profits (as mentioned above) and the increased scale of our in-force book, which includes a first full year’s contribution from REALIC.
Jackson’s strategy is unchanged. We continue to price new business on a conservative basis, targeting value over volume, and our financial market hedging remains focused on optimising the economics of our exposures, therefore accepting a degree of volatility in our accounting results where they are not aligned with the underlying economics. This approach has enabled Jackson to deliver significant profitable growth across the cycle while maintaining a strong balance sheet. Since 2008 Jackson has remitted over US$1.8 billion of cash to the Group, demonstrating that Jackson’s recent growth is quickly translating into profits and into cash, the ultimate metric of our successful strategy.
UK and Europe The UK life and pensions industry underwent considerable regulatory and market change in 2013, with the appointment of two new industry regulatory bodies, the phasing in of auto-enrolment for company pensions and the introduction of the voluntary ABI Code on Retirement Choices. The implementation of the recommendations of the Retail Distribution Review has changed the distribution landscape and providers, distributors, advisers and their clients continue to adjust to the new environment. The Financial Conduct Authority’s Thematic Review into the UK annuity market, which ran throughout 2013, contribute to the long-term stabilisation and growth of these economies by improving their trade balances and ultimately their current account balances. We remain focused on managing each of our businesses at the local level and on their performance in local currency, which is more indicative of their true performance and of their actual long-term growth potential.
Life IFRS operating profit was £1,001 million, up 17 per cent2,3, making a positive start towards our 2017 IFRS objective. EEV life operating profit grew by 22 per cent to £2,385 million, driven by our strong new business growth and the positive impact of higher interest rates on the in-force book.
I am pleased to report that the longrunning project to domesticate the Hong Kong branch of the Prudential Assurance Company has been successfully completed.
Asia remains a significant and attractive opportunity for the Group, underpinned by favourable structural trends of faster economic growth, leading to higher wealth, combined with growing and young populations, high savings rates and rising demand for protection. This is particularly true of the rapidly growing and increasingly wealthy Asian middle class. These opportunities are most evident in our ‘sweet spot’ markets of South-east Asia, including Hong Kong, where the combination of long-term structural trends and the breadth and depth of the Prudential franchise and distribution positions us well to achieve long-term sustainable and profitable growth.
US The US delivered a strong performance in 2013, maintaining its disciplined approach to new business and management of the in-force book, while also improving its capital position. Total US IFRS operating profit increased 30 per cent to £1,302 million (2012: £1,003 million). Life IFRS operating profit in 2013 increased by 29 per cent, to £1,243 million, driven by higher fee income as a result of ongoing positive flows and appreciation in average account values, as well as a first full year’s contribution from REALIC. Reflecting the cash-generative nature of Jackson’s business and capital formation during the year, cash remitted to the Group totalled £294 million, exceeding the 2013 objective of £260 million.
During 2013, equity markets experienced a strong rise as confidence in the US economy began to return and an increase in longer-dated Treasury yields followed long-anticipated actions by the Federal Reserve to taper bond purchases late in the year. In the variable annuity market, some larger variable annuity providers have consciously pulled back, while others are now returning. Against this background, Jackson’s market share of annuities with living benefits has remained relatively steady, while it is continuing to write new business at aggregate internal rates of return in excess of 20 per cent and with a payback period of two years.
M&G Equity markets in developed economies rose to pre-crisis levels during 2013. By contrast, emerging markets suffered a series of setbacks as concerns about slowing economic growth in China and the tapering of quantitative easing in the US weighed heavily on investor sentiment.
Against this backdrop, M&G continues to deliver strong investment performance. Over the three years to 31 December 2013, 21 retail funds, representing approximately 69 per cent of its retail funds under management, produced first or secondquartile investment returns. The performance of funds managed on behalf of segregated institutional fixed income clients also remains very strong, with all actively managed fixed income mandates outperforming their benchmarks over this period.
M&G has pursued business diversification across funds, asset classes and geographies. Its retail funds are now registered for sale in 20 jurisdictions and M&G has operations in 18 countries.
Net retail fund flows in Continental Europe reached a record level of £7.6 billion, a 46 per cent improvement on the previous year. European retail funds under management now total £23.7 billion, up 64 per cent year-on-year, and represent 35 per cent of total retail funds under management, compared with 26 per cent at the end of 2012.
In the UK, M&G’s business has slowed after four consecutive years as the number-one house for net retail sales between 2009 and 2012. M&G remained the number-one firm for gross sales over the calendar year 2013, thereby leading the market for five consecutive years. However, the business did experience modest net outflows of £0.7 billion during the year, largely reflecting the decision in 2012 to slow flows into two market-leading UK corporate bond funds to protect investment performance. Investor appetite for equities strengthened in 2013 as markets recovered, but in many European countries fund buyers continue to have a structural preference for bonds and also favour mixed-asset funds.
In individual annuities, market volumes declined 15 per cent during the year10 against a strong comparative, due to increased activity in 2012 prior to the introduction of Gender Neutral Pricing and the Retail Distribution Review. Our annuity sales sourced from internal vestings decreased 10 per cent as more customers are opting to defer their retirement date, the effect of which is partly offset by higher average fund values. The proportion of our internal customers who chose a Prudential annuity remained in line with 2012. Overall APE sales from individual annuities were 14 per cent lower than in 2012.
In corporate pensions, we continue to focus on securing new members and incremental business from our current portfolio of customers and on additional voluntary contribution plans within the public sector, where we now provide schemes for 69 of the 99 public sector authorities in the UK (2012: 68 schemes).
In the wholesale market, we have continued our selective participation in bulk annuities based on strict return criteria and using our financial strength, superior investment track record, extensive mortality risk assessment experience and servicing capabilities. Bulk annuity APE sales amounted to £28 million (2012: APE sales of £41 million), contributing EEV new business profit of £30 million (2012: £39 million).
During 2013, the UK remitted cash of £355 million to Group (2012: £313 million), exceeding our cash objective of delivering £350 million.
‘The Board proposes to rebase the full-year dividend upwards by 4.38 pence, due to the strong and sustained operational and financial performance of the Group.’
With greater visibility on the potential outcome of Solvency II, we are reporting an economic capital11 surplus of £11.3 billion (2012: £8.8 billion), which is equivalent to an economic solvency ratio of 257 per cent (2012: ratio of 215 per cent). This result is based on an assumption of US equivalence, with no restrictions being placed on the economic value of overseas surplus, and using our internal model, which has not yet been reviewed or approved by the Prudential Regulation Authority.
In July 2013, Prudential plc was listed by the Financial Stability Board as one of nine companies to be designated as a Global Systemically Important Insurer. Prudential is monitoring the development and the potential impact of the framework of policy measures and engaging with the Prudential Regulation Authority on the implication of this designation.
As in previous years, M&G has a strong pipeline of institutional business still to fund. Products designed to help fill the gap left by the decline in long-term commercial bank loans continue to attract considerable interest, while opportunities to lend to medium-sized companies and infrastructure projects are improving. M&G currently manages, on behalf of Prudential and external investors, around £24 billion of direct infrastructure investments and provides around £11 billion of funding to the wider UK economy. As well as providing loans to British business and other organisations, these include investments in social and economic infrastructure, (eg public and private investment in utilities, energy, transport, hospital and schools) and investment in social and residential housing, as mentioned below.
Fund sales, combined with a 15 per cent increase in equity market levels and an 8 per cent rise in bond markets, pushed total funds under management to £244.0 billion at 31 December 2013, 7 per cent higher than at the end of 2012. External client assets rose 13 per cent to £126.0 billion, nearly treble their level at the end of 2008, and accounted for 52 per cent of the total.
M&G has been recognised for its investment performance with numerous awards, including Investment Manager of
It is worth emphasising here again that, although the Board has been able to recommend three upward rebases in the last four years, the Group’s dividend policy remains unchanged. The Board will maintain its focus on delivering a growing dividend from this new higher base, which will continue to be determined after taking into account the Group’s 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.
The global macroeconomic environment is improving, with many signs of recovery in the US and the UK. While the transition to a world with a more normal US monetary policy might create some challenging short-term market and currency volatility in financial markets, a return to global growth and to a more normal interest-rate environment and the robust nature of the long-term secular drivers we benefit from in Asia are all positives for our business in the medium term.
3 Excluding the 2012 one-off gain of £51 million from the sale of the Group’s holding in China Life Insurance Company of Taiwan.
8 Underlying free surplus generated comprises underlying free surplus generated from long-term business (net of investment in new business) and that generated from asset management operations. The 2012 comparative is based on the retrospective application of new and amended accounting standards and excludes the one-off gain of £51 million from the sale of the Group’s holding in China Life Insurance Company of Taiwan.
In the US and the UK, we remain focused on meeting the needs of our customers and continue to implement a prudent strategy, putting value ahead of volume. This allows us to generate significant levels of earnings and cash in both geographies.
Over the last five years, the overall performance of the Group has been transformed, with all four of our businesses now making significant and – in Asia and the US – growing contributions to both earnings and cash generation, from a starting position where the UK was by far the main contributor to earnings and to cash generation. This newly achieved diversification of our cash generation lends both strength and resilience to the Group’s performance over the medium term.
Prudential is a leading international life insurer in Asia, with life and/or asset management operations in 14 markets and serving the emerging middle class families of the region’s powerhouse economies. We have built a high-performing platform with effective multichannel distribution, a product portfolio centred on regular savings and protection, award winning customer services and a well-respected brand.
Prudential UK delivers value for the Group through a relentless focus on the life and pensions needs of the age cohorts where wealth is most heavily concentrated. Our expertise in areas such as longevity, risk management and multi-asset investment, together with our financial strength and highly respected brand, means that the business is strongly positioned to continue pursuing a value-driven strategy built around our core strengths.
M&G has been investing money for individual and institutional clients for over 80 years, and has grown to be one of Europe’s largest retail and institutional fund managers by developing its enduring expertise in active investment. M&G has a convictionled and long-term approach to investment, believing the best returns are delivered for clients through active management by developing a deep understanding of the companies and organisations in whose equities, bonds or property M&G invests.
Prudential Corporation Asia page 20 4m life customers £244bn assets under management
Societies Supporting societies where we operate, through investment in business and infrastructure, tax revenues and community support activities £18.5m total community investment spend
Asset management Prudential helps customers to grow and protect their savings and investments
Generate value for shareholders through fee income from managing growing funds under management
Operate in suitable markets and identify investment opportunities with attractive risk-return profile
We believe that in order to do well for our shareholders we must first do good for our customers. Hence, customers are at the centre of our operating principles.
Our products are designed to provide peace of mind to our customers, whether that be in relation to saving for retirement, or insuring against the risks of illness or death. Satisfied customers are a key driver of our growth as they become our advocates, recommending our products and services to their friends and families.
The UK has an ageing population and a ‘savings gap’, that is unsustainable over the long term. This will drive increasing demand for savings products and retirement income solutions.
Europe is home to the secondlargest retail asset management industry in the world, with over £5.8 trillion of assets. Asset managers with trusted brands and superior investment performance will see increasing demand for their products.
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. We have continuously strengthened our capital position since 2008, in spite of the financial crisis and the challenging macroeconomic environment that followed. Management actions that have been taken over this period include: The sale of our capital-intensive Taiwan agency business in 2009, improving our IGD capital position; The establishment of £1.9 billion of credit default reserves1 in the UK annuity business; and
Our strategy is underpinned by a set of key operating principles.
EEV new business profit3 EEV new business profit represents a measure of the future profitability of all new business sold in the year. Life insurance products are, by their nature, long term and generate profit over a significant number of years. EEV new business profit reflects the value of future profit streams which are not fully captured in the year of sale under IFRS reporting.
EEV new business profit increased by 16 per cent in 2013 compared to 2012, reflecting higher sales and improved margins.
Group IFRS operating profit increased by 17 per cent in 2013 compared to 2012, reflecting strong growth in Asia and the US, which were up 10 per cent and 30 per cent respectively.
Group EEV operating profit in 2013 increased by 29 per cent compared to 2012, driven by higher new business profits and increased contributions from the in-force business.
M easu rin g o u r p erfo rm an ce £3.4bn £4.3bn £4.0bn £5.1bn £5.1bn £688m £935m £1,105m £1,200m £1,341m
3 The EEV basis results have been prepared in accordance with the EEV principles discussed in note 1 of EEV basis supplementary information.
4 Free surplus generation represents ‘underlying free surplus’ based on operating movements, including the general insurance commission earned during the period and excludes market movements, foreign exchange, capital movements, shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs. In addition, following its reclassification as held for sale during 2013, operating results exclude the result of the Japan life insurance business. Comparatives have been retrospectively adjusted on a comparable basis.
9 Underlying free surplus generated comprises underlying free surplus generated from long-term business (net of investment in new business) and that generated from asset management operations. The 2012 comparative is based on the retrospective application of new and amended accounting standards and excludes the one-off gain of £51 million from the sale of the Group’s holdings in China Life Insurance Company of Taiwan.
3 Cumulative Group underlying free surplus generation of at least £10 billion over the four-year period from 2014 to end-2017 2017 objectives
Prudential is 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.
Business unit remittances Remittances measure the cash transferred from the business units to the Group. Cash flows across the Group reflect our aim of achieving a balance between ensuring sufficient net remittances from the businesses to cover the dividend (after corporate costs), and retention of cash for reinvestment in profitable opportunities available to the Group.
We continue to operate with a strong solvency position, with our estimated IGD capital surplus before final dividend covering the capital requirements 2.8 times.
Asia as a percentage of world middle class Asia as a percentage of world population5
B Continued delivery across key value creation metrics: new business profit up 15 per cent, IFRS profits up 16 per cent2, free surplus generation up 18 per cent2
B Increased agency activity, up 8 per cent and improved productivity, up 8 per cent
Asia’s economic transformation has generated material increases in personal wealth and has created significant demand for products that provide solutions to individuals’ financial planning needs.
Favourable economic trends Asia (excluding Japan) is leading the world in terms of Gross Domestic Product growth. Over the next five years it is expected to generate US$5.5 trillion3 of new Gross Domestic Product, more than the US and the other advanced economies combined.
Attractive demographics Economic growth is translating into the rapid increase of the Asian middle class. Between 2009 and 2020 it is estimated that there will be over 1.2 billion people who will have been elevated from rural subsistence to urban lifestyles. Families are getting smaller, life expectancies are lengthening and the incidence of chronic diseases is increasing significantly.
Regulators across the region are generally keen to promote the growth of the life insurance industry, as they appreciate the social utility of providing financial security to individuals and the way insurers channel unproductive cash savings into long-term investments in the economy. However, they are imposing higher standards on the industry and monitoring compliance more actively, with increasing focus on the quality of advice distributors provide and the suitability of the products offered. Although assessments of solvency can vary considerably market by market, there is increasing convergence on risk-based calculations.
Success is defined by metrics that ensure we deliver both volume and value.
Markets with highly attractive economic and demographic characteristics represent the greatest potential for us, which at present we collectively term the ‘sweet spot’. This comprises Indonesia, Hong Kong, Singapore, Malaysia, Vietnam, Thailand and the Philippines. We have strong market positions in all of them, including five countries where we have the leading market share.
We also continue to plan for the longer term by selectively investing in new countries where we see opportunities based on positive demographic trends. In Cambodia our new life business has made a good start and the relationship with our distribution partner ACLEDA Bank is working well. We have also opened a representative office in Myanmar.
Life insurance distribution Prudential Corporation Asia is well positioned in terms of its scale and diversity of distribution. Almost 460,000 agents produce around 60 per cent of sales and the remaining 40 per cent comes mainly from partnership distribution agreements that include access to 15,700 active bank branches throughout the region. At the core of our distribution model is our appreciation of the importance of face-to-face interaction and the need to provide customers with high quality advice.
Our success with agency is driven by a relentless focus on quality and professionalism, starting with the initial recruitment and training. We actively manage agency activity (excluding India, up 33 per cent since 2009) and agency productivity (excluding India, up 13 per cent per annum since 2009).
We have exclusive distribution agreements with a number of banks including Standard Chartered Bank and UOB. In 2013, we also added Thanachart Bank, significantly increasing our distribution reach in Thailand. Success in bancassurance depends on the ability to
u r bu sin esses an d th eir p erfo rm an ce 23 Prudential plc Annual Report 2013
B More than doubled agency size in less than two years
B Improving efficiency – 80 per cent of policies now processed ‘straight through’
B Pioneer in linked policies with riders for flexible savings and protection
Our businesses and their performance continued activate relationships quickly and focus on long-term customer solutions through in-branch, face-to-face advice-based selling.
Customers Prudential Corporation Asia has over 12 million life insurance customers and 19 million in-force policies. We actively manage customer satisfaction levels across multiple indicators, but key statistics are the numbers of customers who keep their policies (our retention rate is 93 per cent), and the number of customers who buy more policies from us (in 2013, 40 per cent of APE sales were from existing customers). This reflects the success of our advice-driven approach and shows that customers appreciate the value of the products we provide.
