Prudential delivered a very strong performance in 2010, with results significantly ahead of 2009. Our disciplined approach to capital allocation, proactive risk management and focus on profitability are generating both growth and cash for our shareholders.
On the statutory International Financial Reporting Standards (IFRS) basis, our operating profit before tax from continuing operations increased by 24 per cent to £1,941 million. On the European Embedded Value basis, Group operating profit before tax increased by 20 per cent to £3,696 million.
In view of the progress that the Group has made in recent years to improve IFRS operating profitability and free surplus generation, the Board has decided to rebase the full year dividend upwards by 4 pence per share, equivalent to an increase of 20 per cent. In line with this, the directors recommend a final dividend of 17.24 pence per share, which brings the total dividend for the year to 23.85 pence per share.
• Insurance operations: Asia, US, UK • Asset management: M&G, Asia, US
EUROPEAN EMBEDDED VALUE OPERATING PROFIT FROM LONG-TERM BUSINESS2 £3,202m £3,840m +20%
• Well diversified platform as no one country, distribution channel or product drives performance
• Retail new business margin increased from 31 per cent to 35 per cent
• M&G’s retail business was awarded the prestigious 2010 Global Group of the Year award at the 15th annual Investment Week Fund Manager of the Year Awards. This is the second time in three years that M&G has received this award
• M&G’s institutional business was also recognised for its investment performance, winning the 2010 UK Asset Management Firm of the Year award at Financial News’ Awards for Excellence in Institutional Asset Management
• Record full year profits of £246 million, 8 per cent higher than previous record achieved in 2008
Prudential plc is an international financial services group with significant operations in Asia, the US and the UK. We serve over 25 million customers and have £340 billion of assets under management. The Group is structured around four main business units: Prudential Corporation Asia, Jackson National Life Insurance Company, Prudential UK and M&G.
Prudential is a leading life insurer in Asia operating in 12 markets. We are in the top three for market share of new business in Hong Kong, India, Indonesia, Malaysia, Singapore, the Philippines and Vietnam.
In Asia we provide a comprehensive range of savings, protection and investment products tailored to meet customers’ needs in each market.
Prudential’s Asian asset management business manages investments across a broad range of asset classes for internal, retail and institutional clients. We are one of the region’s leaders of Asian sourced assets under management. We are also the largest onshore mutual fund manager in Asia.
Jackson is one of the largest life insurance companies in the US, providing retirement savings and income solutions to more than 2.8 million customers.
UNITED STATES www.jackson.com 15m+ customers 2.8m+ customers16,400 employees 320,000+ agents employees including affiliates
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 in with-profits and annuities.
M&G is Prudential’s UK and European fund management business with total assets under management of £198 billion (at 31 December 2010).
% of Group external funds under management 80% M&G 20% Asia
In 2010, our proven strategy of focusing on the most attractive markets and products, together with the discipline with which the Group manages risk and capital, has again delivered outstanding results. The Board has therefore recommended a final dividend of 17.24 pence per share, which brings the total dividend for the reporting period to 23.85 pence per share, 4 pence (20 per cent) higher than the 2009 total dividend. The scrip dividend scheme is not being offered in respect of this dividend. In its place shareholders will be offered a Dividend Reinvestment Plan (DRIP).
Following Board approval, in December we announced new growth and profitability objectives for our Asia business and new cash remittance objectives for the Group. These are challenging but achievable given the Group’s strategy and the potential of our businesses in our chosen markets. These objectives are clear evidence of the Group’s commitment to provide both growth and cash to shareholders. The Board’s recommendation for the final dividend is consistent with that commitment.
One of the key events in the first half of the year was our proposed transaction with AIA. This led to significant focus on Prudential. The decision to pursue this transaction was in line with our strategy, which is to concentrate our resources on the highest growth and highest return markets, many of which are in Asia. The Board spent considerable time reviewing, challenging, questioning and validating the deal, including months of due diligence. I would like to thank the non-executive directors for their extensive contribution to the process. As I said at the 2010 AGM, the whole Board strongly believed this was an opportunity worth pursuing as part of our wider strategy. We greatly regret that we were not successful in completing the deal, however while it would have accelerated our growth, the 2010 results show our ability to deliver a first-class performance without it.
There have been a number of changes to the Board during the year. In October, we announced the appointment of Howard Davies and Paul Manduca as non-executive directors. Paul has replaced James Ross as the Board’s Senior Independent Director. James will retire from the Board at Prudential’s AGM on 19 May 2011. Howard has become Chairman of the Group Risk Committee. Both have extensive experience in the financial sector.
“ Prudential is uniquely positioned in the industry, delivering both rapid, profitable growth in emerging markets and generating strong cash flows.”
I would also like to pay tribute to Mick Newmarch, who died in April 2010. Mick was instrumental in shaping the Group during his time as Chief Executive from 1990 to 1995. Mick refocused and re-energised our business in Asia, laying down the groundwork for our outstanding success in the region today.
Our performance should not only be judged by our financial return. Prudential is committed to being an active and supportive member of the community. We encourage our businesses to establish projects and partnerships around education (particularly financial education) and social welfare. Our approach to community investment is to support charitable organisations and appropriate NGOs, not only through funding, but also with the experience and expertise of our employees. In 2010, around one in four employees volunteered in their community, many of them through our Group-wide flagship volunteering programme, the Chairman’s Challenge. Over the last five years, since the Chairman’s Challenge was launched, more than 100 annual projects have been supported by our employees in partnership with charities including Help Age International, Plan International and Junior Achievement.
Looking at the performance of the Group around the world, our strategy, the quality of our people and the strength of our brands, I remain confident we will continue to deliver profitable growth and sustainable value for our shareholders. We have emerged from the economic turbulence of the past few years as one of the strongest insurers in the world and I would like to express my thanks to all our employees for their continued contribution to the Group’s success.
I am pleased to report a very strong performance in 2010, with results significantly ahead of 2009. We achieved this by remaining focused on rigorous capital allocation and effective management of our balance sheet.
These principles have served us well during the financial crisis allowing us to emerge from the 2008-2009 period with a stronger balance sheet, higher profits, higher cash flows and an increased dividend. Our 2010 results confirm that our strategy, underpinned by our operating principles, should increasingly allow us to differentiate ourselves through our ability to combine growth and cash generation, as we announced at our Investor Day on 1 December 2010.
Our strategy At the centre of our strategy is the acceleration of our profitable growth in Asia, which offers many of the highest growth and return opportunities. The emerging markets of South-East Asia – such as Indonesia, Malaysia, Vietnam, the Philippines and Thailand, together with Hong Kong and Singapore – are particularly attractive. They remain the priority destination for our new capital investment. With our compelling platform of distribution, brand and product development capabilities in the high growth markets of Asia, we believe we are particularly well positioned to take advantage of the considerable opportunity that the region offers.
In asset management, our strong track record, both at M&G and in our asset management business in Asia, is enabling us to grow our funds under management. These businesses make an increasingly important contribution to our profits and cash generation.
Each part of the Group plays a key role in our strategy. Our flexibility and diversification were instrumental in allowing us to navigate successfully the economic and market cycle in 2008 and 2009.
In executing this strategy, we are guided by three clearly defined Group-wide operating principles. The first of these is that from 2008, we decided to take a more balanced approach to performance management across the three key measures of Embedded Value (EEV), IFRS and cash, with an increased emphasis on IFRS and cash. When this operating principle was introduced, it was a clear break with how our industry, and our company, had operated previously. As a consequence of this new focus, we have been able in 2010, for the third year in a row, to report results that are in fast progression across all three key measures – EEV, IFRS and cash.
Second, we have focused on allocating capital with total discipline to the highest return and shortest payback opportunities across the Group. This means that we restrict new business to areas of the market where these stringent criteria are met. As a result, we have not hesitated to take and implement a number of challenging decisions.
Finally, our third operating principle – of equal importance – is to take a proactive approach to managing risk across the cycle. We have transformed the capital position of the Group during the last three years, closing 2010 with more than £4 billion of Insurance Groups Directive (IGD) capital surplus against £1.5 billion at the end of 2008. We have significantly more capital today than before the financial crisis, and we have put in place a set of processes to hedge and manage the key risks to which we are exposed.
Group performance In 2010, APE sales1 were up 23 per cent in life insurance to £3,485 million (2009: £2,844 million) and new business profit1 has increased by 25 per cent to £2,028 million (2009: £1,619 million) as our new business margins increased to 58 per cent (2009: 57 per cent).
Since 2008, we have been using free surplus as the primary indicator of our ability to generate cash and capital. In 2010, free surplus increased 32 per cent to £3.3 billion, up from £2.5 billion at the end of 2009 and £0.9 billion at the end of 2008.
“ We have significantly more capital today than before the financial crisis.”
Our operating performance by business unit Our aim across all our businesses is to develop and market a suite of products that deliver good value solutions that meet our customers’ needs, in a way that is profitable and capital efficient for the Group.
Distribution remains critical to our business in Asia, and our unique combination of proprietary agency distribution and bank partnerships continues to deliver excellent results. Agency will remain the dominant and most profitable channel in Asia for many years to come. It is clear that Prudential’s agency distribution platform compares favourably to our peer group, whether in terms of scale, training or productivity. In addition, we will continue developing our presence in the bancassurance channel. The performance of our new partnership with UOB reinforces our view that the bancassurance channel will be increasingly important as Asian middle classes become wealthier and increasingly use banks and their services. This, together with our strategy of growing health and protection business, has been central to increasing our profitability and margins.
“ In the US, we have maintained our focus on value over sales volume growth, ensuring sales are delivered at highly profitable margin levels.”
Prudential UK Our business in the UK is highly disciplined and generates differentiated returns relative to the market. We continued to be a market leader in both individual annuities and with-profits business. We maintained our focus on balancing the writing of new business with the generation of cash and capital, successfully delivering attractive returns on capital employed. This strategy led the UK to deliver net cash of £420 million to the Group in 2010.
Our emphasis on value and generating strong returns saw the UK business continue to prioritise the retail market, while selectively participating in the wholesale market. Wholesale market opportunities have only been pursued when they meet our strict financial criteria and deliver an appropriate return on the capital invested both in terms of quantum but also, and equally important, of payback period. In 2010 we also continued to make good progress against our cost reduction plans, meeting our 2010 savings target of £195 million per annum six months early.
“ In the UK, we maintained our focus on balancing the writing of new business with the generation of cash and capital.”
Our financial objectives1 In December 2010, we announced new objectives for the Group that reflect our determination to accelerate growth in Asia and our belief that we can continue to deliver both growth and cash sustainably to our shareholders.
These objectives are clear evidence of our determination to provide – through our strategy and disciplined execution – both growth and cash to our shareholders at a sustained pace.
Notes 1 The following discussion and the discussion under ‘Outlook’ below, contain forwardlooking statements that involve inherent risks and uncertainties. Prudential’s actual future financial condition or performance or other indicated results may differ materially from those indicated in any such forward-looking statement due to a number of important factors (including those discussed under the heading ‘Risk factors’ in this report). See the discussion under the heading ‘Forward-looking statements’ at the end of this report. The objectives assume current exchange rates and a normalised economic environment consistent with the economic assumptions made by Prudential in calculating the EEV basis supplementary information for the half year ended 30 June 2010. They have been prepared using current solvency rules and do not pre-judge the outcome of Solvency II, which remains uncertain.
2 Representing the underlying remittances excluding the £150 million impact of pro-active financing techniques used to bring forward cash emergence of the in-force book during the financial crisis.
Regarding Western economies, we continue to be more cautious about the outlook, with some clear differences between the US and Europe. The US economy is recovering, and the combination of the transition of 78 million ‘baby boomers’ into retirement, and our skill base and products, creates a unique and exciting opportunity for us. The economic outlook in Europe is more challenging. However, having focused our UK business, and relying largely on our existing seven million customers, we believe that we will continue to achieve our objectives in terms of margins and capital and cash generation.
I believe that the quality of our strategic options, our discipline in putting value ahead of volume and our focus on execution will continue to allow us to grow profitably and to generate significant returns for our shareholders.
GROUP • Continue to implement strategy with discipline, allocating capital to the most attractive markets and products
• Manage risk and capital prudently, but proactively • Focus on delivering a progressive dividend, determined after taking into account the Group’s financial flexibility and opportunities to invest in areas of business offering attractive returns
• All business units in aggregate to deliver cumulative net cash remittances of at least £3.8 billion over the period 2010 to end-2013
• Continue to pursue a value-driven strategy built around our core strengths in with-profits and annuities
• Deliver further improvements to operational performance and customer service while maintaining a strict focus on costs
Life APE new business sales New business profit Free surplus investment in new business
2 Payback: Expected period over which future undiscounted free surplus generation from shareholder-backed business recoups initial new business investment.
Jackson delivered APE sales of £1,164 million (2009: £912 million) and £761 million of new business profit (2009: £664 million), up 28 per cent and 15 per cent respectively on the prior year. The decline in our new business margin in the US from 73 per cent in 2009 to 65 per cent in 2010 was expected. Nevertheless, Jackson successfully defended most of the exceptional margin gains achieved in 2009 in taking advantage of the extreme dislocation prevalent in the corporate bond market. Jackson has capitalised on the weakened competitive environment in the US life insurance market and has emerged as one of the top three players in the variable annuity market in terms of sales and number two in terms of net flows. However, our expansion in variable annuities has been opportunistic and this market share may not be sustained as competition re-emerges over the medium term.
In asset management, we have delivered £8.9 billion of net inflows over 2010 compared with £15.4 billion in 2009, a year which benefited from exceptionally high flows into M&G’s fixed income funds due to the credit spread environment at the time. M&G is the driver of our inflows in asset management, producing £9.1 billion (2009: £13.5 billion) of net inflows in the period (£7.4 billion retail, £1.7 billion institutional). M&G’s track record in attracting positive net inflows is highly impressive, ranking number 1 in the UK retail market for the last nine consecutive quarters, making it one of the leading asset managers in Europe. At the end of 2010 it had external funds under management of £89.3 billion, an increase of £19.0 billion from the position at the beginning of the year; adding these funds to internal amounts, M&G’s total funds under management were £198.3 billion. Asia asset management continues to make great strides forward attracting £1.8 billion of retail and institutional inflows in 2010 (2009: £556 million). These were offset by £2.1 billion of outflows (2009: £1.4 billion inflows) in low margin money market funds where sales and redemptions tend to be highly volatile.
Profitability In terms of profitability, we have successfully built on the momentum seen last year and delivered another strong performance thanks to a continued focus on our core disciplines of value creation and capital conservation. We have delivered record profitability in 2010 with Group IFRS operating profit up 24 per cent to £1,941 million (2009: £1,564 million) and Group EEV operating profit based on longer-term investment returns (‘EEV operating profit’) up 20 per cent to £3,696 million (2009: £3,090 million) equivalent to an annual return on embedded value of 18 per cent (2009: 15 per cent).
“ In terms of profitability, we have successfully built on the momentum seen last year and delivered another strong performance thanks to a continued focus on our core disciplines of value creation and capital conservation.”
In asset management IFRS operating profit was up 27 per cent to £378 million compared to £297 million in 2009. M&G had a strong year benefiting from rising markets and the strong inflows described above, resulting in IFRS operating profit up 19 per cent to £284 million in 2010 (2009: £238 million). Asia asset management produced IFRS operating profit of £72 million up 31 per cent on the prior year (2009: £55 million), also benefiting from rising markets and an element of improving mix as £1.8 billion of high margin retail and institutional net inflows offset £2.1 billion of low margin money market net outflows.
In 2010, we generated £2,359 million of underlying free surplus from our in-force business, up 13 per cent from £2,089 million in 2009, and we reinvested £645 million of this into writing new business. Asia is the priority destination when it comes to reinvesting our capital and Prudential Corporation Asia (PCA)’s growth is not constrained by the supply of capital from the Group. In the US, we invest in an opportunistic manner reflecting the market and competitive environment at the time. In the UK, we take a selective approach and focus only on lines of business where we believe we have both the scale and expertise to compete successfully. In asset management, our businesses require minimal capital to fund growth. Thus, the split of the investment in new business in 2010 was £280 million into Asia, £300 million into the US and £65 million into the UK. The IRRs on this invested capital were more than 20 per cent in Asia, the US and the UK; with payback periods of three years, one year and four years respectively.
The remaining free surplus generated in the period was retained within our businesses and this will bolster local capital ratios. The total free surplus balance deployed across our life and asset management operations increased from £2,531 million at the beginning of the period to £3,338 million at the end of the period.
New financial objectives – ‘Growth and Cash’ The following discussion contains forward-looking statements that involve inherent risks and uncertainties. Prudential’s actual future financial condition or performance or other indicated results may differ materially from those indicated in any such forwardlooking statement due to a number of important factors (including those discussed under the heading ‘Risk factors’ in this report). See the discussion under the heading ‘Forward-looking statement’ at the end of this report.
(2009: £39 million); and • UK to deliver £350 million of net cash remittance to the Group in 2013
(iii) Cumulative net cash remittances1: • All business units in aggregate to deliver cumulative net cash remittances of at least £3.8 billion over the period 2010 to end-2013. These net remittances are to be underpinned by a targeted level of cumulative underlying free surplus generation of £6.5 billion over the same period.
2 Representing the underlying remittances excluding the £150 million impact of proactive financing techniques used to bring forward cash emergence of the in-force book during the financial crisis.
ASIA GROWTH OBJECTIVES Value of new business (including Japan) 713 901 1,426 IFRS operating profit* 465 604 930 BUSINESS UNIT NET REMITTANCE OBJECTIVES
In 2010 net remittances from business operations increased to £935 million, equivalent to 55 per cent of underlying free surplus generated (after investment in new business) of £1,714 million. The increased level of net remittances further illustrates both the strong and improving capital generative nature of our business, with a greater proportion of this capital being returned to the corporate centre in the form of dividends. The delivery of the 2010 to 2013 financial objectives will see this trend continue.
Capital position, financing and liquidity The Group has continued to maintain a strong capital position. At the end of 2010 our IGD surplus stood at £4.3 billion (2009: £3.4 billion), with coverage a very strong 3.0 times the requirement. All of our subsidiaries maintain strong capital positions at the local regulatory level. In particular, Jackson’s RBC ratio has continued to strengthen throughout the period under review and at the end of 2010 this ratio stood at 483 per cent.
We continue to engage with rating agencies in order to provide insurance financial strength ratings for the Group. Prudential is currently rated A+ by S&P, A2 (negative outlook) by Moody’s and A by Fitch.
The competitive landscape for the life sector varies by market but has largely remained consistent with that seen in prior years. Most markets feature a mix of local and multinational players whose definitions of business success may differ.
Tied agency continues to dominate although distribution through banks is becoming increasingly significant, with examples like HSBC Life and Bank of China Life in Hong Kong. Across the region there is little direct competition on products; there are no patents or copyrights in life insurance, or on product pricing, where regulators typically define the parameters for the industry.
A positive development in a number of markets has been the development of the financial press. Many leading publications carry regular sections on personal financial planning and there is healthy debate on the uses of particular types of product. Prudential is a champion of improving standards of financial literacy.
Strategy overview The overarching objective for Prudential in Asia is to continue building scale profitably, leveraging our advantaged platform. The strategic priorities articulated in 2006 remain entirely relevant and continue to be driven in a highly focused and disciplined way. While market outperformance in terms of new business growth is an indicator of scale, we do not pursue volume for its own sake as we put profitability, returns on capital and capital efficiency ahead of topline growth.
* Operating profit from long-term operations including Japan but excluding asset management operations, development costs and Asia regional head office expenses.
During 2010 total average agent numbers excluding India at 154,000 were up 7.5 per cent over 2009. In India, where significant regulatory changes were introduced during the year, agent numbers were down 27 per cent to 168,000 at the end of December 2010. This is in line with our strategy to rationalise expense levels and focus on productivity improvements, which puts us in a strong position to respond to the recent regulatory changes. Excluding India, our agency productivity in terms of average APE per agent increased by 10 per cent.
Financial performance New business for the fourth quarter was a new record at £435 million, up eight per cent on the same period last year, which was already a record quarter and the full year 2010 was £1,501 million up 24 per cent on 2009 and an impressive 44 per cent ahead of 2007, the last full year to be unaffected by the 2008/2009 financial crisis. Agency remains the largest distribution channel accounting for 66 per cent of new business volumes and with the proportion from bancassurance increasing from 25 per cent to 26 per cent. The proportion of linked and protection business remained broadly in line with prior year at 41 per cent and 27 per cent respectively. With the economic recovery, the size of average cases, excluding India, increased nine per cent. Importantly, our continued emphasis on regular premium business is reflected in its 93 per cent contribution to total APE, which is also in line with prior year.
New business market share statistics for full year 2010 are not yet available but based on our estimates and market intelligence we expect to have retained or improved our market rankings in most markets across the region.
Consistent with our ‘value over volume’ priority we have maintained our product and pricing disciplines. New business profits of £9021 million are up 24 per cent over 2009. Average new business profit margins have remained the same as prior year at 60 per cent, with the positive impacts of country mix changes having largely been offset by operating assumption changes.
• Double 2009 value of IFRS life and asset management pre-tax operating profit
Full year 2010 operating profits from long-term business reported under the IFRS basis were £536 million, up 29 per cent over 2009 reflecting increased crystallisation of profits from the in-force book and lower new business strain of four per cent of APE compared to six per cent last year1. All operations aside from Japan, China and Taiwan made an IFRS profit in 2010.
Hong Kong delivered an excellent result in 2010 with new business APE of £287 million up 19 per cent on prior year. Our continuing success in this market is underpinned by the quality of both our distribution and product development. In 2010 some 42 per cent of our new business sales were from new products launched in the year.
During 2010 we have added new bancassurance agreements with UOB, SCB and Permata.
In Korea we remain focused on writing profitable business and remain resolute in our unwillingness to compete in the low margin, capital-intensive guaranteed products sector. New business volumes of £96 million for 2010 are 21 per cent lower than last year. We remain confident in our approach and the value this is generating for shareholders. The fourth quarter 2010 APE sales at £27 million were four per cent higher than the fourth quarter 2009. Persistency in Korea continues to improve.
Singapore also had a very strong 2010 with new business of £175 million up 37 per cent on prior year with improvements in agency productivity (APE per agent up 15 per cent) and the very successful launch of bancassurance with UOB that generated 11 per cent of new business.