Asset management Eastspring Investments, Prudential’s asset management business in Asia, manages investments for Prudential’s Asia, UK and US life companies and also has a broad base of third-party retail and institutional clients. It has extended distribution reach to the US and Europe.
Eastspring Investments was awarded the ‘Best Asset Management Company of the Year – South-east Asia’ at The Asset Triple A Investor and Fund Management Awards 2013. Eastspring Investments also received multiple accolades for its investment capabilities, including five fund managers across four markets rated as top 10 ‘2013 Most Astute Investors in Asian currency bonds’ by The Asset Benchmark Research; and the business in Malaysia was named ‘Best Group in Equity’ by ‘The Edge Lipper Malaysia Fund Awards 2014’.
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.
Children and Plan International with two main objectives: to enable communities to better cope with disasters, and to help children receive a better start to their education through the First Read initiative. More than 170,000 people in Cambodia, Indonesia, the Philippines, Thailand and Vietnam are expected to benefit from these programmes over a three-year period.
In November 2013, the Philippines suffered one of the worst disasters in its history, Typhoon Haiyan. Prudential has mobilised resources and committed to provide US$2 million (£1.25 million) to the immediate disaster relief and longer-term community rebuilding efforts.
Notes 1 The comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards. In addition, following its reclassification as held for sale at 31 December 2013, operating results exclude the result of the Japan life insurance business. Comparatives have been retrospectively adjusted on a comparable basis.
4 Source: The emerging middle class in developing countries, Homi Kharas – Brookings Institute (March 2010). Prudential estimates.
5 Source: UN Department of Economic and Social Affairs / Population Division. World Population to 2030. Prudential estimates.
B Takes the dialogue to children aged seven to 12, engages entire family
Prudential’s strategy of ‘build on strength’ in the US is well established and continues to focus on: B Capitalising on the ‘baby-boomer’ retirement opportunities; B Maintaining a balanced product suite throughout the economic cycle; B Streamlining operating platforms, driving further operational efficiencies; and
Regulatory environment The financial services industry continues to deal with a multitude of emerging regulatory initiatives in response to the financial crisis. Many of these broader financial services initiatives specifically impact the insurance industry. Within the insurance industry, we are seeing evolving supervisory structures, new global group supervision standards, focus on the reduction of systemic risk, and amplified focus on enterprise risk management as well as initiatives in the area of financial reporting. While discussions are clearly still under way across many initiatives, this is resulting in significant resources being expended across the industry. Finding the appropriate path through all of the regulatory changes clearly remains a challenge.
Product suite Jackson develops and distributes products that address the retirement needs of our customers through various market cycles. These include variable annuities, fixed annuities, fixed index annuities, and separately managed accounts. As would be expected in the current, historically low interest rate environment, variable annuities continue to outsell fixed rate products. The main attraction of a variable annuity product is the optional lifetime guarantee where customers can access a stream of payments with downside
u r bu sin esses an d th eir p erfo rm an ce 27 Prudential plc Annual Report 2013
While sales of fixed annuities and fixed index annuities have been lower recently in line with the market, they still make up a significant portion of our balance sheet and earnings. Jackson stopped selling life insurance products in 2012; however, we continue to look for opportunistic ‘bolt on’ acquisitions to diversify our earnings and balance sheet risks further. Most recently, the purchase of Reassure America Life Insurance Company (REALIC) has contributed significantly, to shape Jackson’s earnings while helping to diversify Jackson’s overall risk profile. We continue to proactively balance value, volume, capital and balance sheet strength across our suite of product offerings which allows us to compete effectively throughout the economic cycle.
High-quality information technology systems are critical for providing awardwinning customer service. We leverage technology to minimise processing errors and reduce the time required to process new business and commissions. The flexibility of our information technology systems contributes to our ability to manufacture, distribute and service an unbundled product design unique to the industry.
Disciplined approach Jackson operates within a well-defined risk framework aligned with the overall Prudential Group risk appetite. The type and number of products we sell remains balanced with the acceptance of risks we retain. Our conservative and disciplined economic approach to pricing is designed to achieve both adequate returns on our products and sufficient resources to support our hedging programme.
3 Source: US Census Bureau. 4 Based on total annuity sales, LIMRA, US
New business pro�t £7m £223m £257m £108m £231m £29m £274m £39m £267m £30m £230m £365m £260m £313m £297m
£297m £313m £355m * One-o� release of excess surplus £6.4bn £6.8bn £6.1bn £7.0bn £8.0bn
‘Our ability to deliver value to our customers and the resulting market franchise served us well in 2013 where, despite the impact of regulatory changes, retail new business profit was resilient, cash generation increased and our strong capital position was maintained.’
B Provision of market leading with-profits investment returns to our customers.
u r bu sin esses an d th eir p erfo rm an ce 29 Prudential plc Annual Report 2013
Ageing population with 57 per cent of liquid assets held by over-55sPerformance highlights
B Diversified distribution model focusing on intermediaries, Prudential Financial Planning (our direct advice service) and individual customers via mail, email and telephone
The changing regulatory landscape The UK life and pensions industry has undergone considerable regulatory and market change in 2013, with the appointment of two new industry regulatory bodies, the phasing in of auto-enrolment for company pensions and the introduction of the ABI Code on Retirement Choices. The implementation of the recommendations of the Retail Distribution Review has changed the distribution landscape and providers, distributors, advisers and their clients continue to adjust to the new environment. The Financial Conduct Authority’s Thematic Review into the UK annuity market, which ran throughout 2013, concluded in February 2014 with the announcement that it was launching a further study to examine competition and choice in the retirement income market as a whole. We continue to support both regulatory and other initiatives to improve consumer experience and outcomes.
Valuable customer franchise With a pedigree stretching back over more than 165 years the Prudential UK business has built the foundation of the Group’s iconic brand and its cash, capital and credit ratings performance. Our approach in the UK is driven by a focus on providing long-term value to our customers based on our longevity and experience, multi-asset investment capabilities and our financial
Our businesses and their performance continued strength. Our long-standing trusted brand favourably positions us to help risk-averse customers save with confidence and then to translate their accumulated wealth into dependable retirement income, through our range of market leading with-profits and annuity products. Our strong brand franchise has also been central to our successful health and protection associates – PruHealth and PruProtect.
— Continuing to improve our service year-on-year for both customers and intermediaries. Prudential UK’s focus on continuing to deliver excellent customer service was recognised at the 2013 Financial Adviser Service Awards, where we retained our two 5-Star ratings in the Life & Pensions and Investment categories.
We have a competitive advantage in with-profits and we are confident that demand will remain strong as customers continue to seek products which mitigate the volatility of the market, while still providing a steady return over the medium to long term.
We have a well-established individual annuity business, sourced from maturing pension policy customers. The strength of our with-profits proposition also continues to drive good external demand for our Income Choice Annuity, which offers customers relatively attractive returns in the current sustained low interest rate environment, with the potential for income growth.
We provide a comprehensive range of risk managed investments, including with-profits bonds and pensions, which continue to outperform competitors’ propositions. We will continue to develop our with-profits proposition, enhancing the range of investment choices available to policyholders and developing our presence in the Individual Savings Account market.
In addition to our customers, our shareholders also continue to benefit from the steady performance of our with-profits based products and the cash they generate. The chart above shows the outperformance of our with-profit funds when compared to those of our peers. This performance has allowed us to add an estimated £2 billion to with-profits policies in the year. Policyholders will typically see year-on-year increases of between 5 per cent and 8 per cent in accumulating with-profits policy values over the past year.
Broad distribution Prudential has developed a diversified distribution model focusing both on financial advisers and the individual customer through a direct non-advised channel and its own financial planning arm – Prudential Financial Planning. The advent of the Retail Distribution Review saw a significant structural shift away from the traditional routes to market such as bancassurance, which when combined with a 20 per cent reduction in the number of financial advisers operating in the UK8, has resulted in lower access to advice, particularly for customers from lower wealth demographics. We prepared well in anticipation of these changes and are strongly placed to remain a key and active provider in our chosen markets, with our chosen distribution partners.
Our direct advice channel, Prudential Financial Planning, continues to establish its presence, focusing primarily on the financial planning needs of our existing direct customer base. By the end of 2013, two years from launch, adviser numbers reached 196.
Prudential UK & Europe will continue to focus on its core strengths of with-profits and annuities while utilising its highly regarded brand franchise in order to help its consumers transfer their accumulated wealth into dependable retirement income. Notes 1 Awarded in the Investment and Life and
2 Awarded at the 23rd annual Money Marketing Financial Services Awards 2013.
£7.9bn £16.9bn £7.4bn £1.7bn £9.1bn £7.4bn £2.1bn £9.5bn £0.5bn £3.9bn £4.4bn
‘M&G’s objective is to produce superior long-term investment returns for its clients – individual and institutional investors – and its shareholder, the Prudential Group. It is the commercialisation of this investment performance through the acquisition of new fund flows that produces attractive profits and cashflow for the Prudential Group.’
B Innovative investment ideas which meet client needs and a proven ability to convert these ideas into significant fund flows; and
B Diversification by asset class, client type, fund and investment strategy and country.
B 64 per cent growth in European retail funds to £23.7 billion under management
B Recognised for its investment performance with numerous awards, including Real Estate Manager, Fixed Income Manager and Investment Manager of the Year at both the Financial News Awards 2013 and European Pensions Awards 2013
Across its chosen markets, M&G serves the needs of both retail and institutional investors. 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. Institutional clients, such as pension funds and local authorities, invest in multiple ways, from segregated mandates through to pooled funds. They are often attracted to investment strategies originally developed by M&G for Prudential’s long-term insurance funds.
It is still too early to offer a definitive assessment of the impact of the Retail Distribution Review, although we do expect more focus in the market on price. In the past few weeks, platforms have begun to disclose their own service pricing and any special fund fees agreed with asset managers. Those managers with strong brands and a reputation for investment performance will be expected to better withstand any such pressures on asset management fees.
By total UK assets under management, M&G is the second largest retail fund manager3 with a market share of 5.5 per cent. In Europe, where M&G has distributed funds for just over 10 years, it has over £23 billion of assets under management and a market share of 0.4 per cent2.
European investors continue to favour fixed income and mixed asset funds, while in the UK the bond sector saw several periods of net redemptions as savers moved more of their money into equities.
In the institutional market, M&G seeks to leverage investment strategies which have been developed originally for Prudential’s insurance funds in order to attract external business.
Meeting customers’ needs A committed focus on long-term investment returns means that the interests of M&G and its customers are always aligned, whether clients are individual savers, institutional investors or the funds of Prudential’s insurance operations.
Investment expertise M&G’s investment expertise spans all the principal asset classes – equities, fixed income and property– so that we can always offer investment solutions to our clients as market conditions and investor sentiment change.
Fixed income: M&G is one of Europe’s largest fixed income investors. Our fund managers benefit from one of the region’s largest and most experienced in-house credit research teams, whose knowledge covers the full range of fixed income investment, from the management of sovereign debt and corporate bond portfolios, through to leveraged finance, real estate finance, direct lending and infrastructure.
A history of innovation Since launching the UK’s first open-ended fund in 1931, we have brought a succession of new investment strategies to the retail and institutional markets. In combination with this tradition of innovative investment thinking, M&G has a proven ability to convert ideas into significant fund flows. It is these two qualities in combination that make M&G distinctive.
Recent investment success stories include the M&G Optimal Income Fund, one of the first truly global flexible bond funds for retail investors. The fund has attracted £17.3 billion of assets since its launch in 2006. Similarly, the M&G Global Dividend Fund, which invests in companies around the world that consistently grow their dividends, has reached £8.9 billion in five years.
Recent innovations for institutional third-party clients have focused on investment strategies to manage long-term inflation-linked liabilities. M&G successfully runs the M&G Secured Property Income Fund, a portfolio of long-lease properties with in-built inflationrelated rental streams, which draws upon our combined real estate and fixed income investment experience. This Fund, which has total investor commitments of over £2.1 billion, has delivered an annualised return of 7.4 per cent above RPI over the five years to 31 December 2013. It had a record year in 2013 in terms of transaction activity, completing on nine transactions with a total end value of £625 million. Of this amount, £235 million were developments, thus demonstrating the Fund’s ability to take on sizeable development financings – an area in which the banks have reduced their activities. This brings the Fund’s development transaction total to £370 million over the life of the fund to date.
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: B To demonstrate how we generate profits; B To show how we think about capital allocation; and
During 2013, global equity markets have performed well overall, and the gradually improving outlook in most of the major economies has also led to a long-awaited uplift in long-term interest rates. These are positive developments for our business performance, and we are well positioned to benefit from the recovery in investment markets, having proactively defended the economics of our business when markets fell. The favourable impact of appreciating equity markets and rising yields, in combination with our strong execution and risk management, has benefited all of our key operating profit and underlying capital generation metrics in 2013.
Operating profit Long-term business: Long-term business operating profit 2,950 2,573 15 2,563 15
Short-term fluctuations in investment returns: Insurance operations (1,083) 100 Other operations (27) 87
Profit before tax attributable to shareholders 1,635 2,747 Tax charge attributable to shareholders’ returns (289) (584)
Basic earnings per share based on operating profit after tax 90.9 76.9 18 19 Basic earnings per share based on total profit after tax 52.8 85.1 (38) (38)
IFRS operating profit Total IFRS operating profit1 increased by 17 per cent in 2013 to £2,954 million (2012: £2,520 million), driven by higher contributions from both life insurance and asset management. This represents a 23 per cent (2012: 23 per cent) post-tax return on opening IFRS shareholders’ funds. Viewed on a geographical basis, each of our Asia, US and UK regions achieved IFRS operating profit in excess of £1 billion for the first time in the Group’s history.
in an cial O ffi cer’s rep o rt o n o u r 20 13 fi n an cial p erfo rm an ce 37 Prudential plc Annual Report 2013
Shareholder-backed Shareholder-backed Shareholder-backed Policyholder liabilities Net liability flows5 Policyholder liabilities Net liability flows5 Policyholder liabilities Net liability flows
Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver1, 3
In 2013, alongside growing the scale of our life operating profit, we have continued to focus on improving its quality by maintaining our bias in favour of less market-sensitive sources of income, such as insurance margin and fee income, ahead of spread income. Our emphasis on risk products such as health and protection, together with the acquisition of REALIC, a closed book of traditional US life business, has driven 32 per cent growth in our insurance margin, increasing the proportion of earnings that is least sensitive to economic conditions. In addition, fee income is up 29 per cent, reflecting both a modest improvement in annual management charges and a 23 per cent increase in the average account balances that we manage on behalf of our customers. In contrast, the contribution to our profits from spread income has increased modestly by 1 per cent, reflecting subdued customer preference for this type of business in the current low interest rate environment. The fact that a higher proportion of our overall income now comprises insurance margin and fee income represents a healthy evolution in both the quality and the balance of our earnings.
The costs we have incurred in writing new business and maintaining the in-force life businesses have also increased but at a more modest rate than total income, highlighting the advantages of increased scale as we build out our business, while maintaining control of costs.
In the US, long-term business IFRS operating profit was up 29 per cent in 2013 to £1,243 million (2012: £964 million), which includes a contribution of £128 million from REALIC (2012: £67 million). Jackson’s total income increased by 24 per cent to £2,514 million (2012: £2,031 million), outpacing the 19 per cent growth in total expenses net of deferred acquisition cost adjustments totalling £1,271 million (2012: £1,067 million). Fee income has become Jackson’s main source of earnings and has grown by 34 per cent to £1,172 million (2012: £875 million). The uplift in fee income is in line with the 33 per cent growth in separate account assets in the period to £65.7 billion (2012: £49.3 billion), reflecting the benefit of variable annuity premium inflows and the rise in US equity markets since December 2012. Insurance margin at £588 million (2012: £399 million) is now a more significant contributor to Jackson’s earnings following the acquisition of REALIC’s seasoned book of term insurance business. Spread income has increased 4 per cent to £730 million (2012: £702 million). We continue to focus on improving the balance of Jackson’s profits and diversifying its sources of earnings and we are pleased that the earnings from REALIC have been consistent with expectations at the time of the acquisition.
Total asset management (inc. MMF) 11,587 18,281 (37) 148,212 133,502 11
Our Asia asset management business, Eastspring Investments, has also seen the combination of net inflows and more favourable equity market conditions, partially offset by adverse currency movement, contribute to a 7 per cent increase in IFRS operating profit1 to £74 million (2012: £69 million). Higher funds under management resulted in a 10 per cent uplift in revenue, outstripping a 5 per cent increase in expenses, which included ongoing investment to expand the Eastspring Investments platform into new markets.
in an cial O ffi cer’s rep o rt o n o u r 20 13 fi n an cial p erfo rm an ce 39 Prudential plc Annual Report 2013
Underlying free surplus generated from in-force life business and asset management 3,099 2,698 Investment in new business (637) (618)
Underlying free surplus generated 2,462 2,080 Market related movements, timing differences and other movements (807) (612) Net cash remitted by business units (1,341) (1,200)
Of the remaining free surplus generated after reinvestment in new business, totalling £2,462 million (2012: £2,080 million), £1,341 million was remitted from the business units to Group. This cash was used to meet central costs of £315 million (2012: £289 million) and dividend payments of £781 million (2012: £655 million). The total free surplus stock deployed across our life and asset management operations at the end of 2013 was £4,003 million. We retain capital in the businesses both to finance future growth and to enable them to withstand the effect of adverse investment market shocks. As the business grows in size, so does the level of capital needed to meet these objectives, leading to an increase in the absolute value of free surplus held at 31 December 2013 compared to the £3,689 million held at 31 December 2012.
After central costs, there was a net cash inflow before dividend of £1,026 million in 2013, compared to £911 million in 2012. Dividend payments in 2013 were £781 million, up 19 per cent from £655 million in 2012 following the decision to rebase the full year dividend upwards by 4 pence in 2012.
Outside of the normal recurring central cash flow items, the holding company generated £605 million in cash (2012: net payments of £76 million). This £605 million included the proceeds from the issue of US$700 million and £700 million (total £1,124 million) of hybrid debts in 2013. Offsetting these were payments of £397 million for the acquisition of Thanachart Life, and we paid £31 million to capitalise the two new legal entities in Hong Kong in anticipation of the domestication of the Hong Kong branch business. In addition, the holding company incurred £83 million of other cash payments in 2013, including payments in respect of amounts due to the UK tax authorities following the settlement reached in 2010 on historic tax issues, and amounts totalling £30 million paid to the Financial Services Authority over issues related to the terminated AIA transaction.
Effect of changes in economic assumptions 821 (2) Other non-operating items11 82 136
EEV operating profit On an EEV basis, Group operating profit1 based on longer-term investment returns was £5,580 million in 2013, 29 per cent higher than the £4,313 million earned in 2012. This represents a 19 per cent (2012: 16 per cent) return on opening EEV shareholders’ funds. The improvement reflects higher profits on life business, which generated new business profit of £2,843 million (up 16 per cent) and £2,796 million (up 42 per cent) from our growing in-force portfolio, and higher contributions from our asset management businesses.
In the UK, EEV life operating earnings increased by 19 per cent to £1,033 million (2012: £866 million), reflecting both higher in-force and new business profits. Life in-force profit increased to £736 million (2012: £553 million), reflecting improved returns on the opening embedded value (up £65 million to £547 million), and the non-recurrence of £52 million net charged to the annuity business in 2012 following strengthened mortality assumptions. It also includes a contribution of £122 million relating to the benefit arising from the reductions announced in UK tax rates from 23 to 20 per cent, compared with £87 million from the 2 per cent tax rate reduction in 2012. In the UK, new business profit was 5 per cent lower at £297 million (2012: £313 million), partly reflecting a lower level of wholesale business in 2013. In UK retail, new business profit was down slightly at £267 million (2012: £274 million), on 12 per cent lower sales volumes following the market disruption caused by the application of the recommendations of the Retail Distribution Review, offset in part by the positive effects of business mix and pricing activity.
Chief Financial Officer’s report on our 2013 financial performance continued £2,843m EEV new business profit increase on 2012
Short-term fluctuations in investment returns for insurance operations of negative £792 million comprise negative £405 million for Asia, negative £422 million for our US operations and positive £35 million in the UK.
In Asia, negative short-term fluctuations of £405 million principally reflect unrealised movements on bond holdings in the year. In the US, the favourable impact of market movements on the expected level of future fee income from the variable annuity separate accounts is more than offset by the net value movements on derivatives held to manage the Group’s equity and interest rates exposure, to give overall negative fluctuations of £422 million in 2013.
Effect of changes in economic assumptions Improved long-term yields compared to last year have a beneficial impact on the future earnings that we expect to generate from our existing book of business. Once this and other changes in investment market conditions are factored into the EEV calculations they give rise to a profit of £821 million in 2013 (2012: negative £2 million), more than offsetting the effects of short-term fluctuations above.
Capital position, financing and liquidity Capital position We continue to operate with a strong solvency position, while maintaining high levels of liquidity and capital generation. At 31 December 2013 our IGD surplus is estimated at £5.1 billion before deducting the 2013 final dividend, equivalent to available capital covering our capital requirement 2.8 times. This is testament to our capital discipline, the effectiveness of our hedging activities, our low direct Eurozone exposure, the minimal level of credit impairments and the natural offsets in our portfolio of businesses which dampen the effects of movements in interest rates.
in an cial O ffi cer’s rep o rt o n o u r 20 13 fi n an cial p erfo rm an ce 43 Prudential plc Annual Report 2013 the portfolio spread over swaps, compared with 40 per cent at 31 December 2012.
In 2013, Prudential plc was designated by the Financial Stability Board as a global systemically important insurer (G-SII). At the same time, the International Association of Insurance Supervisors (IAIS) announced details of its assessment methodology and proposed policy measures for G-SIIs, covering enhanced supervision, effective resolution and higher loss absorption capacity. We continue to monitor these developments.
On this basis, our economic capital12 surplus is £11.3 billion (2012: £8.8 billion), which is equivalent to an economic solvency ratio of 257 per cent (2012: ratio of 215 per cent). The economic solvency position is shown to be robust to a range of market sensitivities.
Net core structural borrowings of shareholder-financed operations 2,406 430 2,836 2,174 579 2,753
Our financing and liquidity position remained strong throughout the period. Our central cash resources amounted to £2.2 billion at 31 December 2013, up from £1.4 billion at 31 December 2012, and we retain a further £2.1 billion of untapped committed liquidity facilities.
The Group’s core structural borrowings at 31 December 2013 totalled £4,636 million (2012: £3,554 million) on an IFRS basis and comprised £4,211 million (2012: £3,126 million) of debt held by the holding company and £425 million (2012: £428 million) of debt held by the Group’s subsidiaries, Prudential Capital and Jackson.
In addition to its net core structural borrowings of shareholder-financed operations set out above, the Group has access to liquidity via the debt capital markets and has in place an unlimited global commercial paper programme. As at 31 December 2013, we had issued commercial paper under this programme totalling £175 million, US$1,948 million, ¤335 million and AU$8 million.
Prudential’s holding company has access to £2.1 billion of syndicated and bilateral committed revolving credit facilities, provided by 17 major international banks, expiring between 2015 and 2018. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 31 December 2013. The medium-term note 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.
Standard & Poor’s, Moody’s and Fitch. Prudential’s long-term senior debt is rated A+, A2 and A from Standard & Poor’s, Moody’s and Fitch, while short-term ratings are A-1, P-1 and F1 respectively. All ratings on Prudential and its subsidiaries are on stable outlook.
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.
Operating profit based on longer-term investment returns 2,954 2,520 5,580 4,313 Items excluded from operating profit (1,319) 227 84 644
Profit for the year 1,346 2,163 4,358 3,769 Exchange movements, net of related tax (255) (216) (1,077) (469) Unrealised gains and losses on Jackson securities classified as available-for-sale13 (1,034) 387 – –
In addition, fears of a broad economic slowdown returned during the year, particularly in emerging markets, as a consequence of the anticipated end to US quantitative easing. As a result, several developing countries have experienced marked currency depreciation against the major global currencies. While Prudential is well diversified by currency, this effect, combined with the appreciation of UK sterling in 2013 on better economic data, has a translational impact on conversion of local balance sheets to UK sterling.
The consideration for the transaction is THB 18.981 billion (£412 million), of which THB 17.500 billion (£380 million) was settled in cash on completion in May 2013, with a further payment of THB 0.946 billion (£20 million) in July 2013 for adjustments to reflect net asset value as at the completion date. In addition, a deferred payment of THB 0.535 billion (£12 million) is payable 12 months after completion. The THB 18.981 billion (£412 million) includes the amounts attributable to the acquisition of the distribution rights associated with the exclusive 15-year bancassurance partnership agreement with Thanachart Bank. No goodwill arose on this acquisition.
It is worth emphasising here again that although the Board has been able to recommend three upward rebases in the last four years, the Group’s dividend policy remains unchanged. The Board will maintain its focus on delivering a growing dividend from this new higher base, which will continue to be determined after taking into account the Group’s 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.
Notes 1 For IFRS reporting purposes, the Group adopted new and amended accounting standards in 2013. Accordingly, the IFRS elements and EEV basis shareholders’ interest for the comparative results have been adjusted for the retrospective application of this adoption of IFRS accounting policies, as discussed in note A2 of the IFRS financial statements and in note 1 of EEV basis results. In addition, following its reclassification as held for sale during 2013, operating results exclude the result of the Japan life insurance business. Profit before tax continues to include these results. 2012 comparatives have been retrospectively adjusted on a comparable basis.
2 Refer to note B1.1 in IFRS financial statements for the breakdown of other income and expenditure, and other non-operating items.
5 Defined as movements in shareholder-backed policyholder liabilities arising from premiums (net of charges), surrenders/withdrawals, maturities and deaths.
6 Includes Group’s proportionate share in PPM South Africa and the Asian asset management joint ventures.
8 Free surplus generation represents ‘underlying free surplus’ based on operating movements, including the general insurance commission earned during the period and excludes market movements, foreign exchange, capital movements, shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs.
The control procedures and systems established within the Group are designed to manage rather than eliminate the risk of failure to meet business objectives. They can only provide reasonable and not absolute assurance against material misstatement or loss and focus on aligning the levels of risk-taking with the achievement of business objectives.
Group Risk Framework Our Group Risk Framework describes our approach to risk management, including provisions for risk governance arrangements; our appetite and limits for risk exposures; policies for the management of various risk types; risk culture standards; and risk reporting. It is under this framework that the key arrangements and standards for risk management and internal control that support Prudential’s compliance with statutory and regulatory requirements are defined.
Risk governance (Unaudited) 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. The framework is based on the concept of ‘three lines of defence’ comprising risk-taking and management, risk control and oversight and independent assurance.
Primary responsibility for strategy, performance management and risk control lies with the Board, which has established the Group Risk Committee to assist in providing leadership, direction and oversight in respect of the Group’s significant risks, and with the Group Chief Executive and the Chief Executives of each of the Group’s business units.
B We have the capabilities, expertise, processes and controls to manage them.
Group Risk has responsibility for establishing and embedding a capital management and risk oversight framework and culture consistent with our risk appetite that protects and enhances the Group’s embedded and franchise value. Group Compliance provides verification of compliance with regulatory standards and informs the Board, as well as the Group’s management, on key regulatory issues affecting the Group. Group Security is responsible for developing and delivering appropriate security measures with a view to protecting the Group’s staff, physical assets and intellectual property.
Risk appetite and limits (Audited) The extent to which we are willing to take risk in the pursuit of our objective to create shareholder value is defined by a number of risk appetite statements, operationalised through measures such as limits, triggers and indicators. These appetite statements and measures are approved by the Board on recommendation of the Group Risk Committee and are subject to annual review.
We define and monitor aggregate risk limits based on financial and non-financial stresses for our earnings volatility, liquidity and capital requirements as follows: Earnings volatility: the objectives of the limits are to ensure that: a The volatility of earnings is consistent with the expectations of stakeholders; b The Group has adequate earnings (and cash flows) to service debt, expected dividends and to withstand unexpected shocks; and c Earnings (and cash flows) are managed properly across geographies and are consistent with funding strategies.
The two measures used to monitor the volatility of earnings are EEV operating profit and IFRS operating profit, although EEV and IFRS total profits are also considered.
Credit risk The risk of loss for the Group’s business or of adverse change in the financial position, 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).
Our risk appetite framework forms an integral part of our annual business planning cycle. The Group Risk Committee is responsible for reviewing the risks inherent in the Group’s business plan and for providing the Board with input on the risk/reward trade offs implicit therein. This review is supported by the Group Risk function, which uses submissions by business units to calculate the Group’s aggregated position (allowing for diversification effects between business units) relative to the aggregate risk limits.
Risk culture (Unaudited) We work to promote a responsible risk culture in three main ways: a By the leadership and behaviours demonstrated by management; b By building skills and capabilities to support management; and c By including risk management (through the balance of risk with profitability and growth) in the performance evaluation of individuals.
Risk reporting (Unaudited) An annual ‘top-down’ identification of our top risks assesses the risks that have the greatest potential to impact the Group’s operating results and financial condition. The management information received by the Group Risk Committees and the Board is tailored around these risks, and it also covers ongoing developments in other key and emerging risks. A discussion of the key risks, including how they affect our operations and how they are managed, follows below.
In Asia, our shareholder exposure to equities relates to revenue from unit-linked products and, from a capital perspective, to the effect of falling equity markets on its with-profits businesses.
(ii) Interest rate risk (Audited) Long-term rates have declined over recent periods in many markets, falling to historic lows. Products that we write are sensitive to movements in interest rates, and while we have already taken a number of actions to de-risk the in-force business as well as re-price and restructure new business offerings in response to historically low interest rates, persistently low rates may impact policyholders’ savings patterns and behaviour.
Interest rate risk arises in our UK business from the need to match cash flows for annuity payments with those from investments; movements in interest rates may have an impact on profits where durations are not perfectly matched. As a result, we aim to match the duration of assets and liabilities as closely as possible and the position is monitored regularly. The with-profits business is exposed to interest rate risk as a result of underlying guarantees. Such risk is largely borne by the with-profits fund but shareholder support may be required in extremis.
In Asia, exposure to interest rate risk arises from the guarantees of some non-unit-linked investment products. This exposure arises because it may not be possible to hold assets which will provide cash flows to match exactly those relating to policyholder liabilities. While this residual asset/liability mismatch risk can be managed, it cannot be eliminated.
Jackson is exposed to interest rate risk in its fixed, fixed index and variable annuity books. Movements in interest rates can influence the cost of guarantees in such products, in particular the cost of guarantees may increase when interest rates fall. Interest rate risk across the entire business is managed through the use of interest rate swaps and interest rate options.
We retain revenues locally to support the growth of our business, and capital is held in the local currency of the business
ffi cer’s rep o rt o n th e risk s facin g o u r bu sin ess an d o u r cap ital stren gth to meet local regulatory and market requirements, accepting the 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 exposures to foreign exchange risks in currencies outside the local territory. Currency borrowings, swaps and other derivatives are used to manage exposures.
Credit risk (Audited) We invest in fixed income assets in order to match policyholder liabilities and enter into reinsurance and derivative contracts to mitigate various types of risk. As a result, we are exposed to credit and counterparty credit risk across our business. We employ a number of risk management tools to manage credit risk, including limits defined on an issuer/counterparty basis as well as on average credit quality, and collateral arrangements in derivative transactions. The Group Credit Risk Committee oversees credit and counterparty credit risk across the Group.
(i) Debt and loan portfolio (Audited) Our UK business is primarily exposed to credit risk in the shareholder-backed portfolio, where fixed income assets represent 33 per cent or £26.8 billion of our exposure. Credit risk arising from £48.0 billion of fixed income assets is largely borne by the with-profits fund, although shareholder support may be required should the with-profits fund become unable to meet its liabilities. Our UK business is exposed to a lesser extent to £7.2 billion of fixed income assets in our unit-linked business.
The exposures held by the shareholderbacked business and with-profits funds in sovereign debt and bank debt securities at 31 December 2013 are given in Note C3.3(b) of the Group’s IFRS financial statements.
(iii) Counterparty credit risk (Audited) We enter into a variety of exchange traded and over-the-counter derivative financial instruments, including futures, options, forward currency contracts and swaps such as interest rate swaps, inflation swaps, cross-currency swaps, swaptions and credit default swaps.
Our exposure to derivative counterparty and reinsurance counterparty credit risk is managed using an array of risk management tools, including a comprehensive system of limits. Where appropriate, we reduce our exposure, purchase credit protection or make use of additional collateral arrangements to control our levels of counterparty credit risk.
We continue to conduct research into longevity risk using data from our substantial annuity portfolio. The assumptions that we make about future expected levels of mortality are particularly relevant in our UK annuity business. The attractiveness of transferring longevity risk (via reinsurance and other external solutions) is regularly evaluated. These are used as risk management tools where it is appropriate and attractive to do so.
Liquidity risk (Audited) Our parent company has significant internal sources of liquidity which are sufficient to meet all of its expected requirements for the foreseeable future without having to make use of external funding. In aggregate the Group has £2.1 billion of undrawn committed
In November 2013, representatives from the European Parliament, the European Commission and the Council of the European Union reached an agreement on the Omnibus II Directive, which is currently expected to be adopted in early 2014. As a result, Solvency II is now expected to be implemented as of 1 January 2016, although the European Commission and the European Insurance and Occupational Pensions Authority are continuing to develop the detailed rules that will complement the high-level principles of the Solvency II and Omnibus II Directives, which are not currently expected to be finalised until mid-2015.
Over the coming months we will remain in regular contact with the Prudential Regulation Authority as we continue to engage in the ‘pre-application’ stage of the approval process for the internal model. In addition, we are engaged in the Prudential Regulation Authority’s ‘Individual Capital Adequacy Standards Plus’ (ICAS+) regime, which is enabling our UK insurance entities to leverage the developments made in relation to the Solvency II internal model for the purpose of meeting the existing ICAS regime.