The United States is the world’s largest retirement savings market. Each year, more of the 78 million baby boomers1 reach retirement age, triggering a shift from savings accumulation to retirement income generation for more than US$10 trillion of accumulated wealth over the next decade.2
“ Jackson’s strategy continues to focus on balancing volume and capital consumption for both variable and fixed annuities.”
MIKE WELLS PRESIDENT AND CHIEF EXECUTIVE OFFICER JACKSON NATIONAL LIFE INSURANCE COMPANY
In 2010, Jackson added two new optional lifetime guaranteed minimum withdrawal benefits (GMWBs) to its variable annuity products. LifeGuard Freedom 6 Net GMWB, introduced in May, gives investors the opportunity to help offset their tax liability by increasing their available withdrawal amounts to generate more income. LifeGuard Freedom Flex, introduced in October, is the industry’s first customisable guaranteed minimum withdrawal benefit. Freedom Flex extends the menu-driven construction that Jackson offers in its variable annuity products, which gives investors the ability to build a personalised benefit based on their individual retirement planning objectives, while paying only for those options elected. Additionally, Jackson added six portfolios from American Funds and added BlackRock, managing two portfolios, to its variable annuity fund line-up during the year.
Continue to focus on improving efficiency of operations Jackson continues to invest in its back office staffing and systems to provide world class customer service in an efficient and cost effective manner. In 2010, for the fifth consecutive year, Jackson was rated as a ‘World Class’ service provider by Service Quality Measurement Group1. Jackson was able to provide this level of service in 2010 while processing record retail sales and maintaining its ratio of statutory general expenses to average assets (one measure of efficiency) at the 2009 level of 44 basis points.
Expand retail operation With consistent, high-quality wholesaling support and customer service, combined with stability in product offering, pricing and financial strength ratings and the ability to bring new products to market swiftly, Jackson continues to be an attractive business partner for its long-term distributors, as well as attract new distributors. During 2010, Jackson increased the number of licensed agents and registered representatives to more than 130,000.
Financial performance IFRS pre-tax operating profit for the long-term business was £833 million in 2010, up 35 per cent over the £618 million in 2009. This increase was primarily due to higher separate account fee income due to substantial positive net flows and the improved equity markets and higher spread income.
* Based on longer-term investment returns and excluding broker-dealer, fund management and Curian. † The Company has amended the presentation of IFRS operating profit for its US operations to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. 2009 amounts have been amended accordingly.
“ In 2010, for the fifth consecutive year, Jackson was rated as a ‘World Class’ service provider by Service Quality Measurement Group1. ”
Total spread income, including the expected return on shareholders’ assets, of £817 million increased 31 per cent over the £622 million in 2009, primarily due to decreased crediting rates on fixed annuities and higher income on the growing general account assets. Jackson undertook various interest rate swap transactions during 2010 to more closely match the overall asset and liability duration, benefiting spread income in 2010 by £108 million.
Administration expenses totalling £344 million in 2010 compared to £259 million in 2009, with the increase due primarily to higher asset based commissions which are excluded from acquisition costs.
With the improvement in the bond markets in 2010, and active management of the investment portfolio to reduce certain investment risks, Jackson realised net gains of £11 million in 2010 compared to net realised losses of £506 million in 2009. Jackson incurred losses, net of recoveries and reversals, on credit related sales of bonds of £89 million (2009: less than £1 million). Write downs were £124 million (£630 million in 2009), including £71 million on RMBS and £39 million on ABS. More than offsetting these losses were interest related gains of £224 million (2009: £125 million), primarily due to sales of lower rated CMBS and corporate debt.
“ Jackson ranked third in new variable annuity sales in the US in 2010 with a market share of 11 per cent, up from fourth and a market share of eight per cent in 20091.”
Fixed annuity APE sales of £84 million were down 20 per cent from the prior year, as consumer demand for the products fell due to the continued low interest rate environment. Jackson’s new business opportunities were balanced with the goals of capital and cash conservation. Jackson ranked eighth in sales of traditional deferred fixed annuities through the third quarter of 2010, with a market share of three per cent compared to 13th with a two per cent market share for the full year 20092.
Fixed index annuity (FIA) APE sales of £109 million in 2010 were down 24 per cent from 2009 as Jackson focused its marketing efforts on the higher margin variable annuity products. Jackson ranked sixth in sales of fixed index annuities through the first three quarters of 2010, with a market share of five per cent, down from fourth and a market share of eight per cent for the full year 20093.
EEV basis new business profits of £761 million were up 15 per cent on 2009, reflecting a 28 per cent increase in APE sales offset somewhat by lower new business margins. Total new business margin was 65 per cent, compared to 73 per cent achieved in 2009.
The variable annuity new business margin of 72 per cent in 2010 decreased somewhat from 81 per cent in 2009, as lower assumed separate account returns and lower assumed spreads on the guaranteed funds were partially offset by an increase in-the take-up rate on guaranteed benefits – particularly guaranteed minimum withdrawal benefits.
In 2010, Jackson invested £300 million of free surplus to write £1,164 million of new business (2009: £326 million and £912 million, respectively). The reduction in capital consumption year-on-year was caused predominantly by the differing business mix in 2010, when Jackson wrote a higher proportion of variable annuity business, which consume lower levels of initial capital, while maintaining a disciplined approach to fixed and fixed index annuity pricing.
Prudential UK competes selectively in the UK’s retirement savings and income market. The focus of the business is to balance writing profitable new business at attractive returns on capital with sustainable cash generation, which is key for the Group and capital preservation. It is this discipline that has enabled Prudential UK to deliver another strong performance in 2010.
The UK has a mature life and pensions market which is characterised by an ageing population – in particular, through two waves of baby-boomers born after World War II and in the 1960s – with wealth distribution significantly skewed and very much concentrated in the 45-74 age group. In this context, the retirement and near-retirement segments are highly attractive.
Business overview Selective participation in the retirement income and savings market Prudential UK has a strong individual annuity business, built on a robust pipeline of internal vestings from maturing individual and corporate pension policies. The internal vestings pipeline is supplemented by sales through intermediaries and strategic partnerships with third parties where Prudential is the recommended annuity provider for customers vesting their pensions at retirement.
Total individual annuity sales of APE £205 million were six per cent lower than in 2009, mainly due to lower sales of conventional annuities where Prudential UK proactively managed the flow of new business to control capital consumption. This was partially offset by strong sales of with-profits annuities which represented 22 per cent of total annuity sales, compared with 15 per cent last year, due to the continuing success of the innovative Income Choice Annuity (ICA). The ICA is a with-profits product, launched in March 2009, which offers consumers security with a potential for income growth.
• Balance writing profitable new business at attractive returns on capital with sustainable cash generation and capital preservation
• Continue to pursue a valuedriven strategy built around our core strengths in withprofits and annuities
Unit-linked bond sales of APE £20 million were 61 per cent up on 2009, helped by the launch of PruDynamic portfolio funds in January 2010 and the continued success of the PruSelect fund range.
Corporate pension sales of APE £221 million were five per cent above 2009 levels. Prudential UK administers corporate pensions for over 600,000 scheme members sponsored by some of the UK’s largest employers and has also built a very strong position in the provision of with-profits Additional Voluntary Contribution (AVC) arrangements. Prudential UK provides AVCs to 66 of the 99 Local Government Authorities in England & Wales. During 2010, Prudential UK continued to focus on strengthening existing relationships through further improvements to online servicing capabilities as well as targeted marketing activity.
Total EEV basis operating profit 982 921 7 921 7 £719m Total IFRS operating profit 2013 FINANCIAL OBJECTIVE
Capitalising on our competitive advantages The strength and investment performance of Prudential UK’s With-Profits Fund is widely recognised in the industry and was demonstrated by the 12.7 per cent pre-tax investment return achieved for policyholder asset shares in the Fund in 2010. The Fund has delivered investment returns of 82.1 per cent over ten years, which compares favourably with other with-profits funds and the FTSE All-Share Index (total return) of 43.3 per cent over the same period. This strong performance has shown that with-profits, when invested in an actively managed, and financially strong fund like Prudential’s, continues to be a very attractive medium to long-term investment, offering strong annualised returns compared with other investment options. Prudential’s with-profits customers benefit from the security offered by Prudential’s large inherited estate, with the free assets of the with-profits fund valued at approximately £6.8 billion at the year end, valued on a realistic basis.
Building capabilities In September 2010, Prudential UK announced a five-year exclusive agreement with Santander to distribute its market-leading investment bonds in the UK. Prudential UK’s Flexible Investment Plan, including PruFund, will be available to Santander’s UK customers in 1,300 high street branches throughout the country.
Total APE sales increased by 13 per cent to £820 million and included the bulk annuity buy-in insurance agreement. This transaction generated EEV new business profit of £104 million and IFRS operating profits of £63 million. Prudential UK will continue to maintain a very strict focus on value and only participate in capital-efficient transactions that meet its strict return on capital requirements. Including this transaction, Prudential UK’s new business margin increased from 32 per cent to 45 per cent.
“ Demand for Prudential UK’s with-profits products remains resilient and the business has continued to innovate to maintain and enhance its position in the market.”
Higher sales and margins resulted in total EEV new business profits increasing by 59 per cent to £365 million. This improvement included the impact of the bulk annuity transaction, but also reflected improved retail margins, in particular on with-profits bonds. Retail EEV new business profits at £257 million were 15 per cent up on 2009 (£223 million).
During 2010 Prudential UK remitted cash of £420 million to the Group, comprising £202 million from the annual with-profits transfer to shareholders and £218 million from the shareholder backed business, which included £120 million from one-off releases of surplus and net financing repayments. The business expects to generate £350 million per annum sustainable cash remittances by 2013, supported by the strength of the with-profits business and surpluses arising from the large book of shareholder backed annuities, maintained into the future by the pipeline of maturing individual and corporate pensions.
This aim is achieved by creating an environment that is attractive to investment talent. The core focus on investment performance, combined with a well-diversified business mix and established distribution capabilities, has helped M&G achieve strong net sales performance, growth in funds under management and increased profitability.
In the institutional marketplace, M&G’s approach centres on leveraging capabilities developed primarily for the Prudential internal funds to create higher margin external business opportunities. This has allowed M&G to offer third-party clients an innovative range of specialist fixed income strategies, including leveraged finance and infrastructure investment.
• Maintain long-term investment performance for both internal and external funds
The improved diversification of sales by asset class was matched by an increased diversification of sales performance by region. In 2009, 19 per cent of net retail flows were from M&G’s distribution business outside of the UK, primarily based in Europe. This figure had increased to 39 per cent by the end of 2010.
Notes 1 Source: Fundscape Pridham Report. 2 Source: Lipper FMI Saleswatch.
The consistency and excellence of its performance resulted in M&G being awarded the prestigious 2010 Global Group of the Year award at the 15th annual Investment Week Fund Manager of the Year Awards. This is the second time in three years that M&G has received this award.
M&G remains focused on cost control with the cost/income ratio1 at 63 per cent over the full year, an improvement on the 2009 result of 65 per cent. A key aspect to cost management is to create a more flexible operational cost base, where appropriate, to enable the business to react to significant changes in its business profile. During 2010, M&G outsourced fund accounting, taxation and pricing operations for its UK regulated retail funds to an external supplier. The transition of these services has secured for M&G access to a scalable global platform to support both the current and future needs of its funds. Outsourcing this element of its operational platform to a dedicated provider of these services also ensures that M&G can focus on the continued delivery of strong investment performance and winning new business.
M&G continues to provide capital efficient profits and cash generation for the Prudential Group, as well as strong investment returns on the internally managed funds. Cash remittances of £150 million in 2010 provided strong support for the Group’s corporate objectives.
The business has consolidated its position in a period of difficult and volatile markets, focusing on liquidity across the Prudential Group, management of existing asset portfolio and conservative levels of new investment. Development of new product and infrastructure has continued, helping to maintain the dynamism and flexibility necessary to identify and realise opportunities for profit within acceptable risk parameters. PruCap is committed to continuing to work closely with other business units across the Prudential Group to exploit opportunities and increase value creation for Prudential as a whole. In particular, PruCap offers to the Prudential Group a holistic view on hedging strategy, liquidity and capital management.
PruCap has a diversified earnings base derived from its portfolio of secured loans, debt investments and the provision of wholesale markets services. As a result of lower net operating revenue and prevailing market conditions, IFRS operating profits decreased by 38 per cent to £38 million, however PruCap still delivered a cash remittance to the Group holding company of £52 million.
Investment performance is a key driver of success and for 2010, 68 per cent of our funds outperformed their peer medians or benchmarks1. Accolades received during the year included the PCA Indonesia Equity Open Fund being recognised as ‘Fund of the Year 2010’ in Japan by Morningstar amongst 557 open-ended funds in the domestic market, as well as the PCA China Dragon A-share Equity Fund being named ‘Best fund in overseas equity category’ in Korea’s 2010 MoneyToday – Morningstar Fund Awards. In India and China, funds offered by our joint venture businesses were ranked topdecile by their respective local rating agencies.
Financial performance Prudential’s Asian asset management business’ total FUM crossed the £50 billion mark for the first time and closed the year at £52 billion which includes a core £25 billion from Prudential Corporation Asia’s life funds, £5 billion of assets from the Group and £22 billion from third-party customers. Compared to 2009, the overall FUM increased by 22 per cent, driven by net inflows of £1.8 billion and a total of £7.7 billion of positive market and currency related movements.
IFRS operating profit from fund management of £72 million is 31 per cent higher than in the prior year. The Funds business remitted a net £33 million of surplus capital to the Group during 2010.
Business overview PPM America (PPMA) manages assets for Prudential’s US, UK and Asian affiliates. PPMA also provides other affiliated and unaffiliated institutional clients with investment services including collateralised debt obligations (CDOs), private equity funds, institutional accounts, and mutual funds. PPMA’s strategy is focused on managing existing assets effectively, maximising the benefits derived from synergies with our international asset management affiliates, and leveraging investment management capabilities across the Prudential Group. PPMA also pursues third-party mandates on an opportunistic basis.
At 31 December 2010, funds under management of £54 billion were as follows: AER
Financial performance At 31 December 2010, Curian had total assets under management of £3.5 billion, compared to £2.3 billion at the end of 2009. Curian generated deposits of £1,361 million in 2010, up 71 per cent over 2009. The increase in both deposits and assets under management was mainly due to an expansion of Curian’s investment platform with the addition of two new investment strategies, plus an expansion of the firm’s wholesaling team, in addition to a rebound from the difficult conditions in the equity markets in early 2009.
Curian’s assets under management surpassed the break-even point during the year, resulting in the firm reporting its first full-year IFRS basis operating profit in 2010, with a net profit of £1 million versus a loss of £6 million during 2009.
Asian operations 604 465 US operations 855 622 UK operations: UK insurance operations 719 657 M&G 284 238 Other income and expenditure (450) (395) Restructuring and Solvency II implementation costs (71) (23)
OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS* note i 1,941 1,564
Profit from continuing operations before tax attributable to shareholders 1,461 746
Asian operations 1,518 1,154 US operations 1,480 1,237 UK operations: UK insurance operations 982 921 M&G 284 238 Other income and expenditure (494) (433) Restructuring and Solvency II implementation costs (74) (27)
OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS* 3,696 3,090 Short-term fluctuations in investment returns (30) 351 Mark to market value movements on core borrowings (164) (795) Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (11) (84) Effect of changes in economic assumptions (10) (910) Costs of terminated AIA transaction (377) – Gain on dilution of holding in PruHealth 3 – Profit on sale and results of Taiwan agency business – 91
* Basis of preparation Results bases With the exception of the adoption of IFRS 3 (Revised) on business combinations and associated amendments to other standards and the altered basis of presentation for Jackson’s IFRS operating profit referred to below, the basis of preparation of the statutory IFRS basis results and supplementary IFRS basis information is consistent with that applied for the 2009 results and financial statements. The EEV basis results have been prepared in accordance with the European Embedded Value Principles issued by the CFO Forum of European Insurance Companies in May 2004. Life insurance products are, by their nature, long-term and the profit on this business is generated over a significant number of years. Accounting under IFRS alone does not, in Prudential’s opinion, fully reflect the value of future profit streams. Prudential considers that embedded value reporting provides investors with a measure of the future profit streams of the Group’s in-force long-term businesses and is a valuable supplement to statutory accounts. With the exception of the presentation of the new business results of the Japan life operation which ceased writing new business in February 2010, there has been no change to the basis of presentation of the EEV results from the 2009 results and financial statements.
Operating profit based on longer-term investment returns Consistent with previous reporting practice, the Group provides supplementary analysis of IFRS profit before tax attributable to shareholders and analyses its EEV basis results, so as to distinguish operating profit based on longer-term investment returns from other elements of total profit. On both the IFRS and
Insurance Groups Directive capital surplus (as adjusted) The surpluses shown for 2010, which is estimated, and 2009 are before allowing for the final dividends for 2010 and 2009 respectively.
Asset management business: M&G 284 238 19 238 19 Asia asset management 72 55 31 58 24 Curian 1 (6) 117 (6) 117 US broker-dealer and asset management 21 10 110 10 110
Other income and expenditure (450) (395) 14 (396) 14 Solvency II implementation costs (45) – 100 – 100 Restructuring costs (26) (23) 13 (23) 13
Note i The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in the supplementary analysis of profit in short-term fluctuations in investment returns. 2009 amounts have been amended accordingly.
In Asia, IFRS operating profit for long-term business increased by 29 per cent from £416 million in 2009 to £536 million in 2010, with the £416 million in 2009 being inclusive of a £63 million one-off credit relating to changes to the Malaysia reserving basis. Profits from in-force business grew by 20 per cent from £494 million in 2009 to £593 million in 2010, reflecting the continued build-up of the business in the region and the positive impact of currency fluctuations. New business strain of £56 million1 (2009: £72 million) was 3.7 per cent of APE new business sales, a significant improvement compared to last year (2009: 6.0 per cent1) demonstrating management’s continued focus on capital efficient growth.
There was a continued strong performance across the Asian region. Hong Kong, Singapore, Malaysia and Indonesia accounted for 81 per cent or £434 million of operating profits (2009: £390 million, including the impact of the one-off credit recorded in Malaysia). Strong underlying improvements were reported in Indonesia with operating profits higher by 54 per cent to £157 million, reflecting both the success of our product offering and the growing maturity of this business. Malaysia operating profits, excluding the one-off credit in 2009, were also higher by 49 per cent to £97 million, reflecting the growing size of our book of business and the strong earnings profile of our health and protection business. The contribution to IFRS profits from the other Asian businesses is also improving. The closure of Japan to new business has substantially reduced the IFRS losses of this business and Taiwan saw an improvement in the year as it refocused on bancassurance business. Korea benefited from improved in-force profits in the period and
Vietnam was up 43 per cent to £43 million. Changes to reserving bases in India and China contributed a £19 million one-off profit, with both countries showing improvement in their underlying results excluding this change.
The US long-term business operating profit increased by 35 per cent from £618 million in 2009 to £833 million in 2010, reflecting strong growth in spread and fee income, up £195 million and £182 million respectively, as Jackson’s policyholder liability balances grew. Jackson undertook various transactions in 2010 to more closely match the overall asset and liability duration. This contributed £108 million to operating profit in the period. These positive contributions to profits have been partially offset by increased costs and DAC amortisation primarily reflecting Jackson’s growth.
Jackson’s operating profit net of related DAC amortisation excludes the net equity hedge accounting effect of negative £367 million (2009: negative effect of £159 million) following a change in the presentation of operating profit based on longerterm investment returns. Jackson’s hedging approach has always focused on optimising the economic outcome ahead of accounting results, which means we accept an element of variability in accounting outcomes in order to ensure we achieve the right economic result. We believe this presentational change, which reclassifies net equity hedge accounting effects as short-term fluctuations in investment returns, will ensure that Jackson’s operating results better reflect its unchanged and continued focus on optimising economic value.
Accounting volatility previously arose within the reported IFRS operating profit due to the difference between the movement in the fair value of free standing derivatives within Jackson’s equity hedging programme for annuity business and the movement in the accounting value of Jackson’s liabilities for variable and fixed index annuity guarantees. Typically, under IFRS, reserves are not fair valued, which for the US variable annuities business produces a distorting accounting effect on the IFRS operating profit that is not representative of the true economics of Jackson’s hedging programme. Jackson’s economically based hedges are marked-to-market. As a result, when the markedto -market value of the hedges changes, there are offsetting changes in the economic value of the hedged liabilities which are not reflected in our accounts. This is particularly relevant for the Guaranteed Minimum Death Benefit (GMDB) and the
Guaranteed Minimum Withdrawal Benefit (GMWB) with ‘for-life’ features. This mismatch creates additional short-term volatility in our profit which does not reflect changes in the underlying economic position.
Over the long-term the impact of this accounting distortion should cumulatively net out to a broadly neutral effect, but in the short-term the impact to the IFRS total profit can be highly volatile. The recent growth in Jackson’s variable annuity business has resulted in this short-term effect having a greater impact on our IFRS operating profit than in prior years. In the 2010 half year financial statements this accounting mismatch produced a positive contribution to the IFRS operating profit of £123 million for the first six months as compared to a negative contribution of £367 million for the full year.
In our UK business, total IFRS operating profit grew by nine per cent to £719 million in 2010, reflecting higher retail profits and the bulk annuity transaction agreed in the last quarter of 2010. Profit from UK general insurance commission decreased by £5 million to £46 million in 2010 in line with the decline in the in-force policy numbers as the business matures.
The £55 million increase in the charge for other income and expenditure to £450 million primarily reflects an increase in interest payable on core structural borrowings.
Spread income has increased by £260 million to £1,013 million, an increase of 35 per cent. This is higher than the six per cent increase in average liabilities, leading to an increase in margin, from 148 bps in 2009 to 188 bps in 2010. The increase in spread income arises primarily in the US, where investment spread has increased by £168 million. This reflects transactions in the period to more closely match the overall asset and liability duration in 2010, with an overall impact of £108 million, as well as decreased crediting rates on fixed annuities.
Acquisition costs have increased in absolute terms by £187 million to £1,674 million in 2010, but as percentage of APE new business sales they have fallen from 51 per cent in 2009 to 48 per cent in 2010. This is primarily due to Asia’s continuing improvements to new business strain, and in the US a move away from up front commission to on-going asset based commission, which is treated as an administration expense.