Currently there are also a number of other global regulatory developments which could impact the way in which we are supervised in our many jurisdictions. These include the Dodd-Frank Act in the US, the work of the Financial Stability Board on Global Systemically Important Insurers (G-SIIs) and the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) being developed by the International Association of Insurance Supervisors (IAIS).
The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States that, among other reforms to financial
ffi cer’s rep o rt o n th e risk s facin g o u r bu sin ess an d o u r cap ital stren gth services entities, products and markets, may subject financial institutions designated as systemically important to heightened prudential and other requirements intended to prevent or mitigate the impact of future disruptions in the US financial system. The full impact of the Dodd-Frank Act on our businesses is not currently clear. However, many of its provisions have a delayed effectiveness and/or require rule making or other actions by various US regulators over the coming years.
In July 2013, the Financial Stability Board announced the initial list of nine insurance groups that have been designated as G-SIIs. This list included Prudential as well as a number of our competitors. The designation as a G-SII is likely to lead to additional policy measures being applied to the designated group. Based on a policy framework released by the IAIS concurrently with the initial list, these additional policy measures will include enhanced Group-wide supervision. This enhanced supervision is intended to commence immediately and will include the development by July 2014 of a Systemic Risk Management Plan under supervisory oversight and implementation thereafter and by the end of 2014, a Group Recovery and Resolution Plan and Liquidity Risk Management Plan. The G-SII regime also introduces two types of capital requirements, the first, a Basic Capital Requirement, designed to act as a minimum Group capital requirement and the second, a Higher Loss Absorption requirement for conducting nontraditional insurance and non-insurance activities. The IAIS released a consultation paper on the Basic Capital Requirement in December 2013 and we will participate in the field testing of the proposals (expected in the first half of 2014). We are monitoring the development of, and the potential impact of, the framework of policy measures and engaging with the Prudential Regulation Authority on the implications of this designation. The IAIS currently expects to finalise the Basic Capital Requirement and Higher Loss Absorption proposals by November 2014 and the end of 2015 respectively. Implementation of the regime is likely to be phased in over a period of years with the Basic Capital Requirement expected to be introduced between 2015 and 2019. The Higher Loss Absorption requirement will apply from January 2019 to the insurance groups identified as G-SIIs in November 2017.
ComFrame is also being developed by the IAIS to provide common global requirements for the supervision of insurance groups. The framework is designed to develop common principles for supervision and so may increase the focus of regulators in some jurisdictions. It is also currently expected that some prescriptive requirements, including group capital requirements will be included in the framework. A revised draft ComFrame proposal was released for consultation in October 2013. The IAIS will undertake a field testing exercise from 2014 to 2018 to assess the impacts of the quantitative and qualitative requirements proposed under ComFrame. ComFrame is expected to be implemented in 2019.
Risk mitigation and hedging (Unaudited) We manage our actual risk profile against our tolerance of risk. To do this, we maintain risk registers that include details of the risks we have identified and of the controls and mitigating actions we employ in managing them. Any mitigation strategies involving large transactions such as a material derivative transaction involving shareholder business are subject to review at Group level before implementation.
Capital management Regulatory capital (IGD) (Audited) Prudential is 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 borrowings. No diversification benefit is recognised.
Our capital position remains strong. We have continued to place emphasis on maintaining the Group’s financial strength through optimising the balance between writing profitable new business, conserving capital and generating cash. We estimate that our IGD capital surplus is £5.1 billion at 31 December 2013 (before taking into account the 2013 final dividend), with available capital covering our capital requirements 2.8 times. This compares to a capital surplus of £5.1 billion at the end of 2012 (before taking into account the 2012 final dividend), albeit this was calculated on a different basis.
— Subordinated debt issuance of £1.1 billion; offset by: — The impact of the Thanachart acquisition cost, net of IGD contribution, £0.3 billion; — Reduction in respect of Jackson IGD of £1.2 billion, as described below; — Reduction in the shareholders’ interest in future transfers from the UK’s with-profits fund asset allowance (as discussed below) of £0.2 billion; — Final 2012 dividend of £0.5 billion and interim 2013 dividend of £0.3 billion; — External financing costs and other central costs, net of tax, of £0.6 billion; and
The calculation does not fully adjust capital requirements for risk nor does it capture the true economic value of assets. Global regulatory developments, such as Solvency II and ComFrame, aim to ensure that the calculation of regulatory surplus evolves over time into a more meaningful risk-sensitive measure.
(Unaudited) In March 2013, we agreed with the PRA to amend the calculation of the contribution Jackson makes to the Group’s IGD2 surplus. Until then, the contribution of Jackson to the reported IGD was based on an intervention level set at 75 per cent of US Risk Based Capital Company Action Level. Post this change, the contribution of Jackson to IGD surplus now equals the surplus in excess of 250 per cent of Company Action Level. This is more in line with the level at which we have historically reported free surplus, which had been set at 235 per cent of Company Action Level, and which has been raised to 250 per cent in the first half of 2013 to align with IGD. In the absence of an agreed Solvency II approach, we believe that this change makes the IGD surplus a more meaningful measure and one that is more closely aligned with economic reality. The revised IGD surplus calculation has no impact on the way that the US business is managed or regulated locally. The impact of this change, when it was introduced in March 2013, was a reduction in IGD surplus of £1.2 billion.
Stress testing (Unaudited) As at 31 December 2013, stress testing of our IGD capital position to various events has the following results: — An instantaneous 20 per cent fall in equity markets from 31 December 2013 levels would reduce the IGD surplus by £50 million; — A 40 per cent fall in equity markets (comprising an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period) would reduce the IGD surplus by £250 million; — A 100 basis points reduction (subject to a floor of zero) in interest rates would reduce the IGD surplus by £50 million; and
— Credit defaults of 10 times the expected level would reduce IGD surplus by £600 million.
We believe that the results of these stress tests, together with our strong underlying earnings capacity, our established hedging programmes and our additional areas of financial flexibility, demonstrate that we are in a position to withstand significant deterioration in market conditions.
We also use an economic capital assessment to monitor our capital requirements across the Group, allowing for realistic diversification benefits, and continue to maintain a strong position. This assessment provides valuable insights into our risk profile.
Economic capital position (Unaudited) Following provisional agreement on the Solvency II Omnibus II Directive on 13 November 2013, Solvency II is now expected to come into force on 1 January 2016. Therefore our economic capital results are based on outputs from our Solvency II internal model. Although the Solvency II and Omnibus II Directives, together with draft Level 2 ‘Delegated Acts’, provide a viable framework for the calculation of Solvency II results, there remain material areas of uncertainty and in many areas the Group’s methodology and assumptions are subject to review and approval by the Prudential Regulation Authority, the Group’s lead regulator. We do not expect to submit our Solvency II internal model to the Prudential Regulation Authority for approval until 2015, and therefore the economic capital position disclosed below should not be interpreted as output from an approved internal model.
ffi cer’s rep o rt o n th e risk s facin g o u r bu sin ess an d o u r cap ital stren gth information. By disclosing economic capital information at this stage, the directors of Prudential plc are seeking to provide an indication of the potential outcome of Solvency II based on the Group’s current interpretation of the draft rules. An update of the capital position based on the Solvency II internal model will be reported annually going forward, and will evolve to reflect changes to the Solvency II rules, ongoing refinements to our internal model calibrations, and feedback from the Prudential Regulation Authority on Prudential’s approach to implementing this new capital regime. Against this background of uncertainty, it is possible that the final outcome of Solvency II could result in a fall in the Group solvency ratio, relative to the results shown above.
Stress testing At 31 December 2013, stress testing the economic capital position gives the following results and demonstrates the Group’s ability to withstand significant deteriorations in market conditions: — An instantaneous 20 per cent fall in equity markets would reduce surplus by £0.3 billion but increase the economic solvency ratio to 260 per cent; — An instantaneous 40 per cent fall in equity markets would reduce surplus by £1.0 billion but increase the economic solvency ratio to 258 per cent; — A 100 basis points reduction in interest rates (subject to a floor of zero) would reduce surplus by £1.3 billion and reduce the economic solvency ratio to 225 per cent; — A 100 basis points increase in interest rates would increase surplus by £0.8 billion and increase the economic solvency ratio to 284 per cent; and
— A 100 basis points increase in credit spreads would reduce surplus by £1.3 billion and reduce the economic solvency ratio to 254 per cent.
We use a variety of metrics for measuring capital performance and profitability, including traditional accounting metrics and economic returns. Capital allocation decisions are supported by this quantitative analysis, as well as strategic considerations.
The economic framework measures risk adjusted returns on economic capital, a methodology that ensures meaningful comparison across the Group. Capital utilisation, return on capital and new business value creation are measured at the product level as part of the business planning process.
3 The methodology and assumptions used in calculating the economic capital result are set out in note II of Additional unaudited financial information. The economic Solvency ratio is based on the Group’s Solvency II internal model which will be subject to Prudential Regulation Authority review and approval before its formal adoption in 2016. We do not expect to submit our Solvency II internal model to the Prudential Regulation Authority for approval until 2015 and therefore these economic capital disclosures should not be interpreted as outputs from an approved internal model.
Our long-term sustainable approach to business is reinforced by our Group-wide corporate responsibility strategy. While we believe that corporate responsibility is best managed on the ground by those closest to the customer and local stakeholders, our Group approach is underpinned by four global themes: B �Serving�our�customers; B� Valuing�our�people; �B� �Supporting�local�communities;�and
US$2m donated to disaster relief in the Philippines following Typhoon Haiyan £18.5m total community investment spend employees donate through payroll giving across the Group
�— 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
Prudential�Singapore�introduced�the� PRUVantage�iPad�application,�a�customer� engagement�tool�to�help�customers�better� understand�different�investment�concepts� and�what�to�look�for�when�considering� investing.�Prudential�was�the�first�to�launch� this�state-of-the-art�interactive�client� engagement�tool�in�the�market,�allowing� quick�and�easy�access�to�product� information�and�investment�concepts.�Since� its�launch,�the�application�has�been�well� received�by�customers�and�agents.� At�present,�more�than�two-thirds�of�the� agency�force�is�using�this�tool�as�part�of�their� sales�and�customer�engagement�process.
Asset management M&G,�Prudential’s�UK�and�European�asset� management�business,�is�a�long-term,� active�investor�that�takes�seriously�its� responsibility�to�look�after�our�customers’� assets,�often�working�closely�with�the� management�of�the�companies�in�which�it� invests.�Active�voting�is�an�integral�part�of� M&G’s�investment�approach.�We�believe� that�exercising�our�votes�both�adds�value� and�protects�our�interests�as�shareholders.� The�M&G�website�provides�an�overview�of� voting�history:�www.mandg.co.uk/ Corporate/CorporateResponsibility/ CorporateGovernance/Voting�history.jsp
the�leadership�skills�of�the�senior� executive�population�through�the� delivery�of�the�‘top�of�the�class’� Leadership�Development�Series,�and� the�launch�of�the�Jackson�Development� Zone�in�the�US�offers�a�flexible�work� environment�where�university�students� can�gain�real-life�work�experience�and� career�opportunities.�Career� development�centres�within�Prudential�UK� enable�colleagues�to�consider�how�they� want�to�develop�their�careers,�and�M&G� has�continued�to�run�programmes�to� develop�individuals�with�the�potential�to� excel,�supporting�junior�talent�into�wider� and�more�senior�roles.�At�Group�head� office,�all�employees�have�access�to� sessions�that�focus�on�cross-cultural� awareness,�building�effective�partnerships� and�self-motivation,�while�targeted�talent� development�initiatives�aim�to�support�the� development�of�senior�managers�and� future�leaders.
o rp o rate resp o n sib ility rev iew 57 Prudential plc Annual Report 2013
In�the�US,�Jackson�has�opened�a�new� downtown�East�Lansing�office�next�to�the� Michigan�State�University�(MSU)�campus� with�the�aim�of�offering�students�real-life� work�experience�that�could�potentially�lead� to�career�opportunities�after�graduation.�The� Jackson�Development�Zone�has�also�become� the�new�home�for�the�Jackson�National� Community�Fund,�offering�students�and�the� community�opportunities�to�volunteer� alongside�Jackson�employees.�This�will�not� only�benefit�the�business,�but�will�also� encourage�employees,�MSU�students�and� local�community�partners�to�collaborate.�
Education and life skills In�Asia,�the�Prudence�Foundation�was� established�in�2011�as�an�umbrella�to� coordinate�all�community�investment�and� charitable�activity�in�the�region.�The� Foundation�focuses�on�three�key�pillars;� Children,�Education�and�Disaster� Preparedness�and�Relief,�and�under�each�of� these�it�has�regional�flagship�programmes.
At�its�core,�Cha-Ching�consists�of�a� series�of�three-minute�animated�music� videos�featuring�six�band�members� developed�with�Cartoon�Network�and� Dr�Alice�Wilder�to�help�children�learn�the� fundamental�money�management� concepts�of�earn,�save,�spend�and�donate.� The�episodes�air�daily�on�Cartoon� Network,�the�number�one�children’s� channel�in�Asia,�in�seven�countries:�Hong� Kong,�Indonesia,�Malaysia,�the�Philippines,� Singapore,�Thailand�and�Vietnam.
Typhoon�Haiyan,�which�struck�the� Philippines�in�November�2013,�caused� widespread�loss�of�life�as�well�as�destruction� to�homes,�businesses�and�infrastructure.� Rebuilding�costs�are�estimated�to�be� £3.6�billion.�We�have�worked�with�NGOs� in�the�region�to�provide�emergency�relief.� Immediate�donations�were�made�and� mechanisms�established�for�employees� across�the�Group�who�wished�to�contribute,� which�were�matched�by�the�Group.�In�the� longer�term�we�will�look�at�how�Prudential� can�assist�with�rebuilding�initiatives�in�those� areas�affected.�The�Prudence�Foundation� has�pledged�a�total�of�£1.25�million�to�the� relief�and�community-rebuilding�effort�in� the�Philippines.
At�M&G,�employees�have�spent�over� 1,000�hours�actively�involved�in�initiatives� with�community�organisations,�charities� and�schools�in�and�around�Chelmsford�and� London�–�with�a�particular�focus�on�helping� the�disadvantaged�in�those�communities.� It�has�also�maintained�its�sponsorship�of� the�‘Women�in�Investment�Management’� event�targeted�at�female�students,�and� continued�to�support�underprivileged� students�through�the�Social�Mobility� Foundation�in�the�form�of�both�mentoring� and�internships.
Of�these,�almost�5,000�employees� volunteered�through�Prudential’s�flagship� international�programme,�the�Chairman’s� Challenge.�The�programme�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.�It� allows�us�to�support�many�different�charities� with�volunteers�as�well�as�financial�support.� Prudential�donates�£150�to�our�charity� partners�for�every�employee�who�registers� for�the�programme.�Charity�partners�use� this�money�to�seed-fund�charitable�projects� for�Prudential�volunteers.�
Within�the�UK�occupied�properties�the� continued�implementation�of�ISO14001� has�given�us�the�framework�with�which�to� implement�further�initiatives�across�our� portfolio.�These�have�included�the�installation� of�more�efficient�lighting�in�a�number�of�our� buildings,�the�introduction�of�more�efficient� air�conditioning�systems�and�continued� monitoring�of�our�buildings’�running�times� to�maximise�efficiencies.�As�of�June�2013,� all�waste�generated�from�UK�occupied� properties�was�diverted�from�landfill.�
Reducing our impact: property investment portfolio M&G�Real�Estates’�approach�to� Responsible�Property�Investment�(RPI)� enables�it�to�manage�and�respond�to�the� growing�range�of�environmental�and�social� issues�that�can�impact�property�values.�It� also�helps�M&G�to�protect�and�enhance� fund�and�asset�performance�for�its�clients.
The�management�of�environmental� issues�is�an�integral�part�of�managing�the� total�risks�faced�by�our�business.�In�addition� to�meeting�legal�requirements,�our�key� environmental�objectives�are�to: a� �Continuously�improve�environmental� performance; b� �Reduce�emissions�and�waste; c� �Raise�awareness�among�employees; d� �Strive�to�ensure�that�our�suppliers� adhere�to�the�same�environmental� standards;�and e� �Protect�shareholders’�and�other� stakeholders’�interests�by�careful� management�of�our�environmental�impacts.�
Fugitive emissions UK�Occupied 305 0.0039 UK�Investments 575 0.0003 Continental�Europe�Occupied 0 0.0000 Continental�Europe�Investments 0 0.0000 US�Occupied 437 0.0041 North�America�Investments 111 0.0004 Asia�Occupied 0 0.0000 Asia�Investments 0 0.0000
o rp o rate resp o n sib ility rev iew 61 Prudential plc Annual Report 2013
Purchased electricity UK�Occupied 11,212 0.1433 UK�Investments 32,671 0.0145 Continental�Europe�Occupied 2,092 0.1829 Continental�Europe�Investments 256 0.0020 US�Occupied 25,813 0.2424 North�America�Investments 18,120 0.0735 Asia�Occupied 27,305 0.0849 Asia�Investments 15,740 0.1220
Waste generated in operations UK�Occupied 50 0.0006 UK�Investments 522 0.00023 Continental�Europe�Investments 230 0.0001 US�Occupied 116 0.00005 North�America�Investments 41 0.00017 Asia�Investments 47 0.00002
Section 3 64 Board of directors 69 Corporate governance report 69 Board 73 Board committees 74 Audit Committee report 78 Nomination Committee report 80 Risk Committee report and risk governance 83 Remuneration Committee report 83 Corporate governance codes 84 Shareholders 86 Additional disclosures 87 Index to principal directors’ report disclosures
Nationality: French Appointment date: March 2008 Group Chief Executive from October 2009
From September 2005 until March 2011, Paul was a non-executive director of Wm Morrison Supermarkets Plc. During that time, he was the Senior Independent Director, a member of the Nomination Committee and Chairman of the Remuneration Committee, and prior to that he chaired their Audit Committee. 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.
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 is a member of the Securities Institute, a former Chairman of the Association of Investment Companies from 1991 to 1993, and a former member of the Takeover Panel.
Skills and experience Tidjane was the Chief Financial Officer from March 2008 until his appointment as Group Chief Executive in 2009.
B o ard o f d irecto rs 65 Prudential plc Annual Report 2013
Skills and experience Jackie Hunt was appointed as Director and Chief Executive of Prudential UK & Europe on 5 September 2013. Before joining Prudential, Jackie was a Director and Chief Financial Officer of Standard Life from May 2010. She joined Standard Life in January 2009 as Deputy Chief Financial Officer and before this, she held various senior management roles at Aviva, including Chief Financial Officer at Norwich Union. After qualifying as a Chartered Accountant with Deloitte & Touche in South Africa, Jackie worked for PricewaterhouseCoopers and Royal & Sun Alliance before joining Aviva in 2003.
Skills and experience Michael McLintock is the Chief Executive of M&G, a position he held at the time of M&G’s acquisition by Prudential in 1999, having joined M&G in 1992.
Nationality: British Appointment date: October 2010 Committee memberships: Chairman of the Risk Committee (from October 2010), Audit Committee (from November 2010), Nomination Committee (from July 2012)
Nationality: British Appointment date: 1 June 2013 Committee membership: Remuneration Committee (from June 2013)
He is a Deputy Chairman of the Takeover Panel, a non-executive director of UK Financial Investments Limited (since 2009) and Chairman of City of London Investment Trust plc (since 2011). Age 59.
Skills and experience Ann began her career in 1976 with Sun Life of Canada, joining Mercantile & General Reinsurance Group in 1981, where she held a number of management roles rising to Senior Vice President and Controller for life and health and property/casualty businesses in North America in 1995. In 1996, Swiss Re acquired Mercantile & General Reinsurance Group and Ann became Chief Financial Officer of Swiss Re Life & Health, North America. In 1997, she was made Chief Executive Officer of Swiss Re Life & Health, Canada. She moved to London as Chief Financial Officer of Swiss Re Life & Health Division in 1998 and joined the Property & Casualty Business Group, based out of Zurich, as Chief Financial Officer on its establishment in 2001. From 2003 until February 2007, Ann was Chief Financial Officer of the Swiss Re Group.
From its nationalisation in 2008 until January 2009, Ann was Interim Chief Financial Officer and Executive Director of Northern Rock. Ann is a non-executive director of British American Tobacco p.l.c., Rio Tinto plc, Rio Tinto Limited, UBS AG, Arden Holdings Limited, Atrium Underwriting Group Limited and Atrium Underwriters Limited. Age 58.
Skills and experience Alistair was a partner of KPMG from 1986 to 2010. He joined KPMG (then Peat Marwick Mitchell) in 1973 and held a number of senior leadership positions. These included Vice Chairman of UK Financial Services and Head of UK Insurance Practice, International Managing Partner – Global Markets and UK Vice Chairman. Latterly, he served as a Global Vice Chairman of KPMG from 2007 to 2010.
From 1998 to 2007, Kai worked for Standard Chartered PLC where he was a Group Executive Director responsible for Asia Governance and Risk. His responsibilities included developing strategy and business performance across Asia, as well as strategic merger and acquisition activity. Prior to that, he spent 19 years at Bank of America and from 1990 was based in Asia as Group Executive Vice President and Head of the Asia Wholesale Banking Group. From 2004 to 2007, he was a non-executive director at Tate & Lyle plc and at Visa International, where he served on the Asia Pacific Board.
Barry is a member of the Board of Directors of the International Insurance Society. He is also a member of the Board of Visitors of Lipscomb University, a member of the Board of Managers of the Hong Kong International School and Chairman of Save the Children (HK) Ltd. Age 56.
Skills and experience Mike Wells is President and CEO of Jackson National Life Insurance Company (‘Jackson’). Mike has served in a variety of senior and strategic positions at Jackson over the last 15 years, including President of Jackson National Life Distributors. Mike has been Vice Chairman and Chief Operating Officer of Jackson for the last nine years. During this period he has led the development of Jackson’s variable annuity business and has been responsible for IT, strategy, operations, communications, distributions, Curian and the retail broker dealers. Age 53.
Skills and experience Kai Nargolwala was the nonexecutive Chairman of Credit Suisse Asia Pacific until December 2011, having joined Credit Suisse in 2008 as a member of the Executive Board and CEO of the Asia Pacific region.
Nationality: British Appointment date: May 2006 Committee memberships: Chairman of the Remuneration Committee (from June 2011), Risk Committee (from November 2010), Nomination Committee (from June 2011)
Skills and experience Alice Schroeder began her career as a qualified accountant at Ernst & Young in 1980 where she worked for 11 years before leaving to join the Financial Accounting Standards Board as a manager. From September 1993, she worked at various investment banks leading teams of analysts specialising in property-casualty insurance before joining Morgan Stanley, where she became a Managing Director in 2001, heading the Global Insurance Equity Research team. In May 2003, Alice became a senior adviser at Morgan Stanley, leaving in November 2009. She is a highly respected analyst and the author of the official biography of Warren Buffett, Chairman and CEO of Berkshire Hathaway.
In performing its duties, the Board has access to the services of the Group Company Secretary who advises on corporate governance matters, Board procedures and compliance with the applicable rules and regulations. Directors have the right to seek independent professional advice at the Group’s expense and copies of such advice are circulated to other directors where applicable and appropriate.
Non-executive directors The non-executive directors are independent of management, bringing effective and constructive challenge to the deliberations of the Board.
Dear shareholder Good governance is central to how we do business at Prudential. The Board ensures that our governance policies, structures and processes are strong and appropriate, and play a key part in supporting the growth of the business.
A vital part of good governance is transparency, and we are committed to reporting on our governance as clearly as possible, ensuring that it remains the best available, and continues to make a strong contribution to the long-term success of the Group.
Committee membership Philip Remnant and Alice Schroeder were appointed to the Audit Committee following the regular review of membership for the principal committees directors and the Group Chief Executive is evaluated by the Chairman in individual meetings. Philip Remnant, the Senior Independent Director, led the nonexecutive directors in a performance evaluation of the Chairman.
Diversity The Group seeks, through its diversity policy, to encourage the recruitment and retention of talented individuals from a diverse range of backgrounds. Furthermore, the Board remains committed to inclusion in all its forms and believes that leading companies seek out, and not simply tolerate, diversity.
The inclusion of women in the recruitment process extends to the Board and is an important diversity consideration during searches for new Board members. Prudential embraces the proposition that more women on boards would be advantageous to companies, as well as to society at large. The Group remains duty bound to recruit the best available talent, and although the Board does not endorse quotas, it does commit to having an increasing representation of women in senior positions in the Group and on the Board.
Group governance The Board is responsible for establishing a system of internal control and for reviewing its effectiveness. To achieve this, the Board has established frameworks for internal governance, risk and corporate responsibility. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
In line with the Turnbull 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.
Group risk framework: Describes the Group’s approach to risk management and the key risk arrangements and standards for risk management and internal control which support compliance with the Group’s internal, statutory and regulatory requirements. The strategic report provides further detail on Prudential’s risk appetite and exposures on pages 46 to 53 and corporate responsibility activities on pages 54 to 61. Further details on the procedures for the management of risk and the systems of internal control operated by the Group are given in the section on risk governance on page 81.
Corporate responsibility framework: Provides an overview of the Group-wide philosophy and approach to corporate responsibility, supports the Group’s commercial focus and the increasing challenges faced including changes in stakeholder expectations. A key element is the Group Code of Business Conduct which sets out the ethical standards the Board requires of itself, employees, agents and others working on behalf of the Group, in their dealings with employees, customers, shareholders, suppliers and competitors in the wider community and in respect of the environment.
Throughout their period in office, directors are regularly updated on the Group’s businesses and the regulatory and industry-specific environments in which it operates, as well as on their legal and other duties and obligations as directors, where appropriate. The scope of these updates is reviewed in line with the requirements of the business and can be in the form of written reports to the Board or presentations by senior executives or external advisers where appropriate. In order to enhance their knowledge and effectiveness throughout their term in office, non-executive directors serving on key committees are updated regularly on matters specific to the relevant committee and receive presentations from senior executives on topics of interest to them.
Non-executive directors also received updates and briefings relevant to their duties as directors of a company listed on the Hong Kong Stock Exchange.
Terms of appointment for non-executive directors Non-executive directors are appointed on the understanding that they serve an initial term of three years. Subject to review by the Nomination Committee, it would be
expected that they would serve a second term of three years. In both instances, non-executive directors remain subject to annual election at the Annual General Meeting. After six years of service, non-executive directors may be appointed for a further year, up to a maximum of three years, subject to rigorous annual review by the Nomination Committee and annual election at the Annual General Meeting. Good governance does not support the practice of serving longer than nine years on the Board as a non-executive director.
The terms and conditions of all directors’ appointments are available for inspection at the Company’s registered office during normal business hours and at the Annual General Meeting.
Independence The independence of the non-executive directors is determined with reference to the UK and HK Codes. Prudential is required to affirm annually the independence of all non-executive directors under the Hong Kong Listing Rules and also the independence of its Audit Committee members under the Sarbanes-Oxley legislation. The Board has appropriate processes in place to manage any potential conflicts of interest.
Alistair Johnston was a partner in the Group’s auditor, KPMG, from 1986 to 2010. However, he did not audit the Prudential Group and he no longer has any financial or other interest in KPMG. The Board does not consider that this former relationship with KPMG affects Alistair’s status as an independent director of Prudential.
The Nomination Committee, or the Board where appropriate, evaluates and approves each such situation individually, where applicable, and the Nomination Committee annually reviews such declarations prior to the publication of the Annual Report.
In line with the UK Code, executive directors would not be expected to hold more than one non-executive directorship, nor the chairmanship, of a FTSE 100 company. Some of our executive directors hold directorships or trustee positions of unquoted companies or institutions. Details of any fees retained are included on page 118.
Directors’ indemnities and protections Suitable insurance cover is in place in respect of legal action against directors and senior managers of companies within the Prudential Group. Protection for directors, and certain senior managers, of companies within the Group, against personal financial exposure which may be incurred in their capacity as such, is also provided. These include qualifying third-party indemnity provisions (as defined by the Companies Act 2006) for the benefit of directors of Prudential plc and other such persons including, where applicable, in their capacity as directors of other companies within the Group. These indemnities were in force during 2013 and remain in force.
Meetings The Board met on 10 occasions during the year, which included one meeting held at the Group’s overseas operations in Thailand. These meetings enable the directors to develop a fuller understanding of the Group’s operations and to meet with the senior management.
Where a director was unable to attend Board meetings, their views were canvassed by the Chairman prior to the meeting.
Powers of the Board The Board may exercise all powers conferred on it by the Company’s Articles of Association and the Companies Act 2006. This includes the powers of the Company to borrow money and to mortgage or charge any of its assets (subject to the limitations set out in the Companies Act 2006 and the Company’s Articles of Association) and to give a guarantee, security or indemnity in respect of a debt or other obligation of the Company.
The committee chairmen report to the Board on matters of significance after each meeting. Each Board committee has written terms of reference which were reviewed during the course of the year to ensure that these remained in line with best practice and that each committee continued to have suitable delegated authority to fulfil their responsibilities without creating duplication of activities. Copies of the updated terms of reference can be found on the Company’s website.
The committees have access to the services of the Group Company Secretary and may seek external professional advice at the Company’s expense.
A report on the activities undertaken by each committee during the course of the year is set out on pages 74 to 83.
Notes 1 Rob Devey was eligible to attend eight meetings during the year, up until his resignation on 5 September 2013. 2 Jackie Hunt was eligible to attend three meetings during the year, from the date of her appointment. 3 Keki Dadiseth was eligible to attend four meeting during the year, up until his resignation on 1 May 2013. 4 Michael Garrett was eligible to attend eight meetings during the year, up until his resignation on 5 Anthony Nightingale was eligible to attend six meetings during the year, from the date of his appointment. 6 Alice Schroeder was eligible to attend six meetings during the year, from the date of her appointment.
‘Ensuring that the new reporting requirements were suitably implemented was a key focus for the Committee during 2013.’
Note 1 Alice Schroeder was eligible to attend six meetings during the year, from the date of her appointment.
The Board determined that Ann Godbehere, the Committee Chairman, has recent and relevant financial experience for the purposes of the UK Code and the Hong Kong Listing Rules. In March 2013, the Board designated Ann Godbehere as its Audit Committee financial expert for the purposes of the Sarbanes-Oxley Act. This will be reviewed during 2014 in conjunction with the publication of Form 20-F.
The principal responsibilities of the Committee are to: — Monitor the integrity of the financial statements, including the review of half and full-year results, the Annual Report and accounts and other significant financial announcements and review the critical accounting policies, going concern assumption and key judgemental areas contained therein; — Consider and advise the Board in meeting its obligation to report that the Annual Report is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy; — Monitor the framework and effectiveness of the Group’s systems of internal control, including the Turnbull compliance statement and Sarbanes-Oxley procedures; — Monitor auditor independence and the external auditor’s plans and audit strategy, the effectiveness of the external audit process, the external auditor’s qualifications, expertise and resources, and make recommendations to the Board for the re-appointment of the external auditor; — Approve the internal audit plan and resources, and monitor the audit framework and effectiveness of the internal audit function; — Monitor the effectiveness of compliance processes and controls, and performance against the group compliance plan; — Review the anti-money laundering procedures in place, as well as the review of procedures operated for handling allegations from whistleblowers; and
The Chairman of the Board, the Group Chief Executive, the Chief Financial Officer, the Group Chief Risk Officer, the Group General Counsel and head of Group-wide Internal Audit, as well as other senior staff from the Group Finance, Internal Audit, Risk, Compliance and Security functions attended the meetings by invitation to contribute to the discussions relating to their respective areas of expertise. The lead and other partners of the external auditor also attended the meetings.
u d it C o m m ittee rep o rt throughout the accounting period and whether management had made appropriate estimates and judgements over recognition, measurement and presentation of the results. The Committee also focused on material transactions, clarity of disclosures, significant audit adjustments, the going concern assumptions, compliance with accounting standards and obligations under applicable laws, regulations and governance codes. The Committee further considered changes to the Annual Report requirements, including the introduction of the new strategic report, additional disclosures of the Audit Committee report and the fair, balanced and understandable requirement under the UK Code, providing advice to the Board in respect of this last requirement. In preparing the Annual Report, the Group has taken the opportunity to reassess the structure of the narrative sections and the Committee’s work in this area included consideration and discussions with management so that the narrative sections provide an enhanced description of the Company’s business and results.
Accounting policy changes on consolidated investment holdings (IFRS 10), accounting for joint ventures and associated undertakings (IFRS 11 and IFRS 12), fair value measurement (IFRS 13) and accounting for the Group’s defined benefit pension schemes (revised IAS 19) were also considered. In addition, the Committee considered the impact that the acquisitions of REALIC and Thanachart Life would have on the financial statements.
The Committee received detailed papers from management regarding Group capital, Group liquidity, subsidiary capital and subsidiary 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.
As part of its assessment of the explanation of performance, the Committee considered judgemental aspects of the Group’s reporting of non GAAP metrics and in relation to the Group’s supplementary reporting on the European Embedded Value (EEV) basis, specifically: — The appropriateness of the economic assumptions underpinning the projected rates of return and risk discount rates; — The appropriateness of changes to EEV operating assumptions and the level of operating experience variances; and
— Disclosures to explain the proposed change from 2014 so that the EEV results will be prepared on a post-tax only basis.
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, accounting presentation and disclosure.
For all of the above areas, the Committee received input from management and the external auditor prior to reaching its conclusions.
Confidential reporting The Committee is responsible for reviewing the Group’s whistle-blowing procedures and received, as a standing item, reports on concerns raised through these channels, as well as any management action taken in response.
The Confidential Helpline Policy (the ‘Policy’) is kept under regular review by the Committee and is maintained as part of the Group Governance Manual. No material changes to the Policy have been made during the course of 2013, although it has been updated to reflect the latest guidance issued by the Institute of Business Ethics.