DAC adjustments represents the level of costs deferred in the year offset by amortisation in the period. The year-on-year movement reflects changes in business mix and, in part, the acceleration of DAC amortisation in US.
iii Acquisition cost ratio represents shareholder acquisition costs as a percentage of total APE, including Japan APE new business sales of £7 million (2009: £52 million).
The increase in US asset management operating income principally arises in PPMA, reflecting increased performance fees and higher management fees.
IFRS basis results – Analysis of asset management pre-tax IFRS operating profit based on longer-term investment returns 2010 £m
Operating income* 482 160 89 183 914 Operating profit based on longer-term investment returns 177 55 61 4 297
IFRS basis profit after tax The total profit before tax from continuing operations attributable to shareholders was £1,461 million in 2010, compared with £746 million in 2009. The improvement reflects the increase in operating profit based on longer-term investment returns and the impact of one-off items. The profit in 2010 was reduced by the terminated AIA transaction costs of £377 million, whereas 2009 was adversely impacted by the £621 million loss recorded as part of the disposal of the Taiwan Agency business and IGD hedge costs of £235 million.
The positive short-term fluctuations of £114 million for our Asian operations primarily reflect unrealised gains on the shareholder debt portfolio, as well as a £30 million unrealised gain on the Group’s 8.66 per cent stake in China Life Insurance Company of Taiwan.
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (10) (74) Costs of terminated AIA transaction (377) – Gain on dilution of holding in PruHealth 30 – Loss on sale and results of Taiwan agency business – (621)
PROFIT BEFORE TAX FROM CONTINUING OPERATIONS ATTRIBUTABLE TO SHAREHOLDERS 1,461 746
The positive short-term fluctuations of £116 million for our UK operations reflect principally value movements on fixed income assets backing the capital of the shareholder-backed annuity business, brought about by the falls in yields during 2010.
Costs of terminated AIA transaction During the period the Group incurred pre-tax costs in relation to the AIA transaction of £377 million. This comprises the termination break fee of £153 million, the costs associated with foreign exchange hedging of £100 million, underwriting fees of £58 million and adviser and other fees totalling £66 million. After expected tax relief, the post-tax cost is £284 million.
Gain on dilution of holding in PruHealth On 1 August 2010, Discovery Holdings of South Africa, the Group’s joint venture partner in its investment in PruHealth, completed the acquisition of the entire share capital of Standard Life Healthcare, a wholly-owned subsidiary of the Standard Life Group, for £138 million. Discovery funded the purchase of the Standard Life Healthcare transaction, and contributed Standard Life Healthcare to PruHealth as a capital investment on completion. As a result of the transaction, Discovery have increased their shareholding in PruHealth from the previous level of 50 per cent to 75 per cent, and Prudential’s shareholding reduced from 50 per cent of the previous joint venture structure to 25 per cent of the new structure of the much enlarged business.
Effective tax rates The effective rate of tax on operating profits, based on longerterm investment returns, was 11 per cent (2009: 24 per cent). Adjusting the reported tax rate to exclude the exceptional tax credit of £158 million which primarily relates to the impact of a settlement agreed with the UK tax authorities, the underlying tax rate on 2010 operating profits was 19 per cent. This is lower than 2009 primarily due to 2010 benefiting from revisions to prior period tax returns in the UK and an increase in the proportion of income in Asia which attracts lower tax. The effective rate of tax at the total IFRS profit level for continuing operations was two per cent (2009: seven per cent). Adjusting the rate in 2010 to exclude the exceptional tax credit of £158 million gives an underlying tax rate at the total IFRS profit level for 2010 of 13 per cent. In both 2009 and 2010, we have benefited from utilising carried forward tax losses for which no deferred tax asset had been previously recognised.
Insurance business: Asia 1,450 1,105 31 1,190 22 US 1,458 1,233 18 1,249 17 UK 936 870 8 870 8 Development expenses (4) (6) 33 (6) 33
Other income and expenditure (494) (433) 14 (434) 14 Solvency II implementation costs (46) – 100 – 100 Restructuring costs (28) (27) 4 (27) 4
In the UK operating assumption changes, experience variances and other items had an overall impact of positive £21 million, which is not significant in the context of the size of this business.
EEV basis profit after tax and non-controlling interests Short-term fluctuations in investment returns EEV operating profit is based on longer-term investment return assumptions rather than actual investment returns achieved. Short-term fluctuations represent the difference between the actual investment return and those assumed in arriving at the reported operating profit.
For our UK business, the short-term fluctuations in investment returns were positive £336 million (2009: positive £445 million), principally due to the 2010 return on the investments of the with-profits life fund (covering policyholder liabilities and unallocated surplus) of positive 12.0 per cent being higher than the long-term assumed return of 6.7 per cent and to the unrealised gains arising on corporate bonds held as part of the annuity portfolio.
Mark to market movement on core borrowings The mark to market movement on core borrowings was a negative £164 million, as credit spreads continued to narrow to more normal levels.
EEV basis operating profit based on longer-term investment returns 3,696 3,090 Short-term fluctuations in investment returns: – Insurance operations (55) 481 – IGD hedge costs – (235) – Other operations 25 105 (30) 351 Mark to market value movements on core borrowings (164) (795) Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (11) (84) Effect of changes in economic assumptions (10) (910) Costs of terminated AIA transaction (377) – Gain on dilution of holding in PruHealth 3 – Profit on sale and results of Taiwan agency business – 91
Effect of changes in economic assumptions The effect of changes in economic assumptions of negative £10 million comprises negative £71 million for Asia, negative £1 million for the US and positive £62 million for the UK.
In our Asian business, economic assumption changes were negative £71 million mainly reflecting the impact of falls in interest rates and the derisking of the portfolios in Hong Kong and Singapore.
In our UK business, economic assumption changes were positive £62 million, where the impact of the lower risk discount rate more than offset the effect of lower expected long-term rates of return following a reduction in UK Gilt rates of 0.4 per cent during 2010.
On an EEV basis, a gain of £3 million arises upon the dilution, representing the difference between the fair value of the enlarged investment still held and the embedded value of the original 50 per cent investment holding. From 1 August 2010 the Group incorporates 25 per cent of PruHealth’s new business sales, profits and EEV in-force results into its consolidated EEV financial results.
Effective tax rates The fall in the total tax rate, excluding the impact of the exceptional tax credit, from 28 per cent in 2009 to 22 per cent in 2010 arises from the effect of the mark to market value movements on core borrowings. As noted above, these movements gave rise to a charge in the EEV income statement of £164 million in 2010 and £795 million in 2009. As the liabilities are generally held to maturity or for the long-term, no deferred tax asset or liability is established on the market value adjustments and therefore, in 2010 and 2009 no deferred tax credits were established. The underlying tax rate on profits excluding the mark to market value adjustment on core borrowings and the exceptional tax credit was 21 per cent in 2010 as against 19 per cent in 2009.
Basic EPS based on operating profit after tax and non-controlling interests: 2010 pence 2009 pence
Basic EPS based on total profit after non-controlling interests: Notes i The exceptional tax credit in 2010 relates to a £158 million credit which primarily relates to the impact of a settlement agreed with the UK tax authorities.
ii The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. 2009 amounts have been amended accordingly.
Dividend per share Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved by shareholders. The second interim dividend of 13.56 pence per ordinary share for the year ended 31 December 2009 was paid to eligible shareholders on 27 May 2010 and the 2010 interim dividend of 6.61 pence per ordinary share was paid to eligible shareholders on 23 September 2010.
Following the Board’s decision to rebase the dividend upwards and subject to shareholders’ approval, the 2010 final dividend of 17.24 pence per ordinary share will be paid on 26 May 2011 in sterling to shareholders on the principal and Irish branch registers at 6.00pm BST on Friday, 1 April 2011 (the ‘Record Date’), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on the Record Date (‘HK Shareholders’). Holders of US American Depositary Receipts (‘US Shareholders’) will be paid their dividends in US dollars on or about five days after the payment date of the dividend to shareholders on the principal register. The final dividend will be paid on or about 2 June 2011 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte.) Limited (‘CDP’) at 5.00pm Singapore time on the Record Date (‘SG Shareholders’). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at 4.00pm UK time on 8 March 2011. The exchange rate at which the dividend payable to the SG Shareholders will be translated into SG$ will be determined by CDP. The dividend will distribute an estimated £439 million of shareholders’ funds.
The final dividend of 17.24 pence per share brings the total dividend for the reporting period to 23.85 pence per share, four pence per share (20 per cent) higher than the 2009 total dividend.
Operating profit based on longer-term investment returns 1,941 1,564 3,696 3,090 Items excluded from operating profit (480) (818) (589) (1,347)
TOTAL PROFIT BEFORE TAX 1,461 746 3,107 1,743 Exceptional tax credit 158 – 158 – Tax, discontinued operations and non-controlling interests (188) (70) (692) (498)
PROFIT FOR THE PERIOD 1,431 676 2,573 1,245 Exchange movements, net of related tax 251 (195) 693 (750) Unrealised gains and losses on Jackson securities classified as available for salenote a 478 1,043 – – Dividends (511) (481) (511) (481) New share capital subscribed 75 141 75 141 Other 36 29 104 162
Net worth note c 6,163 5,059 Value of in-force 12,051 10,283
Notes a Net of related changes to deferred acquisition costs and tax.
b The increase in free surplus of £683 million from 2010 arises primarily from £1,284 million being generated by the long-term business, off-set by cash paid to the holding company and other items.
c The increase in net worth in the period principally reflects the free surplus generated in the period, offset by cash paid to the holding company, changes to required capital and other items.
e The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge accounting credit effect (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. 2009 amounts have been amended accordingly.
f EEV shareholders’ funds excluding goodwill attributable to shareholders is £16,741 million (2009: £13,963 million).
IFRS Statutory IFRS basis shareholders’ funds at 31 December 2010 were £8.0 billion. This compares to the £6.3 billion at 31 December 2009, an increase of £1.7 billion, and equivalent to 28 per cent.
The movement reflects the profit for the year after tax and non-controlling interests of £1.4 billion, exchange translation gains of £0.3 billion, the improvement in the level of net unrealised gains on Jackson’s debt securities of £0.5 billion from the position at 31 December 2009 and other items of £0.1 billion, offset by dividend payments of £0.5 billion.
Overview The Group manages its internal cash flow by focusing on the free surplus generated by the life and asset management businesses as defined below and the percentage of net underlying free surplus that is remitted to the holding company as cash (‘the remittance ratio’). The tables below set out the Group’s free surplus generation for 2010, the holding company cash flow statement and a table showing the remittance ratio for each of the business operations.
TOTAL MOVEMENT DURING THE PERIOD 807 1,672 FREE SURPLUS AT 1 JANUARY 2,531 859
Comprised of: Free surplus relating to long-term insurance business 2,748 2,065 Free surplus of other insurance business 33 37 IFRS net assets of asset management businesses excluding goodwill 557 429
The shareholders’ funds at 31 December relating to long-term business of £18.2 billion comprise £7.4 billion (up 29 per cent from 2009) for our Asian long-term business operations, £4.8 billion (up 16 per cent from 2009) for our US long-term business operations and £6.0 billion (up 10 per cent from 2009) for our UK long-term business operations.
Post-tax new business profit for the year 672 (1) 671 495 266 1,433 1,432
Pre-tax new business profit for the year 902 (1) 901 761 365 2,028 2,027
period comprises the movement in this balance excluding foreign exchange, capital movements, and other reserve movements. Specifically, it includes amounts maturing from the in-force operations during the period less the investment in new business, the effect of market movements and other one-off items.
Free surplus invested in new business (231) (15) (246) (326) (103) (660) (675)
Net worth invested in new business (170) (16) (186) (26) (21) (217) (233)
Value of in-force created by new business 759 3 762 464 187 1,410 1,413
New business sales (APE) 1,300 1,356 924 723 New business margins (% APE) 60% 57% 73% 32% Internal rate of return* >20% >20% >20% >15%
* The internal rate of return is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the lifetime of the business written in shareholder-backed life funds is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is equal to the amount required to pay acquisition costs and set up statutory reserves less premiums received, plus required capital. The impact of the time value of options and guarantees is included in the calculation.
Overall, the Group wrote £3,485 million of sales on an APE basis1 in 2010 (2009: £2,844 million) generating a post-tax new business contribution to embedded value of £1,433 million (2009: £1,143 million). To support these sales, we invested £643 million of capital (2009: £660 million). By focusing on sales of products and in geographies which are less capital intensive, the Group has increased the amount of post-tax new business profit contribution1 to embedded value per £1 million of free surplus invested by 29 per cent to £2.2 million (2009: £1.7 million). We estimate the Group’s internal rate of return for the 12 months ended 31 December 2010 to be greater than 20 per cent. The amount of capital invested covers both new business strain, including commissions, of £182 million (2009: £209 million) and the required capital of £461 million (2009: £451 million). Management will continue to focus on capital preservation and investment in those areas which add most value to the Group.
In the US, investment in new business was £300 million, eight per cent lower than 2009 (£326 million) and considerably lower than the 28 per cent increase in APE new business sales. For each £1 million of free surplus invested we generated £1.7 million of post-tax new business contribution to embedded value (2009: £1.3 million). This higher return reflects a change in business mix with a higher proportion of variable annuity business and a reduced proportion of more capital intensive fixed annuities. The average free surplus undiscounted payback period for business written in the 12 months to 31 December 2010 was one year (2009: two years).
Expected period of emergence Asia US UK Total Asia US UK Total * The analysis excludes amounts incorporated into VIF at 31 December 2010 where there is no definitive timeframe for when the payments will be made. In particular it excludes the value of the shareholders’ interest in the estate. All amounts have been translated at year end exchange rates.
In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2010, the tables also present the expected future free surplus to be generated from the investment made in new business during 2010.
Undiscounted expected free surplus generation 4,680 1,282 911 6,873 Less: discount effect (3,713) (434) (582) (4,729)
Post-tax EEV new business profit 671 495 266 1,432 Tax 230 266 99 595
The equivalent discounted amounts of the totals shown in the table on the preceding are outlined below: 2010 £m
Our disciplined approach to writing low strain, high return, short payback new business, produces an expected free surplus generation profile with sizeable free surplus releases in the early years, thereby ensuring that the initial investment is paid back quickly and incremental profits are earned thereafter.
The combination of the long-term business in-force releases depicted in the previous tables, coupled with asset management profits, returns on excess assets together with the impact of future new business, reinforces our confidence that we remain on track to deliver a cumulative net free surplus after new business investment of £6.5 billion in the 2010 to 2013 period.
The above amounts can be reconciled to the Group’s financial statements as follows: Total £m
Discounted expected generation from all in-force business at 31 December 2010 14,990 Add: Free surplus of life operations held at 31 December 2010 2,748 Less: Time value of options and guarantees (369) Other non-modelled items* 845
ASIA NET 233 40 M&G PAID TO GROUP 150 93 PRUCAP PAID TO GROUP 52 82
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD 1,232 1,486 * Including central finance subsidiaries.
Cash remittances as a percentage of free surplus As previously highlighted, the Group focuses on the generation of free surplus by each of the Group’s business units and then balances cash remittances from these units between financing new business growth, managing market shocks and covering the Group’s central outgoings, including the shareholder dividend. The table above highlights this balance by comparing the 2010 net underlying free surplus generated with the net amounts that have been remitted by each of our underlying business operations.
Cash received from Jackson was £80 million in 2010, £41 million higher than the £39 million remitted in 2009. This is equivalent to a modest proportion of net underlying free surplus generated, reflecting our decision to retain free surplus in the business, in order to provide the capital to capture the attractive new business returns created by the market dislocation and to rebuild the capital buffers of this business following the 2008/2009 financial crisis. From 2011, it is planned that Jackson will increase the level of remittances to the Group.
Central outflows improved by £80 million to £226 million in 2010 (2009: £306 million). Lower corporate costs and higher tax receipts in 2010 more than offset increased net interest payments, following the additional debt raised in 2009, and Solvency II project spend.
Following a settlement reached with the UK tax authorities in relation to matters arising principally in 2001 to 2008, £266 million in exceptional tax outflows are expected to be made over the period from 2011 to 2013. We anticipate that half will be paid in 2011 and the remainder split evenly over 2012 and 2013.
In 2010, central cash resources funded the acquisition of UOB Life and related distribution agreements. In addition, £377 million relating to costs associated with the terminated AIA transaction were also funded from our central resources. Offsetting these outflows were net funds received of £120 million following bank loan reorganisation.
As a result of the transactions above, together with a £19 million foreign exchange revaluation gain, the overall holding company cash and short-term investment balances at 31 December 2010 decreased by £254 million to £1.2 billion from the £1.5 billion at 31 December 2009.
Holding company cash flow We continue to manage cash flows across the Group with a view to achieving a balance between ensuring sufficient net remittances from the businesses to cover the progressive dividend (after corporate costs) and maximising value for shareholders through the retention and the reinvestment of the free surplus generated at business unit level in the particularly profitable opportunities available to the Group given its established position in key life insurance markets. On this basis, the holding company cash flow statement at an operating level should ordinarily balance close to zero before exceptional cash flows, but from time to time additional remittances from business operations will be made to provide the Group with greater financial flexibility at the corporate centre.
Less: Liabilities Policyholder liabilities 214,727 186,398 Unallocated surplus of with-profits funds 10,253 10,019 224,980 196,417 Less: Shareholders’ accrued interest in the long-term business (10,176) (9,002)
214,804 187,415 Core structural borrowings of shareholders’ financed operations (IFRS book value basis) 3,676 3,394 Other liabilities including non-controlling interest 24,119 21,672
The following sections focus on key areas of interest in the balance sheet.
Debt securities 53,261 9,054 54,037 116,352 101,751 Equity 31,371 54,274 990 86,635 69,354 Property investments 8,993 745 1,509 11,247 10,905 Commercial mortgage loans 256 – 4,693 4,949 4,634 Other loans 1,888 – 2,424 4,312 4,120 Deposits 7,272 749 1,931 9,952 12,820 Other investments note i 3,887 131 1,832 5,850 5,138
The investments held by the shareholder-backed operations are predominantly debt securities, totalling £54 billion, £4 billion, £26 billion and £22 billion for Asia, the US and the UK long-term businesses respectively, of which 84 per cent, 95 per cent and 98 per cent are rated, either externally or internally, as investment grade.
In addition, £2 billion of debt securities was held by asset management and other operations, substantially all of which was managed by Prudential Capital.
NET FLOWS 1,298 7,368 1,029 9,695 7,171 Investment related items and other movements 1,523 3,464 4,289 9,276 10,820 Assumption changes 19 – (46) (27) (113) Acquisition of UOB Life Assurance Limited 464 – – 464 – Dilution of holding in PruHealth – – (27) (27) – Disposal of Taiwan agency business – – – – (3,508) Foreign exchange translation difference 1,362 1,380 (1) 2,741 (6,498)
WITH-PROFITS FUNDS – Policyholder liabilities 92,544 86,337 – Unallocated surplus 10,253 10,019
The increase reflects positive net flows (premiums less surrenders and maturities/deaths) of £9.7 billion in 2010 (2009: £7.2 billion), driven by strong inflows in the US (£7.4 billion) and Asia (£1.3 billion) and the £0.9 billion bulk annuity transaction in the UK. Positive investment-related and other items of £9.3 billion (2009: £10.8 billion) also contributed to the growth following improvements in the bond and equity markets during the year.
During 2010, the unallocated surplus, which represents the excess of assets over policyholder liabilities for the Group’s with-profit funds on a statutory basis, increased two per cent in 2010 to £10.3 billion.
Shareholders’ net borrowings and ratings Shareholders’ net borrowings at 31 December 2010: AER
Perpetual subordinated Capital securities (Innovative Tier 1) 1,463 28 1,491 1,422 (71) 1,351 Subordinated notes (Lower Tier 2) 1,255 117 1,372 1,269 103 1,372
Net core structural borrowings of shareholder-financed operations 2,444 190 2,634 1,908 30 1,938
After adjusting for holding company cash and short-term investments of £1.2 billion, net core structural borrowings at 31 December 2010 were £2.4 billion compared with £1.9 billion at 31 December 2009. The movement of £0.5 billion includes positive operating cash flows of £0.3 billion, the movement in borrowings of £0.3 billion mentioned above and the use of £0.7 billion of central resources to fund the acquisition of UOB Life and related distribution agreements and the terminated AIA transaction costs.
We manage the Group’s core debt within a target level consistent with our current debt ratings. At 31 December 2010, the gearing ratio (debt, net of cash and short-term investments, as a proportion of EEV shareholders’ funds plus debt) was 11.8 per cent, compared with 11.1 per cent at 31 December 2009. Prudential plc has strong debt ratings from Standard & Poor’s, Moody’s and Fitch. Prudential’s long-term senior debt is rated A+, A2 (negative outlook) and A from Standard & Poor’s, Moody’s and Fitch, while short-term ratings are A-1, P-1 and F1 respectively.
Financial position on defined benefit pension schemes The Group currently operates three defined benefit schemes in the UK, of which by far the largest is the Prudential Staff Pension Scheme (PSPS) and two smaller schemes, Scottish Amicable (SAPS) and M&G.
Defined benefit schemes in the UK are generally required to be subject to a full actuarial valuation every three years, in order to assess the appropriate level of funding for schemes in relation to their commitments. The valuations of PSPS as at 5 April 2008 and SAPS as at 31 March 2008 were finalised in the second quarter of 2009. The valuation of the M&G pension scheme as at 31 December 2008 was finalised in January 2010. The valuation of PSPS demonstrated the scheme to be 106 per cent funded by reference to the Scheme Solvency Target that forms the basis of the scheme’s funding objective. No formal deficit plan was required. However, in recognition of the fall in value of the Scheme’s investments between 5 April 2008 and the completion of the actuarial valuation, additional funding akin to deficit funding was agreed by the Trustees. This is subject to reassessment when the next valuation is completed. The total contributions being currently made by the Group into the scheme, representing the annual accrual cost and deficit funding, are £50 million per annum. Deficit funding for PSPS is apportioned in the ratio of 70/30 between the PAC with-profits fund and shareholder-backed operations.
The actuarial valuation of SAPS as at 31 March 2008 demonstrated the scheme to be 91 per cent funded, representing a deficit of £38 million. Based on this valuation and subsequent agreements with the Trustees, £13.1 million per annum of deficit funding is currently being paid into the scheme. The next triennial valuations for the PSPS and SAPS schemes are scheduled to take place as at 5 April 2011 and 31 March 2011 respectively.