The Committee also met with the head of Group Security, who is responsible for the Policy, without the presence of management, in respect of its responsibilities for reviewing whistleblowing procedures and any concerns regarding such issues.
In 2013, the standard terms of reference for the business unit audit committees were updated in line with revised provisions included in the Committee’s terms of reference. These will be adopted in 2014 by the business unit audit committees, with minor variations, to address local requirements or the particular requirements of the business.
Effectiveness of the business unit audit committees An annual assessment of the business unit audit committees was carried out by Group-wide Internal Audit in order to ensure that these committees continued to function effectively and provide appropriate support to enable the Committee to fulfil its responsibilities.
The results of the assessment concluded that the business unit audit committees continued to operate effectively and the Committee considered a report on the findings at its meeting in December.
Pursuant to the requirements of Section 404 of the Sarbanes-Oxley Act, the Group undertakes an annual assessment of the effectiveness of internal control over financial reporting.
Group-wide Internal Audit Group-wide Internal Audit is a fundamental function which supports the Committee in meeting its legal and regulatory responsibilities and also in complying with provisions of the UK and HK Codes. The independent assurance provided by the function formed a key part of the Committee’s deliberations on the systems of internal control and risk management.
Each of the Group’s business units has an internal audit team, the heads of which report to the Head of Group-wide Internal Audit. Internal audit resources, plans, budgets and its work are overseen by both the Committee and the relevant business unit audit committee. The Head of Groupwide Internal Audit reports functionally to the Committee and for management purposes to the Group Chief Executive.
During the year, the Committee considered the following matters: Effective Internal Audit in the Financial Services Sector In July 2013, the Chartered Institute of Internal Auditors (CIIA) issued recommendations on Effective Internal Audit in the Financial Services Sector. Group-wide Internal Audit benchmarked their current structure and practices against the guidelines and the results of the benchmarking were also externally quality assured. While largely compliant, a programme of enhancement is scheduled to be completed to deliver full compliance in 2014. Aligned with the CIIA guidance for effective Internal Audit in the Financial Services Sector, the revised Charter of Group-wide Internal Audit has been published on the Company’s website. In addition, the Committee has formally assessed that Group-wide Internal Audit has sufficient resources to discharge its mandate.
Internal auditor performance In addition to periodic external effectiveness reviews (such as that conducted by PwC in 2012), the Committee regularly assesses the performance and effectiveness of the internal audit function, and did so during the course of the 2013. The assessment was performed by Group-wide Internal Audit Quality Assurance and conducted in accordance with the CIIA’s professional practice standards. For 2013, the assessment concluded that Group-wide Internal Audit complies with the requirements of internal audit policies, procedures and practices, and standards in all material respects and is aligned with its mandated objectives. As such, the Committee determined that Group-wide Internal Audit continued to operate effectively.
External audit The Committee is responsible for overseeing the relationship with the external auditor, KPMG Audit Plc, monitoring its performance, objectivity and independence, to ensure that its coverage is focused and that suitable overlap with the work of internal audit is achieved. As part of its remit, the Committee met with the external auditor without the presence of management on two occasions during the year.
The Committee also reviewed the external audit strategy and received reports from the auditor on its own policies and procedures regarding independence and quality control, including an annual confirmation of its independence in line with industry standards.
Re-appointment of auditor The Group operates a policy under which at least once every five years a formal review is undertaken by the Committee to assess whether the external audit should be re-tendered. The external audit was last put out to competitive tender in 1999 when the present auditor was appointed. Since 2005, the Committee has annually considered the need to re-tender the external audit service and it again considered this in February 2014, concluding that there was nothing in the performance of the auditor which required a change.
The Committee acknowledges the provisions contained in the UK Code in respect of audit tendering, along with the current proposals of the UK Competition Commission and the European Union. The Committee intends to comply with these changes and will finalise its decision on the timeline for completing a tender of the external audit service when legislative requirements become final.
Following its review of the external auditor’s effectiveness and independence, the Committee has recommended to the Board that KPMG be re-appointed as auditor of the Company. Due to a legal reorganisation within KPMG, the specific entity being appointed for 2014 will be KPMG LLP rather than KPMG Audit Plc as currently. The Board has, therefore, decided to put KPMG Audit Plc’s parent entity, KPMG LLP, forward to be appointed as auditor and a resolution concerning their appointment will be put to a shareholder vote at the Annual General Meeting on 15 May 2014.
u d it C o m m ittee rep o rt
Dialogue with the regulator Ongoing dialogue with the Prudential Regulatory Authority (PRA) was maintained through the usual cycle of close and continuous meetings with the Committee Chairman and relevant members of management. Discussions focussed on the Committee’s responsibilities on matters of financial reporting, audit and compliance.
Role and responsibilities of the Committee The purpose of the Committee is to assist the Board in ensuring that it maintains the appropriate balance of skills, knowledge and diversity to support the Group’s strategic objectives, and that a clear and transparent appointment process for directors is in place. The principal responsibilities of the Committee are to: — Review the size, structure and composition of the Board, including the skills, knowledge, experience and diversity of Board members, and make recommendations to the Board with regard to changes; — Identify and nominate candidates for appointment to the Board, based on merit and against objective criteria; — Make recommendations to the membership of the Audit, Risk, Remuneration and Nomination Committees in consultation with the chairmen of those committees; — Consider and, where necessary, authorise any actual or potential situational conflicts arising out of a proposed new appointment, changes in the circumstances of an existing appointment or those of a director’s connected person; and
The Group Chief Executive is closely involved in the work of the Committee and was invited to attend and contribute to meetings. The Group HR Director was also invited to attend meetings.
How the Committee discharged its responsibilities in 2013 During the year, the Committee undertook the following work: Board composition The Committee reviewed the composition of the Board and, in particular, the non-executive directors, to ensure that the balance of skills, experience and knowledge continued to be appropriate for the Group’s business to meet the strategic objectives. The Committee also considered whether any additional skills and experience would be needed, either to complement those already on the Board, or to plan for filling vacancies due to the future retirement of non-executive directors.
Appointment of directors Two new non-executive directors and one executive director were appointed during the course of the year.
The Committee initiated the recruitment process for two non-executive directors to replace Keki Dadiseth and Michael Garrett who retired in 2013, and made recommendations to the Board on the appointment of Alice Schroeder and Anthony Nightingale (details of the process are set out in the box opposite). Korn Ferry Whitehead Mann and Ridgeway Partners were appointed to assist in the searches leading to the appointment of Alice Schroeder and Anthony Nightingale respectively. Neither of the search consultancies used in the process undertook any other significant work for Prudential.
The Committee evaluated the skills and knowledge required in order to ensure the Board was appropriately balanced to meet the needs of the Group and agreed role specifications setting out the key attributes expected in the successful candidates.
The search consultancies shared with the Nomination Committee a long list of potential non-executive directors. The Committee reviewed the potential candidates provided by Korn Ferry Whitehead Mann and Ridgeway Partners, agreeing a shortlist of individuals meeting the key skills, knowledge and personal attributes, as identified by the Committee. The Committee members and Group Chief Executive then met with the identified candidates, further evaluating them against the needs of the business and the Board.
The Committee gave consideration to the external commitments of the candidates to ensure they could dedicate sufficient time to meet the demands of the role and that they were suitably independent of the Group to fulfil the role of a non-executive director. On completion of the process, the Committee agreed to recommend Alice Schroeder and Anthony Nightingale to the Board for appointment.
‘The Committee continued to strengthen the Group risk framework, taking a more universal approach to the Group’s risks that went beyond the management of financial risk.’
Role and responsibilities of the Committee The Committee is responsible for assisting the Board in providing leadership, direction and oversight of the Group’s overall risk appetite, risk tolerance and risk management framework. The principal responsibilities of the Committee are to: — Review the Group’s risk, capital and liquidity management framework, as well as the Group’s risk appetite, its risk policies and standards, including the parameters used and methodologies and processes adopted for identifying and assessing risks; — Review the material and emerging risk exposures of the Group, including market, credit, insurance, operational, liquidity and economic and regulatory capital risks, as well as regulatory and compliance matters; — Oversee the Group’s processes and policies for determining risk tolerance and reviewing management’s measurement and effectiveness of the Group’s risk tolerance levels; — Receive and review Group-wide Internal Audit reports on the risk management function; — Assist the Board in reviewing the risks inherent in the business plans; and
— Provide qualitative and quantitative advice to the Remuneration Committee on risk weightings applied to performance objectives incorporated in executive remuneration, and evaluate whether the remuneration approach for senior executives was positioned within the Group’s overall risk appetite framework.
Meetings The Committee met on five occasions during the year and continued to maintain close links with the Audit Committee. The Chairman of the Audit Committee is a member of the Risk Committee and the Committee Chairman is a member of the Audit Committee. This cross-membership facilitates an effective linkage between both committees, ensuring that any risk assurance relevant to financial reporting is referred to that Committee.
How the Committee discharged its responsibilities in 2013 During the year, the Committee undertook the following work: Group risk framework The Committee continued its granular review of the Group risk framework, expanding and strengthening it in respect of the Group’s significant investment portfolios and taking account of Prudential’s wider stakeholders.
The Committee reviewed the adequacy of capital levels in respect of the principal risks to the Group, including the levels of capital buffers for unforeseen risks.
Regulatory and economic capital models The development and finalisation of the model used in the preparation of the Group’s Pillar I disclosures required under Solvency II were areas of focus for the Committee. The appropriateness of the underlying model and the assumptions forming the basis of the Economic Capital Model were further key
Stress testing Alongside the Committee’s regular review of the Reverse Stress Test Exercise, Prudential also participated in the industry-wide stress testing carried out by the PRA.
The Committee considered the impact of the additional testing on the operation of the business units, approving the proposed timeline for the coordinated exercise and governance process for signing off the results.
The meetings were also used to better understand the PRA’s areas of focus and how these might impact the responsibilities of the Committee.
Risk objectives In keeping with this philosophy, the Group has five objectives for risk and capital management which are as follows: 1 Framework Design, implement and maintain a capital management and risk oversight framework, which is consistent with the Group’s risk appetite and philosophy towards risk-taking; 2 Monitoring Establish a ‘no surprises’ risk management culture by identifying the risk landscape, assessing and monitoring risk exposures and understanding change drivers; 3 Control Implement suitable risk mitigation strategies and remedial actions where exposures are deemed inappropriate, and manage the response to potentially extreme events; 4 Communication Effectively communicate the Group’s risk, capital and profitability position to both internal and external stakeholders; and 5 Culture Foster a risk management culture, providing quality assurance and facilitating the sharing of best practice.
Key Board-level committees Executive personnel Exec/Management committees GHO functions Direct reporting line
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 GCC Group Compliance Committee STOC Solvency II Technical Oversight Committee
Management 1st line of defence 2nd line of defence 3rd line of defence
The Group-level risk committees are supported by the Group Chief Risk Officer, with functional oversight provided by Group Security, Group Compliance and Group Risk. Group Security is responsible for developing and delivering appropriate security measures, with a view to protecting the Group’s staff, physical assets and intellectual property. Group Compliance provides verification of compliance with regulatory standards and informs the Board, as well as management, on key regulatory issues affecting the Group. Group Risk has responsibility for establishing and embedding a capital management and risk oversight framework and culture consistent with Prudential’s risk appetite, that protects and enhances the Group’s embedded and franchise value.
Group-wide Internal Audit (GwIA) The third line of defence comprises the Group-wide Internal Audit function, which provides independent and objective assurance to the Board, Audit and Risk Committees and the Group Executive Committee, to protect the assets, sustainability and reputation of the organisation.
Group Credit Risk Committee (GCRC) Purpose: Reviews the Group’s investment and counterparty credit risk positions.
Responsibility for these risks has moved to the GORC from January 2014.
The Group’s capital position and overall position against risk limits are reviewed regularly by the Group Executive Risk Committee, the Committee and the Board. Key economic capital metrics, as well as risk-adjusted profitability information, are included in the business plans which are reviewed by the Group Executive Risk Committee, the Committee and the Board.
Routine internal reporting by the business units varies according to the nature of the business, with each business unit responsible for ensuring that its risk reporting framework meets both the needs of the respective business unit and the standards set by the Group Risk function. Clear escalation criteria and processes are in place for the timely reporting of risks and incidents by business units to the various Group-level risk committees and, where appropriate, the Board. Each business unit reviews the risks inherent in their business operations as part of the annual preparation of their business plan, and subsequently, these opportunities and risks are regularly reviewed against business objectives with Group Risk. The impact of large transactions or divergences from the agreed business plan are also reviewed and reported by Group Risk.
Remuneration Committee The report on the responsibilities and activities of the Remuneration Committee can be found in the directors’ remuneration report, which is set out on pages 89 to 123.
In line with its listings on the London and Hong Kong stock exchanges, Prudential applies the principles of the UK and HK codes.
The principles of the UK and HK Codes have been applied as set out earlier in the corporate governance report and also in the directors’ remuneration report, which can be found on pages 89 to 123. The UK Code can be viewed on the Financial Reporting Council’s website, with the HK Code available on the website of the Hong Kong Stock Exchange.
The latest analysts’ and brokers’ reports are circulated regularly to Board members. The Chairman and the non-executive directors also provided feedback to the Board on topics raised with them by major shareholders. Major shareholders and debt investors are welcome to meet with newly appointed directors, or any of the directors generally.
Prudential also maintains secondary listings on the New York Stock Exchange in the form of American Depositary Receipts which are referenced to ordinary shares on the main UK register, under a depositary agreement with J.P. Morgan, and on the Singapore Stock Exchange in the form of interests in shares, which are referenced to the shares on the Hong Kong register under a depository agreement with the Central Depository (Pte) Limited.
Rights and obligations The rights and obligations attaching to the Company’s shares are set out in full in the Articles of Association. There are currently no voting restrictions on the ordinary shares, all of which are fully paid, and each share carries one vote on a poll. If votes are cast on a show of hands, each shareholder present in person or by proxy, or in the case of a corporation, each of its duly authorised corporate representatives, has one vote, except that if a proxy is appointed by more than one member, the proxy has one vote for and one vote against if instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution.
Rights to dividends under the various schemes are set out in the directors’ remuneration policy section of the remuneration report.
All directors are required to hold a number of shares under guidelines approved by the Board, which they would also be expected to retain as described on page 100 of the directors’ remuneration report.
Significant shareholdings The following notifications have been disclosed under the FCA’s Disclosure and Transparency Rules in respect of notifiable interests exceeding 3 per cent in the voting rights of the issued share capital.
No further notifications have been received between the end of 2013 and the date of this report.
Details of shares issued during 2013 and 2012 are given in Note C10 on page 257.
Model code for securities transactions by directors Prudential confirms that it has adopted a code of conduct regarding securities transactions by directors on terms no less exacting than required by Appendix 10 to the Hong Kong Listing Rules, and that the directors have complied with this code of conduct throughout the period.
— Review and consider and, where applicable, follow up on matters raised by other components of the disclosure process. These may include, to the extent they are relevant to the disclosure process, any matters to be raised with the Audit Committee, the internal auditors or the external auditor on the Company’s internal controls.
In addition, the Disclosure Committee evaluates whether or not a particular matter requires disclosure to the market, taking into account relevant regulations, and reviews all forward-looking statements.
The following additional disclosures are made in compliance with the Companies Act 2006, the Disclosure and Transparency Rules issued by the FCA and the UK and HK Codes.
Financial reporting 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 127 to 289 and the supplementary information on pages 296 to 330. 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 291 and 332.
Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the Group. The criteria applied in the preparation of the financial statements are set out in the statement of directors’ responsibilities on pages 290 and 331.
Company law also requires the Board to approve the strategic report. In addition, the UK Code requires the directors’ statement to state that they consider the annual report and financial statements, taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
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 pages 290 and 331.
The strategic report provides, on pages 46 to 53, a description of the Group’s risk and capital management, which includes a description of the Group’s liquidity position. These risks are also discussed in the audited sections of the Group Chief Risk Officer’s report on the risks facing our business and our capital strength.
Going concern In accordance with the requirements of the guidance issued by the Financial Reporting Council in October 2009 ‘Going Concern and Liquidity Risk: Guidance for directors of UK companies 2009’, after making sufficient enquiries the directors have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for the foreseeable future. In support of this expectation, the Company’s business activities, together with the factors likely to affect its future development, successful performance and position in the current economic climate are set out in the strategic report on pages 34 to 45. The risks facing the Group’s capital and liquidity positions and their sensitivities are referred to in the strategic report on pages 46 to 53. Specifically, the Group’s borrowings are detailed in Note C6 on pages 235 to 236, the market risk and liquidity analysis associated with the Group’s assets and liabilities can be found in Note C3.5(a) on pages 206 to 208, policyholder liability maturity profile by business units in Notes C4.1(b), C4.1(c) and C4.1(d) on pages 215, 217 and 218 respectively, cash flow details in the consolidated statement of cash flows and provisions and contingencies in Note C12. The directors, therefore, have continued to adopt the going concern basis of accounting in preparing the financial statements for the year ended 31 December 2013.