The valuation basis under IAS 19 for the Group financial statements differs markedly from the full triennial actuarial valuation basis. In particular, reflecting the trust deed provisions over distributions, the net underlying surplus of £421 million for PSPS is not recognised. As at 31 December 2010, on the Group IFRS statement of financial position, the shareholders’ share of the liabilities for these UK schemes amounted to a £83 million liability net of related tax relief. The total share attributable to the PAC with-profits fund amounted to a liability of £99 million net of related tax relief.
Changes to Group holdings during the period During 2010 we completed the acquisition of UOB Life for total cash consideration, of SGD 495 million (£220 million), giving rise to goodwill of £141 million. This acquisition accompanied a long-term strategic partnership with UOB facilitating distribution of Prudential’s life insurance products through UOB’s bank branches in Singapore, Indonesia and Thailand.
We also announced the acquisition of Standard Life Healthcare by our PruHealth joint venture partner Discovery and its combination with the existing PruHealth business. This led to a reduction in our shareholding in the enlarged combined businesses from 50 per cent to 25 per cent effective from 1 August, the date of the acquisition. The effects on our EEV and IFRS accounting are as previously set out in this review.
The Group’s risk appetite framework sets out our appetite for risk exposures as well as our approach to risk management and return optimisation. Under this approach, we monitor our risk profile continuously against agreed limits. Our main strategies for managing and mitigating risk include asset liability management, using derivatives to hedge relevant market risks, and implementing reinsurance and corporate insurance programmes.
Our risk appetite framework forms an integral part of our annual business planning cycle. Our Group Risk function monitors the Group’s risk profile against the agreed limits. Using submissions from business units, Group Risk calculates the Group’s aggregated position (allowing for diversification effects between business units) relative to the limits implied by the risk appetite statements.
In the event that the business unit plans imply risk limits will be exceeded, this will necessitate a dialogue between the executive and the relevant business unit or units. Exceeding Group limits may be avoided if, for example, limits in other business units are not fully utilised, or if the diversification effect at Group level of a particular risk with other business units means the Group limit is not breached.
Market risk is managed such that as conditions evolve the risk profile is maintained within risk appetite. In addition to business unit operational limits on credit risk, we set counterparty risk limits at Group level. The limits on our total Group-wide exposures to a single counterparty are specified within different credit rating ‘categories’. The Group Risk and the Group Credit Risk Committee monitor our actual exposures against these limits on at least a monthly basis, escalating matters to Group Executive Risk Committee (GERC) as appropriate.
Risk exposures The Group Risk Framework deploys a common risk language, allowing meaningful comparisons to be made between different business units. Risks are broadly categorised as shown opposite.
The key financial and non-financial risks and uncertainties faced by the Group, and our approaches to managing them, are described below.
1 Financial risks a Market risk i Equity risk In the UK business, most of our equity exposure is incurred in the with-profits fund, which includes a large inherited estate estimated at £6.8 billion as at 31 December 2010 (2009: £6.4 billion), which can absorb market fluctuations and protect the fund’s solvency. The inherited estate itself is partially protected against falls in equity markets through an active hedging policy.
In the US, where we are a leading provider of variable annuities, there are well-understood risks associated with the guarantees embedded in our products. We provide guaranteed minimum death benefits (GMDB) on all policies in this class, guaranteed minimum withdrawal benefits (GMWB) on 64 per cent of the book, and guaranteed minimum income benefits (GMIB) on only six per cent. To protect the shareholders against the volatility introduced by these embedded options, we use both a comprehensive hedging programme and reinsurance. Due to the inability to economically reinsure or hedge the GMIB, Jackson ceased offering this benefit in 2009.
It is our philosophy not to compete on price. Our individual guarantees tend to be more expensive than the market average because we seek to sell at a price capable of funding the cost we incur to hedge or reinsure our risks.
Jackson hedges the economics of its products rather than the accounting result. This focus means that we sometimes accept a degree of variability in our accounting results in order to ensure we achieve the appropriate economic result. Accordingly, while its hedges are effective on an economic basis, due to different accounting treatment for the hedges and some of the underlying hedged items on an IFRS basis, the reported income effect is more variable. As previously highlighted, this resulted in a negative net equity hedge accounting effect of £367 million in the period (net of related DAC amortisation) as compared to an equivalent negative effect of £159 million in 2009. During 2010, we reclassified these effects from operating profit based on longer-term investment returns to short-term fluctuations to ensure the Group’s operating results better reflect Jackson’s continued focus on optimising economic value.
In the US, there is interest rate risk across the portfolio. The majority of Jackson’s fixed annuity and life liabilities allow for an annual reset of the crediting rate, which provides for a greater level of discretion in determining the amount of interest rate risk to assume. The primary concerns with these liabilities relate to potential surrenders when rates increase and, in a low interest environment, the minimum guarantees required by state law. With its large fixed annuity and fixed index annuity books, Jackson has natural offsets for its variable annuity interest-rate related risks. Jackson manages interest rate exposure through a combination of interest rate swaps and interest rate options.
Credit risk • The risk of loss if another party fails to meet its obligations, or fails to do so in a timely fashion.
Business environment risk • Exposure to forces in the external environment that could significantly change the fundamentals that drive the business’s overall objectives and strategy.
In the UK, the investment policy for the shareholder-backed annuity business is to match the cash flows from investments with the annuity payments. As a result, assets and liabilities are closely matched by duration. The impact on profit of any residual cash flow mismatching can be adversely affected by changes in interest rates; therefore the mismatching position is regularly monitored.
The exposure to interest rate risk arising from Asia is at modest levels.
b Credit risk In addition to business unit operational limits on credit risk, we monitor closely our counterparty exposures at Group level, highlighting those that are large or of concern. Where appropriate, we will reduce our exposure, purchase credit protection or make use of collateral arrangements to control our levels of credit risk.
Asia Asia’s debt portfolio totalled £14.1 billion at 31 December 2010. Of this, approximately 69 per cent was in unit-linked and withprofits funds with minimal shareholders’ risk. The remaining 31 per cent is shareholder exposure and is invested predominantly (84 per cent) in investment grade bonds. For Asia, the portfolio has performed very well, and did not experience any default losses in 2010.
During 2010, we continued to materially reduce our holdings in subordinated financial debt backing our annuity business, improving the overall credit quality of our bond portfolios. This has resulted in gross losses of £104 million on shareholderbacked business and £62 million on policyholder-backed business in the period. On a Pillar I basis these losses have been fully offset by a reduction in long-term default reserves of £98 million shareholder/£39 million policyholder that arose as a result of the improvement in the quality of our remaining bond portfolios and a further release of short-term default reserves of £6 million shareholder and £23 million policyholder, which were allocated to the assets sold. On an IFRS basis, the gross costs less the reduction in long-term and short-term default reserves resulted in a small overall pre-tax loss to operating profit of £4 million to shareholders and £15 million to policyholders.
Within the RMBS portfolio of £2.8 billion, the agency guaranteed portion is 55 per cent. Another 22 per cent of the portfolio is non-agency prime and Alt-A investments with pre-2006/2007 vintages, where experience has been much more positive than later vintages. Our exposure to the 2006/2007 vintages totals £424 million of which £413 million is invested in the senior part of the capital structure, thereby significantly reducing the risk of defaults and the magnitude of loss if a shortfall does occur. The actual exposure to non-senior 2006/2007 Prime and Alt-A RMBS is only £11 million. The total RMBS portfolio has an average fair value price of 88 cents on the dollar.
In Jackson, total amounts charged to profits relating to debt securities were £213 million (2009: £631 million). This is net of recoveries/reversals recognised in the year of £10 million (2009: £5 million).
IFRS write-downs excluding defaults for the year were £124 million compared to £630 million in 2009. Of this amount £71 million (2009: £509 million) was in respect of RMBS securities.
The impairment process reflects a rigorous review of every bond and security in our portfolio. Our accounting policy requires us to book full mark to market losses on impaired securities through our income statement. However, we would expect only a proportion of these losses eventually to turn into defaults, and some of the impaired securities to recover in price over time.
Unrealised gains and losses on debt securities in the US Jackson’s net unrealised gains from debt securities has steadily improved from negative £2,897 million at 31 December 2008 to positive £4 million at 31 December 2009 to positive £1,210 million at 31 December 2010. The gross unrealised loss position moved from £966 million at 31 December 2009 to £370 million at 31 December 2010. Gross unrealised losses on securities priced at less than 80 per cent of face value totalled £224 million at 31 December 2010 compared to £594 million at 31 December 2009.
Loans Of the total Group loans of £9.3 billion at 31 December 2010, £7.1 billion are held by shareholder-backed operations comprised of £4.7 billion commercial mortgage loans and £2.4 billion of other loans.
The balance of the total shareholder loans amounts to £1.4 billion and relates to bridging loan finance managed by Prudential Capital.
With regard to strategic risk, both business operations and the corporate centre are required to adopt a forward-looking approach to risk management by performing risk assessments as part of the annual strategic planning process. This supports the identification of potential threats and the initiatives needed to address them, as well as competitive opportunities. The impact on the underlying businesses and/or Group-wide risk profile is also considered to ensure that strategic initiatives are within the Group's risk appetite.
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 was £4.3 billion at 31 December 2010 (before taking into account the 2010 final dividend), covering our capital requirements 3.0 times. This compares to a capital surplus of £3.4 billion at the end of 2009 (before taking into account the 2009 final dividend).
Solvency II The European Union (EU) is developing a new solvency framework for insurance companies, referred to as ‘Solvency II’. The Solvency II Directive, which sets out the new framework, was formally approved by the Economic and Financial Affairs Council in November 2009 and is expected to be implemented from 1 January 2013. The new approach is based on the concept of three pillars – minimum capital requirements, supervisory review of firms’ assessments of risk, and enhanced disclosure requirements.
Specifically, Pillar 1 covers the quantitative requirements around own funds, valuation rules for assets and liabilities and capital requirements. Pillar 2 provides the qualitative requirements for risk management, governance and controls, including the requirement for insurers to submit an Own Risk and Solvency Assessment (ORSA) which will be used by the regulator as part of the supervisory review process. Pillar 3 deals with the enhanced requirements for supervisory reporting and public disclosure.
A key aspect of Solvency II is that the assessment of risks and capital requirements will be aligned more closely with economic capital methodologies. Companies may be allowed to make use of internal economic capital models if approved by the local regulator.
In particular, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published a number of consultation papers in 2009 and 2010 covering advice to the European Commission on the implementing measures but there remains significant uncertainty regarding the outcome from this process. Prudential is actively participating in shaping the outcome through our involvement in industry bodies and trade associations, including the Chief Risk Officer and Chief Financial Officer Forums, together with the Association of British Insurers (ABI) and the Comité Européen des Assurances (CEA). In addition, further guidance and technical standards are currently being developed by the European Insurance and Occupational Pensions Authority (EIOPA). These are expected to be subject to a formal consultation in mid-2011 and finalised by early 2012.
Capital allocation Prudential’s approach to capital allocation takes into account a range of factors, especially risk adjusted returns on capital, the impact of alternative capital measurement bases (accounting, regulatory, economic and ratings agency assessments), tax efficiency, and wider strategic objectives.
Risk mitigation and hedging 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 − are subject to review at Group level before implementation.