Post-balance sheet events Significant events affecting the Group which have taken place after the end of the financial year are detailed in Note D4 on page 272.
Change of control 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.
Compensation for loss of office None of the terms of employment of the directors includes provisions for payment of compensation for loss of office or employment that occurs as a result of a change of control. Terms applying on a termination of their office are set out in the directors’ remuneration report. In the US, senior executives participate on a discretionary basis in a plan which entitles them to compensation, in the event that their employment is terminated or adversely affected as a result of a change of control.
For the year ended 31 December 2013, none of the directors, their associates or any shareholders of the Company (which have, to the knowledge of the directors of the Company, owned more than 5 per cent of the issued share capital) had any interest in the Group’s major customers.
Post-balance sheet events Note D4 of the Notes on the Group financial statements 272
Future developments of the business of the Company Group Chief Executive’s report 12
In addition, the risk factors set out on pages 362 to 366 and the additional unaudited financial information set out on pages 335 to 361, are incorporated by reference into this directors’ report.
R em u n eratio n rep o rt 89 Prudential plc Annual Report 2013
Dear fellow shareholder, I am pleased to present the Remuneration Committee’s report on directors’ remuneration for the year to 31 December 2013.
I trust that you will find this a clear and comprehensive report that illustrates the strong alignment between Prudential’s performance and our executive directors’ remuneration. To comply with new legislation regarding disclosure of executive directors’ remuneration we have changed the format of this year’s report and, in addition, the Remuneration Committee has taken into account best practice guidelines issued by shareholder representatives.
To assist shareholders with the understanding of our remuneration practices we have set out an ‘at a glance’ summary page, overleaf. This is followed by: — Our directors’ remuneration policy on pages 94 to 106 which describes how we will pay directors in the future; — Our annual report on remuneration on pages 107 to 119 which sets out remuneration delivered in respect of performance in 2013 and operation in 2014; and
Strong share price growth and a step change in our dividend policy means that £100 invested in Prudential on 1 January 2009 increased to £434 by 31 December 2013. This outstanding track record means that Prudential’s shareholder return is, once more, significantly ahead of our peers in the international insurance sector over the three year performance period of our long-term incentives. As a result the awards made in 2011 under the Group Performance Share Plan will be released in full in 2014 .
Further details of how the Remuneration Committee rewarded this exceptional 2013 performance are set out in the annual report on remuneration on pages 107 to 119.
Aligning 2014 pay to performance In 2013, shareholders approved a new remuneration architecture that further improved the alignment of the Group’s reward strategy with the business strategy. As set out in the directors’ remuneration policy, we are not intending to make any changes to our remuneration architecture for 2014, or any significant changes to the metrics used.
The Chief Financial Officer’s total remuneration opportunity for 2014 has increased by 10 per cent. This reflects the increasing complexity and responsibilities of the role, together with the incumbent’s considerable performance and contribution to the Group. In making this adjustment, the Remuneration Committee was mindful of ensuring that the majority of this be provided through long-term incentive awards, so that the full value is only realised over the long term and subject to the achievement of stretching performance conditions. I am grateful for the support that our major shareholders gave for this when I discussed it with them prior to implementation.
In conclusion I trust that you find this a clear and comprehensive report that demonstrates the link between pay and performance at Prudential.
Our remuneration strategy remains unchanged from that approved by shareholders in last year’s directors’ remuneration report: To attract and retain the high calibre executives required to lead and develop the Group Reward must be: B Valued by executives; and B Competitive, to engage executives who are in demand in the global talent market, and, if required, support hiring the best external talent.
To reward executives for delivering our business plans and generating sustainable growth and returns for shareholders Reward must be: B Determined by delivery of the Group’s annual and longer-term business objectives; B Aligned with shareholder value creation; and B Consistent with the Group’s risk appetite so that the delivery of the business plan can be sustained.
Salary increases are in line with budgets for all employees: B Salary increases of 3% in 2013. B Salary increases of 3% in 20142.
The Group Chief Executive has a maximum AIP opportunity of 200% of salary, with the maximum for the CFO of 175%. For other executives the maximum is 160%.
2013 bonuses were paid based on performance measures related to profit, cash flow and capital adequacy, as well as personal objectives.
Notes 1 CEO, JNL also shares in the JNL bonus pool; and CEO, M&G retains separate arrangements. 2 The Chief Financial Officer received an increase of 5%. 3 Progress against the share ownership guidelines is detailed in the ‘Statement of directors’
Key Fixed pay Short-term variable pay Long-term variable pay Share ownership guidelines
What 2013 performance means for executive directors’ pay At Prudential, the remuneration packages are designed to ensure a strong alignment between pay and performance. As you can see from the charts on page 90, sustained growth across all of our key performance metrics has delivered substantial value to our shareholders. This has been reflected in both the annual bonuses paid and the release of long-term incentive awards, as set out in the annual report on remuneration.
In particular, the long-term incentives awarded to executive directors in 2011 had stretching performance conditions attached to vesting and were denominated in shares. The significant value generated for shareholders through share price growth and dividends paid over the last three years is, therefore, reflected in the value of the LTIP releases, together with the achievement of performance conditions, as illustrated in the chart below.
Legacy below board plans (awarded 2010) Dividends Share price growth Award size
Tidjane Thiam Group Chief Executive 1,030 381 2,056 5,189 8,656 9,533
Note 1 Jackie Hunt received a payment of £801,000 in respect of awards forfeited when leaving Standard Life, included in the above ‘Single Figure’.
This remuneration policy will apply following the AGM on 15 May 2014 (subject to shareholder approval). Total remuneration for our executive directors is made up of a number of elements. The purpose of each element is set out below: Component Purpose
Fixed pay Base salary Paying salaries at a competitive level enables the Company to recruit and retain key executives.
Prudential Long Term Incentive Plan (‘PLTIP’) The Prudential Long Term Incentive Plan is designed to incentivise the delivery of: — Longer- term business plans; sustainable long-term returns for shareholders; and adherence to the Group’s risk appetite.
Awards are made in Prudential shares, aligning the experience of executives and shareholders.
Group Performance Share Plan (‘GPSP’) The GPSP was designed to incentivise the achievement of sustainable long-term returns for shareholders.
Awards were made in Prudential shares, aligning the absolute shareholder experience of executives and shareholders.
Business Unit Performance Plan (‘BUPP’) The BUPP was designed to incentivise the delivery of business unit performance for executives who have regional responsibilities. These directors received awards under both the GPSP and the BUPP to ensure a dual focus on business unit and Group performance.
Awards were made in Prudential shares aligning the absolute shareholder experience of executives and shareholders.
The Committee reviews salaries annually with changes effective from 1 January. In determining base salaries for each executive, the Committee considers factors such as: — Salary increases for all employees; — The performance and experience of the executive; — Group or business unit financial performance; and
As the Company has executive directors based in multiple geographies, and within insurance and asset management businesses, the Remuneration Committee reviews data from a number of different markets which it believes to be the most relevant benchmarks. The benchmarks used are disclosed in the annual report on remuneration.
Salaries are typically paid in the local currency of the country where the executive is based. This means that the reported salary in the ‘single figure’ table may fluctuate due to currency movements. The Committee may also determine that the salary of an executive is set in an alternative currency (for example US dollars).
Benefits Prudential’s policy is for the Committee to have the discretion to offer executive directors benefits which reflect their individual circumstances and are competitive within their local market, including: — Health and wellness benefits; — Protection and security benefits; — Transport benefits; — Family and education benefits; — All employee share plans and savings plans; and
Operation Currently all executive directors participate in the Annual Incentive Plan (AIP).
The Committee determines the annual incentive payment for each executive director with reference to the performance achieved against performance ranges.
The Jackson Senior Management Bonus Pool is calculated based on JNL’s financial performance and distributed to Jackson’s leadership team.
In assessing performance, the Committee will take into account the personal performance of the director and the Group and/or business units’ adherence to the risk appetite and framework, as well as other relevant factors. To assist them in their assessment the Committee considers a report from the Group Chief Risk Officer on adherence to the Group’s risk appetite and framework.
Opportunity The Chief Executive, M&G has a bonus opportunity of 0.75 per cent of M&G’s IFRS profit, capped at six times salary.
For other executive directors the maximum AIP opportunity is up to 200 per cent of salary. Annual awards are disclosed in the relevant annual report on remuneration.
In addition to the AIP, the President & CEO, JNL receives a 10 per cent share of the Jackson Senior Management Bonus Pool.
The Committee retains the discretion to adjust and/or set different performance measures if events occur (such as a change in strategy, a material acquisition and/or divestment of a Group business or a change in prevailing market conditions) which cause the Committee to determine that the measures are no longer appropriate and that amendment is required so that they achieve their original purpose.
irecto rs’ rem u n eratio n p o licy 97 Prudential plc Annual Report 2013
Operation All executive directors are required to defer a percentage of their total annual bonus into Prudential shares. Currently all directors defer 40 per cent of bonus for three years.
— Lapse and, in exchange, the Participant will be granted an award under any other share or cash incentive plan which the Remuneration Committee considers to be broadly equivalent to the award.
Operation Prudential’s policy is that executive directors receive long-term incentive awards with full vesting only achieved if the Company meets stretching performance targets.
The levels of award made under the PLTIP in 2014 (as a percentage of salary) are: Group Investment Director 250%
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding PLTIP award. This power could be invoked, for example, if a business decision taken during the performance period led to a material breach of a law or regulation, or if there is a material adverse restatement of the accounts for that period. The Committee also has the discretion to postpone the vesting date of the award.
When awards are released they are increased to reflect the number of shares which could have been purchased with the dividends paid on the released shares, between the awards being granted and released. However, the Committee has the discretion to determine that the number of dividend shares should be reduced or forfeited.
Awards made in a particular year are usually significantly below this limit. The levels of award in 2014 are shown above. The Committee do not envisage increasing these over the life of the policy and would consult with major shareholders before doing so. In addition, these would be disclosed in the relevant annual report on remuneration and be subject to an advisory vote at the AGM.
The performance conditions attached to PLTIP awards are: — Relative TSR (50 per cent of award); and
Threshold and maximum achievement levels will be set at the beginning of the performance periods in line with the three year business plan. 25 per cent of this portion of the award will vest for achieving threshold performance increasing to full vesting for meeting stretch targets. The target for Group IFRS operating profit will be disclosed when the performance period ends.
For current awards The Committee may revise the peer group used to measure relative TSR to reflect events such as mergers, demergers, listings and delistings.
As set out in the Rules of the PLTIP, which were approved by shareholders at the 2013 AGM, the Committee has the discretion to amend the performance conditions attached to an award if circumstances relevant to the performance condition have changed, and the Committee is satisfied that the amended measure will be a fairer measure of performance and no more or less demanding than the original condition. The Committee will consult with major shareholders before revising performance conditions on outstanding awards under the PLTIP. In addition, these would be disclosed in the relevant annual report on remuneration and would be subject to an advisory vote at the AGM.
The Chief Executive, M&G currently receives awards under the M&G Executive LTIP. Under this plan an annual award of phantom shares is made with a notional starting share price of £1. The phantom share price at vesting is determined by the performance of M&G over the three year performance period.
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding M&G Executive LTIP award. This power could be invoked, for example, if a business decision taken during the performance period led to a material breach of a law or regulation, or if there is a material adverse restatement of the accounts for that period.
Executives have five years from the implementation of this policy (or the date of their appointment, if later) to build this level of ownership. Shares earned and deferred under the Annual Incentive Plan are included in calculating the executive director’s shareholding for these purposes. Unvested share awards under long-term incentive plans are not included.
irecto rs’ rem u n eratio n p o licy 101 Prudential plc Annual Report 2013
Operation Prior to the approval of the PLTIP, the Group Performance Share Plan and the Business Unit Performance Plan were the principal long-term incentive plans operated for executive directors.
All executive directors were eligible to participate in the GPSP. The Chief Executive, UK & Europe, Chief Executive, PCA and President & CEO, JNL also received awards under the Business Unit Performance Plan.
The GPSP and BUPP are conditional share plans: the shares which were awarded will be released to directors to the extent that performance conditions have been met, over the three-year performance period.
The Committee has the discretion to reduce the proportion of an award that will vest or determine that an award will be forfeited or to postpone the vesting date of the award to allow the Committee to consider whether any part of the award should vest.
When awards are released they are increased to reflect the number of shares which could have been purchased with the dividends paid on the released shares, during the performance period. However, the Committee has the discretion to determine that the number of dividend shares should be reduced or forfeited.
If an award vests early as a result of a corporate transaction (eg takeover, merger, winding up, rights issue etc) awards may be exchanged for replacement award (either in cash or shares) of equal value or released. Where the awards are released, the Remuneration Committee will have regard to the performance of the Company, the time elapsed between the date of grant and the relevant event and any other matter which the Remuneration Committee considers relevant or appropriate.
See page 104 for details of the Committee’s powers in respect of GPSP and BUPP participants joining or leaving the Group.
The maximum vesting under the GPSP and BUPP is 100 per cent of the original award, plus accrued dividends.
GPSP awards normally vest on the basis of the Group’s Total Shareholder Return (TSR) performance. TSR is the combination of the share price growth and the dividends paid. Awards made prior to 2013 are subject to Prudential’s TSR achievement over the performance period compared with the TSR of an index composed of international insurers.
For threshold performance of meeting the index, 25 per cent of the award vests. This increases on a straight-line basis to 75 per cent vesting for performance of 110 per cent of the index and full vesting for 120 per cent of the index. The same performance condition also applies to the UK BUPP.
The peer group for outstanding awards is disclosed in the relevant annual report on remuneration. The Remuneration Committee may revise this peer group to reflect events such as mergers, demergers and delistings.
Some awards were granted using alternative performance conditions, eg UK IFRS operating profit and TSR on a ranked basis where the Committee considered it appropriate.
In addition, for any award made under the GPSP or the BUPP to vest, the Committee must be satisfied that the quality of the Company’s underlying financial performance justifies the level of reward delivered at the end of the performance period. If performance measures are not achieved in full, the unvested portion of any award lapses and performance cannot be retested.
Jackson BUPP The performance measure under the Jackson BUPP is shareholder capital value growth. This was selected as a performance measure because it is an estimation of the shareholder value created by the Jackson business over the performance period.
For market-based performance conditions (eg relative TSR and M&G investment performance) the Committee requires that performance is in the upper quartile, relative to Prudential’s peer group, for awards to vest in full.
Legacy payments Any commitment made before either (i) 27 June 2012 or (ii) an individual becoming a director, will be honoured even where it is not consistent with the policy prevailing at the time such commitment is fulfilled.
irecto rs’ rem u n eratio n p o licy 103 Prudential plc Annual Report 2013
In li n e w it h ex p ec ta ti o n s
— Estimated value of benefits based on amounts paid in 2013.
— JNL bonus pool at the average of the last three years.
No long-term incentive vesting. — 62.5% of award under Prudential LTIP (midway between threshold and maximum).
All of the remuneration obligations placed on the Company by service contracts and letters of engagement are set out elsewhere in this directors’ remuneration policy.
On joining the Board from within the Group the Committee may allow an executive to retain any outstanding deferred bonus and/or long-term incentive awards and/or other contractual arrangements which they held on their appointment. These awards (which may have been made under plans not listed in this policy) would remain subject to the original Rules, performance conditions and vesting schedule applied to them when they were awarded.
Notice periods Principles The Company’s policy is that executive directors’ service contracts will not require the Company to give an executive more than 12 months’ notice without prior shareholder approval. A shorter notice period may be offered where this is in line with market practice in an executive’s location.
The Company is required to give to, and to receive from, each of the current executive directors 12 months’ notice of termination, unless indicated in this table. An executive director whose contract is terminated would be entitled to 12 months’ salary and benefits in respect of their notice period. Payments are phased over the notice period, although a payment in lieu of notice may be made.
Should an executive director step down from the Board but remain employed by the Group, they would not receive any payment in lieu of notice in respect of their service as a director.
The contract for Mike Wells is a renewable one-year fixed-term contract, renewable automatically on the same terms and conditions, unless the Company or the director gives at least 90 days’ notice prior to the end of the relevant term.
The contract for Michael McLintock requires that he gives the Company six months’ notice of termination.
Deferred bonus awards are normally retained by participants leaving the Company. Awards made in respect of performance in, or before, 2012 will be released shortly after the end of employment. Awards made in respect of performance in 2013, and subsequent years, will vest on the original timetable.
Potential variations Any executive director dismissed for cause would forfeit all outstanding deferred bonus awards.
Should an executive director step down from the Board but remain employed by the Group, they would retain any outstanding deferred bonus awards. These awards would remain subject to the original Rules, performance conditions and vesting schedule applied to them when they were awarded.
Principles The treatment of outstanding long-term incentives will be decided by the Committee, taking into account the circumstances of the departure, including the performance of the director.
Executives will normally retain their outstanding long-term incentive awards. These awards will ordinarily be pro-rated based on time employed, will vest on the original timescale and will remain subject to the original performance conditions assessed over the entire performance period.
The release of awards may be expedited in the case of the death of a participant.
Awards made under the M&G Executive LTIP will be released immediately should the director leave due to disablement or death and would be pro-rated based on time employed.
The Committee may decide to award an executive stepping down from the Board, but remaining with the Group, a bonus pro-rated to reflect the portion of the financial year which had elapsed on the date of their change of role. This would be calculated with reference to individual and financial performance measures in the usual way. The Committee may determine that a portion of such a bonus must be deferred.
Other payments Principles Consistent with other employees in their business unit, executive directors may receive payments to compensate them for the loss of employment rights on termination. Payments may include: — A nominal amount for agreeing to non-solicitation and confidentiality clauses; — Directors’ and Officers’ insurance cover for a specified period following the executive’s termination date; — Payment for outplacement services; and
The Committee reserves the right to make additional exit payments where such payments are made in good faith: — In discharge of an existing legal obligation (or by way of damages for breach of such an obligation); or
The basic and additional fees are reviewed annually by the Board, with any changes effective from 1 July. In determining the level of fees the Board considers: — The time commitment and other requirements of the role; Group financial performance; salary increases for all employees; and benchmark information from appropriate markets.
The Chairman may be offered benefits including: — Health and wellness benefits; protection and security benefits; transport benefits; and relocation and expatriate benefits (where appropriate)
Recruitment of a new non-executive chairman or non-executive director The fees for a new non-executive director will be consistent with the current basic fee paid to other non-executive directors (as set out in the annual report on remuneration for that year) and will be reflective of their additional responsibilities as Chair and/or members of Board committees.
The fee for a new non-executive Chairman will be set with reference to the time commitment and other requirements of the role, the experience of the candidate, as well as internal relativities among the other executive and non-executive directors. To provide context for this decision, data would be sought for suitable market reference point(s).
n n u al rep o rt o n rem u n eratio n 107 Prudential plc Annual Report 2013
In 2013, the Committee met five times. Key activities at each meeting are shown in the table below: Meeting Key activities
September 2013 Monitor performance against long-term incentive targets, based on the half year results; review the dilution levels resulting from the Company’s share plans; consider the latest version of the external measures report; review total 2014 remuneration of executive directors for consultation with shareholders; and review draft remuneration policy report for consultation with shareholders.
During 2013, Deloitte LLP were the independent advisor to the Committee. Deloitte were appointed by the Committee in 2011 following a competitive tender process. As part of this process, the Committee considered the services that Deloitte provided to Prudential and its competitors as well as other potential conflicts of interests. Deloitte is a member of the Remuneration Consultants’ Group and voluntarily operate under their code of conduct when providing advice on executive remuneration in the UK. Deloitte regularly meet with the Chairman of the Committee without management present. The Committee is comfortable that the Deloitte engagement partner and team, that provide remuneration advice to the Committee, do not have connections with Prudential that may impair their independence and objectivity. The total fees paid to Deloitte for the provision of independent advice to the Committee in 2013 were £72,000, charged on a time and materials basis. During 2013, Deloitte also gave Prudential management advice on remuneration, as well as providing guidance on Solvency II, taxation and other financial matters. In addition, management received external advice and data from a number of providers. This included market data and legal counsel. This is not considered to be material advice or services.
During the year, the Company has complied with the appropriate provisions of the UK Corporate Governance Code which are in force regarding directors’ remuneration.
Remuneration in respect of performance in 2013 Base salary Executive directors’ salaries were reviewed in 2012, with changes effective from 1 January 2013. When the Committee took these decisions it considered the salary increases awarded to other employees, the performance and experience of each executive, and the relative size of each directors’ role, as well as the performance of the Group. Salary increases for the wider workforce vary across our business units, varying with local market conditions; in 2013 salary budgets increased between 3 per cent and 6 per cent for the wider workforce.
To provide context for this review, information was also drawn from the following market reference points: Director Role Benchmark(s) used to assess remuneration
After careful consideration the Committee decided to increase salaries by 3 per cent as set out below.
Note 1 Jackie Hunt was appointed on 5 September 2013. Her salary on joining was £625,000.
Notes 1 The maximum bonus opportunity shown for Rob Devey was his annual opportunity – this was pro-rated for the portion of 2013 for which he was employed by the Company (to 31 October). Please see the section on ‘Payment to past directors’ for details. 2 Michael McLintock’s annual bonus opportunity in 2013 was the lower of 0.75 per cent of M&G’s IFRS profit and six times annual salary. M&G’s IFRS profit in 2013 was £395 million. 3 In addition to the AIP, Mike Wells receives a 10 per cent share of the Jackson Senior Management Bonus Pool. This is determined by the financial performance of Jackson.
n n u al rep o rt o n rem u n eratio n 109 Prudential plc Annual Report 2013 2013 AIP performance measures and achievement Financial performance The financial performance measures set for 2013 are shown below. Prior to the start of the year the Committee set stretching performance ranges for each of these measures. The Committee reviewed the Group’s performance against these ranges at its meeting in February 2014; in all of our key performance metrics the Group’s 2013 results exceed those achieved in 2012. The Committee also reviewed a report from the Group Chief Risk Officer which assessed the achievement of these results in the context of adherence to the Group’s risk appetite and framework.
Notes 1 The weighting of each measure within the Group financial element of the bonus for all executives excluding the Chief Executive, M&G. Weightings for the business unit bonus element vary based on the strategy of each business. 2 In addition, investment performance (measured over a one and three-year basis) forms 30 per cent of the Chief Executive, M&G’s annual bonus.
2013 annual incentive plan payments On the basis of the outstanding performance of the Group and business units, and the Committee’s assessment of each executive’s personal performance, the Committee determined the following 2013 AIP payments: Executive Role 2013 salary Maximum 2013 AIP 2013 AIP payment
Notes 1 Rob Devey received a bonus pro-rated for the portion of 2013 he was employed by the Company (to 31 October 2013). Please see the section on ‘Payments to past directors’ for details. 2 Michael McLintock’s annual bonus opportunity in 2013 was the lower of 0.75 per cent of M&G’s IFRS profit and six times annual salary. M&G’s IFRS profit in 2013 was £395 million. 3 In addition to the AIP Mike Wells also received 10 per cent of the JNL Senior Management Bonus Pool. His total bonus including his AIP and JNL Senior
Long-term incentive plans with performance periods ending on 31 December 2013 Our long-term incentive plans have performance conditions which are based on the Group’s business priorities. When the Committee decided the proportion of these awards which should be released, actual financial results were reviewed against the performance targets set. The Committee also reviewed the underlying Company performance to ensure that these vesting levels were appropriate. The vesting levels are set out below.
Note 1 Companies in the peer group for the 2011 GPSP and UK BUPP awards are: Aegon, Allianz, Aviva, Axa, Generali, ING, Legal & General, Manulife, Old Mutual and Standard Life.
Legacy below Board long-term incentive plans On 31 December 2013, the performance periods for the 2010 awards under the JNL long-term incentive plans (which began on 1 January 2010) came to an end. Over the four-year period the shareholder value of the US business grew by 14.33 per cent per annum (on a compound basis) and by 70.848 per cent over the performance period. This resulted in vesting of 121.16 per cent of Mike Wells’ 2010 JNL US Performance Share Plan award and of 70.848 per cent of his 2010 cash-settled JNL Long-Term Incentive Plan award. These were the last awards which Mike Wells received under these plans.
John Foley Contributions into the defined contribution pension scheme and a cash supplement with a total value of 25 per cent of salary.
Michael McLintock previously participated in a contributory defined benefit scheme which was open at the time he joined the Company. The scheme provided a target pension of two-thirds of final pensionable earnings on retirement for an employee with 30 years or more potential service who remains in service to normal retirement date. Mr McLintock is now a deferred member of the scheme. Mr McLintock’s normal retirement date under the scheme is age 60. Should Mr McLintock claim his deferred pension before this age it will be subject to an actuarial reduction. There are no additional benefits payable should Mr McLintock retire early.
At the end of 2013 the transfer value of this entitlement was £1,089,263. This equates to an annual pension of £57,378, which will increase broadly in line with inflation in the period before becoming due for payment on Mr McLintock’s retirement.
‡ The long-term incentive values shown above are higher than those reported in the 2012 Annual Report. This is because there was significant share price growth between the final three months of 2012 (used to estimate the value of the awards, in line with the regulations) and the price on 15 March 2013 and 2 April 2013, when long-term awards were released. The estimated share price was £8.67 but the actual price on release was £11.54 (15 March 2013) and £10.83 (2 April 2013). Dividend equivalent shares were also added to GPSP and BUPP awards on release.
§ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of the Companies Act.
3 Mike Wells’ bonus figure excludes a contribution of US$15,000 from a profit sharing plan which has been made into a 401(k) retirement plan. This is included under employers pension contribution.
n n u al rep o rt o n rem u n eratio n 113 Prudential plc Annual Report 2013
Performance graph and table The chart below illustrates the TSR performance of Prudential, the FTSE 100 and International Insurers over the past five years. The information in the table below shows the total remuneration for the Group Chief Executive over the period: Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013
Group Chief Executive Mark Tucker Tidjane Thiam Tidjane Thiam Tidjane Thiam Tidjane Thiam Tidjane Thiam
Group Chief Executive Single Figure of total remuneration 3,737 640 5,293 5,339 9,533 8,656
Group Chief Executive 3% 0% 2.8% All UK employees 4.8% 5.3% 20.3%
The UK work force has been chosen as the most appropriate comparator group as it reflects the economic environment for the location in which the Group Chief Executive is employed.
Note 1 All employee pay as taken from note B3.1 to the financial statements. The figure for 2012 includes an adjustment in respect of pension actuarial gains.
Non-executive remuneration in 2013 Chairman’s fees The annual fee paid to the Chairman, Paul Manduca, remained unchanged at £600,000.
Non-executive director fees An increase of just under 3 per cent was made to the basic non-executive fee with effect from 1 July 2013. Increases were made to the additional fees paid to chairmen of the Remuneration Committee and Risk Committee, and a fee for membership of the Nomination Committee of £10,000 per annum was introduced. These changes reflect the increased time commitment involved in these roles. The revised fees are shown below: Annual Fees
Anthony Nightingale4 67 n/a – – 67 n/a Philip Remnant4 194 n/a – – 194 n/a Alice Schroeder4 64 n/a – – 64 n/a * Benefits include the cost of providing the use of a car and driver, medical insurance and security arrangements. The value of some benefits included in the 2012 benefits calculation (for example life assurance) have not been included in 2013 taxable benefits information as they are not subject to UK tax. The 2012 number has not been restated from the 2012 report as the differences are not considered significant.
n n u al rep o rt o n rem u n eratio n 115 Prudential plc Annual Report 2013
John Foley Group Investment Director 250% 1,570,745 25% 31 Dec 15 50% 50% Jackie Hunt1 Chief Executive, UK & Europe 225% 1,406,282 25% 31 Dec 15 50% 50% Michael McLintock2 Chief Executive, M&G 150% 556,196 25% 31 Dec 15 100% Nic Nicandrou Chief Financial Officer 225% 1,460,023 25% 31 Dec 15 50% 50% Barry Stowe Chief Executive, PCA 225% 1,563,811 25% 31 Dec 15 50% 50% Tidjane Thiam Group Chief Executive 400% 4,119,988 25% 31 Dec 15 50% 50% Mike Wells President & CEO, JNL 460% 3,257,930 25% 31 Dec 15 50% 50%
2 The awards made under the PLTIP to the Chief Executive, M&G are subject only to the TSR performance condition. The IFRS profit of M&G is a performance condition under the M&G Executive LTIP.
Group TSR performance will be measured on a ranked basis. 25 per cent of the award will vest for TSR at the median of the peer group increasing to full vesting for performance at the upper quartile. The peer group for 2013 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
Performance ranges for IFRS operating profit measured on a cumulative basis over three years are set at the start of the performance period. Due to commercial sensitivities these are not published in advance but will be disclosed for Group, when awards vest.
Michael McLintock Chief Executive, M&G 300% 1,112,400 See note 31 Dec 15
Note 1 The value of the award on vesting will be based on the profitability and investment performance of M&G over the performance period, as described in the
Keki Dadiseth8 32,196 n/a n/a – n/a n/a Michael Garrett9 39,233 n/a n/a – n/a n/a * Based on the closing share price on 31 December 2013 (£13.40). † Further information on share awards subject to performance conditions are detailed in the ‘share-based long-term incentive awards’ section of the
3 For the 1 January 2013 figure Mike Wells’ beneficial interest in shares is made up of 295,904 ADRs (representing 591,808 ordinary shares). For the 31 December 2013 figure his beneficial interest in shares is made up of 202,922 ADRs (representing 405,844 ordinary shares). In the table above, the figure for shares subject to performance conditions includes the maximum number of shares (150 per cent of the original number awarded) which may be released to Mike Wells under the JNL Performance Share Plan. This maximum number of shares may be released if stretch performance targets are achieved.
4 Rob Devey left the Board on 5 September 2013. 5 Anthony Nightingale was appointed to the Board on 1 June 2013. 6 Philip Remnant was appointed to the Board on 1 January 2013. 7 Alice Schroeder was appointed to the Board on 10 June 2013. For the 31 December 2013 figure her beneficial interest in shares is made up of 1,000 ADRs
(representing 2,000 ordinary shares). 8 Keki Dadiseth retired from the Board on 1 May 2013. 9 Michael Garrett retired from the Board on 31 August 2013.
Outstanding share options The following table sets out the share options held by the directors in the UK Savings-Related Share Option Scheme (SAYE) as at the end of the period. No other directors participated in any other option scheme.
Market price at 31 December 2013 Beginning End Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period
Directors’ terms of employment Executive directors’ service contracts The remuneration policy report contains further details of the terms included in executive director service contracts. Details of the service contracts of each executive director are outlined below: Executive director Date of contract Notice period to the Company Notice period from the Company
Keki Dadiseth1 1 April 2005 AGM 2005 6 months n/a Howard Davies 15 October 2010 AGM 2011 6 months AGM 2014 Michael Garrett2 1 September 2004 AGM 2005 6 months n/a Ann Godbehere 2 August 2007 AGM 2008 6 months AGM 2014 Alistair Johnston 1 January 2012 AGM 2012 6 months AGM 2015 Kaikhushru Nargolwala 1 January 2012 AGM 2012 6 months AGM 2015 Anthony Nightingale3 1 June 2013 AGM 2014 6 months AGM 2014 Philip Remnant 1 January 2013 AGM 2013 6 months AGM 2016 Alice Schroeder3 10 June 2013 AGM 2014 6 months AGM 2014 Lord Turnbull 18 May 2006 AGM 2006 6 months AGM 2015
End of performance period 2011 Group LTIP 1,185,536 Relative TSR 25% 31 Dec 2013 2012 Group LTIP 1,060,994 Relative TSR 25% 31 Dec 2014 * The face value of awards was calculated using Standard Life’s three days average share price on the date Jackie Hunt joined the Company (September 2013) of £3.389. † The performance conditions attached to the awards are the same TSR conditions as other GPSP and UK BUPP awards made in the relevant year. ‡ The percentage of award released for achieving maximum targets is 100 per cent.
In 2013 Rob Devey was granted an award under the Prudential Long Term Incentive Plan as follows. At vesting, the award will be pro-rated for time employed. It remains subject to the original vesting schedule and to potential future reduction depending on the achievement of performance conditions: Executive
As set out in the section on ‘Remuneration in respect of performance in 2013’, the performance conditions attached to Rob Devey’s 2011 GPSP and UK BUPP awards were met in full and 100 per cent of the proportion of these awards that were outstanding (34 months out of 36) will be released in 2014.
Clark Manning Clark Manning stepped down from his role as President and Chief Executive of Jackson and as an executive director on 31 December 2010. Clark Manning remained Chairman of Jackson until 30 April 2011 and acted in an advisory role until 31 December 2011. The 2010 directors’ remuneration report provided full details of the remuneration arrangements that would apply to Clark Manning after his resignation. These arrangements were implemented as intended by the Committee.
Statement of voting at general meeting At the 2013 Annual General Meeting, shareholders were asked to vote on the 2012 directors’ remuneration report, the adoption of the Prudential Long Term Incentive Plan and the adoption of the rules of the Prudential 2013 Savings-Related Share Option Scheme (‘Prudential SAYE’). Each of these resolutions received a significant vote in favour by shareholders; the Committee is grateful for this support and endorsement by our shareholders. The votes received were: Resolution Votes for % of votes cast Votes against % of votes cast Total votes cast Votes withheld
Statement of implementation in 2014 Executive directors’ salaries were reviewed in 2013 with changes effective from 1 January 2014. When the Committee took these decisions, it considered the salary increases awarded to other employees in 2013 and the expected increases in 2014. The Committee also took account of the performance and experience of each executive, and the relative size of each directors’ role, as well as the performance of the Group. The external markets used to provide context to Committee were those used for 2013 salaries, with for the Chief Executive, M&G, an additional benchmark of Asset Management within International Insurance Companies.