The primary focus in Asia is regular premium products that provide both savings and protection benefits.
In Malaysia and Indonesia, Prudential also offers life insurance policies that are constructed to comply with Islamic principles otherwise known as Takaful. The main principles are policyholders co-operate amongst themselves for the common good, uncertainty is eliminated in respect of subscription and compensation and there is no investment in prohibited areas such as gambling or alcohol.
Variable annuities are tax-advantaged, deferred annuities where the rate of return depends upon the performance of the underlying investment portfolio, similar in principle to UK unit-linked products. They are also used for asset accumulation in retirement planning and to provide income in retirement.
As the investment return on the separate account assets is attributed directly to the contract holders, Jackson’s profit arises from the fees charged on the contracts, less the expenses incurred, which include the costs of hedging the guarantees. As previously described, hedge results are reflected in shortterm fluctuations. In addition to being a profitable book of business in its own right, the variable annuity book also provides an opportunity to utilise the offsetting equity risk among various lines of business to cost effectively manage our equity exposure. It is believed that the internal management of equity risk, coupled with the use of external derivative instruments where necessary, continues to provide a cost-effective method of managing equity exposure. Profits in the variable annuity book of business will continue to be subject to the impact of market movements on both sales and allocations to the variable accounts and the effects of the economic hedging programme. While risk is hedged on an economic basis, the nature and duration of the hedging instruments, which are recorded at fair value through the income statement, will fluctuate and produce some accounting volatility. Management continues to believe that, on a long-term economic basis, the equity exposure remains well managed.
Institutional products Jackson’s institutional products division markets institutional products such as traditional Guaranteed Investment Contracts (GICs), Funding Agreements and Medium Term Note (MTN) funding agreements. The institutional product offerings also include Jackson’s funding agreements issued to the Federal Home Loan Bank. Institutional products are distributed directly to investors, through investment banks, or through funding agreement brokers. Jackson sold no institutional products during 2010 or 2009, as available capital was directed to support higher-margin variable annuity sales.
With-profits policies are supported by a with-profits sub-fund and can be single premium (for example, Onshore Bonds or Flexible Investment Bonds) or regular premium (for example, certain pension products).
The EEV basis is a value-based method of reporting in that it reflects the change in value of the business over the accounting period. This value is called the shareholders’ funds on the EEV basis which, at a given point in time, is the value of future profits expected to arise from the current book of long-term insurance business plus the net worth of the Company. In determining these expected profits, full allowance is made for the risks attached to their emergence and the associated cost of capital, and takes into account recent experience in assessing likely future persistency, mortality and expenses.
The change in value is typically analysed into the following components: • the value added from new business sold during the year; • the change in value from existing business already in place at the start of the year; • short-term fluctuations in investment returns; • change in economic assumptions; • change in the time value of cost of options and guarantees and economic assumption changes; • other items (for example, profit from other Group operations, tax, foreign exchange, exceptional items); and • dividends.
EEV basis results are prepared by first of all setting ‘best estimate’ assumptions, by product, for all relevant factors including expenses, surrender levels and mortality. Economic assumptions as to future investment returns and inflation are generally based on a combination of market data and long-term assumptions. These assumptions are used to project future cash flows. The present value of the future cash flows is then calculated using a discount rate which reflects both the time value of money and the risks associated with the cash flows. The risk discount rate is determined by adding a risk margin to the appropriate risk-free rate of return. The actual outcome may differ from that projected, in which case the effect will be reflected in the experience variances for that year.
The following review provides an overview of our activities and progress. Prudential publishes an annual CR report, available online at www.prudential.co.uk
Our approach The very nature of our products is long term and we do not underestimate the trust our customers place in us to ensure we effectively plan and provide for them in the future. Through 163 years of experience looking after our customers’ interests, and supporting wider society, we have established a heritage of responsibility that is integrated into the way we run our business. This culture of individual responsibility also extends to the high standards of behaviour we expect from our agents and intermediaries.
“We direct our resources towards the issues that we believe are most relevant to our business and where we can make the most impact.”
We are in no doubt that acting responsibly with our customers’ investments, supporting the welfare of the communities in which they live and playing our part in protecting the environment are fundamental to managing a sustainable company. We firmly believe that these activities are best managed by our businesses on the ground, those who are closest to the customer and local stakeholders.
Healthcare is particularly important in a number of our markets in Asia, and we continue to broaden our health and protection product offering. Our evolving suite of health-related products includes innovative solutions such as PRUmy child, the first of its kind to offer coverage during pregnancy and infancy. PRUmy child also combines protection with savings, enabling parents to provide for their children’s education.
1 Fair and transparent products meeting customer needs 2 Best people for the best performing business 3 Protecting the environment 4 Supporting local communities
The United States is the world’s largest retirement savings market. Each year more of the 78 million ‘baby boomers’1 will move into retirement. Jackson, our US business, has more than 2.8 million policies and contracts in force. The economic downturn and demographic changes have led many people to be unprepared as they approach retirement. Jackson’s educational programme, ‘Retirementology’, is designed to help people understand how better to prepare for their financial future.
To help customers make informed financial decisions, Prudential UK has developed a series of online guides offering clear product information. This includes an interactive questionnaire which helps customers find an annuity product to meet their needs by calculating what level of income could be generated.
“As one of the largest active investors in the UK stock market, M&G takes seriously its responsibilities as a shareholder.”
M&G, Prudential’s UK and European fund management business, has served retail and institutional investors for 80 years. It has a history of innovation, designing new funds and investment plans that meet a clear client need.
With inflation once again a concern for investors, M&G has developed a number of innovative investment strategies for clients. For institutional investors, M&G offers the Secured Property Income Fund, which matches commercial property rents against pension funds' long-term liabilities. In the retail market, the recently-launched M&G inflation-linked Corporate Bond Fund enables savers to protect their investments in corporate bonds from rising prices.
As a Group with a long-term view, it is clearly important to participate in global debates and policy considerations that affect our customers. Across our business we share our knowledge and expertise to help inform policy debates.
Customer service and performance Prudential’s reputation for good customer service has continued to be recognised through a number of awards and industry rankings.
• Prudential UK achieved: Five-star rating for excellent service at the Financial Adviser Service Awards for the second year running
In the UK, Prudential is a member of the Association of British Insurers’ (ABI) Customer Impact Scheme, which seeks to drive continuous improvement through monitoring customers’ experiences. We are one of 35 companies that participate in the annual Customer Impact Survey. In 2010, our UK business saw an increase in the number of customers rating it ‘very good’ or ‘excellent’ for the time taken to arrange an annuity (64 per cent). In part this is due to our participation in the ‘Options’ initiative. This industry-wide scheme, of which we are a founding member, is designed to speed up the exchange of information and funds between pension and annuity providers.
In the UK, the Financial Ombudsman Service (FOS) publishes complaint data on case adjudications for more than 150 financial services companies. Prudential performed well and was placed in the top 10 per cent of all companies in the FOS data.
It is important that we not only develop talent from within the business, but also use our brand strength and heritage to attract new talent. Our flagship development programme, Momentum, operating since 2007, aims to recruit high potential individuals early in their careers and to provide them with a fast-track development plan. Through business placements and training modules, participants gain the management skills and experience required to succeed in an international business. Momentum places a strong emphasis on diversity and is open to people both within and outside Prudential. In 2010, the Momentum website received more than 58,000 visits from 142 countries. More than 2,800 people from 83 countries applied for the programme. The 30 successful applicants increased the total number of participants in the programme to 60, who are in roles across the Group.
Building and rewarding performance We believe that employees should be rewarded for the contribution they make to our business as a whole. Our reward system is therefore based on both individual performance and behaviours. Our remuneration policies are regularly reviewed to ensure that our reward structure keeps pace with the markets in which we operate, and that they remain relevant to the growth of our business.
Developing an organisation that works We recognise that an important part of sustaining performance comes from effectively engaging and communicating with our employees. We conduct regular surveys in our businesses to: monitor levels of engagement with Prudential as an employer; identify the effectiveness of our organisations’ structures and practices, and highlight areas for improvement.
At Group Head Office, a dedicated team provides regular communication to employees across the Group, through the Group intranet. This includes communication from senior management on Group strategy, direction and performance. We also regularly hold a conference for the Group Leadership Team, approximately 75 senior managers from across the Company who are either leading a significant part of the Group strategy or responsible for implementing a major part of it.
We also train our people to be aware of, and sensitive to, the needs of employees and customers with a disability.
Reducing our direct impact: occupied properties For all UK buildings, and Jackson’s main premises in North America (in Lansing, Michigan and Denver, Colorado) we assess the direct impact that our occupied properties have on the environment. This includes monitoring energy consumption, carbon dioxide emissions, water consumption, waste and recycling.
The UK Government is committed to reducing national carbon emissions by 80 per cent from 1990 levels by 2050. A central part of its strategy is the introduction of a mandatory climate change and energy savings scheme, the Carbon Reduction Commitment Energy Efficiency Scheme. In 2010, we registered as a participant in this scheme. We will be reporting our footprint data in July 2011.
Under the European Union Energy Performance of Buildings Directive, Energy Performance Certificates (EPCs) are required for any building that is constructed, sold or rented. EPCs rate the energy usage and efficiency of a building, enabling property investors and prospective occupiers to consider energy efficiency ratings and levels of carbon emissions. EPCs for our occupied and commercial properties have been introduced in the UK. In 2010, we retained our ISO 14001 environmental management certification for all our UK occupied properties.
A number of our customer-focused initiatives also deliver wider benefits in support of our CR agenda. For example, in the US, Jackson’s green delivery programme offers customers the option to receive some of their correspondence electronically. This has helped Jackson to reduce its paper consumption and generate cost savings for the business. Jackson has also provided funding to the US non-profit organisation Green Forests to plant 100,000 trees.
Reducing our impact from our property investment portfolio PRUPIM manages more than £16 billion (at 31 December 2010) worth of property assets, making it one of the largest real estate investment managers in the UK and Europe.
PRUPIM’s vision as a leading real estate fund manager is to deliver superior investment performance through further integrating sustainability into its business culture, activities and decision making. It seeks to address its own impact, and influence the property sector, through innovation and thought-leadership.
Employee volunteering In 2010, almost 25 per cent of employees volunteered in their community on a wide range of projects. These varied from fundraising for local charities such as Cancer Research and the Muscular Dystrophy Campaign in the UK, to employees giving up their time to distribute food to the homeless in the US and delivering financial education seminars in Asia.
The winning project In 2010, the winning project was the Goal for Youth programme in Hong Kong, where more than 1,800 secondary school students benefited from attending financial management workshops run by more than 188 Prudential volunteers, in partnership with Junior Achievement.
In addition to the financial education projects included in the Chairman’s Challenge, we support a number of other initiatives that aim to improve financial knowledge.
In 2010, Save the Children became a new charity partner through the Group’s support for its Children’s Emergency Fund.
It is the Group's policy not to make donations to political parties nor to incur political expenditure, within the meaning of those expressions as defined in the Political Parties, Elections and Referendums Act 2000. The Group did not make any such donations or incur any such expenditure in 2010.
Responsibility Committee Below the Board, the Responsibility Committee comprises senior representatives from relevant Group functions and each of our core businesses. This committee is responsible for monitoring the Group’s CR activities and for raising issues that need to be addressed.
Code of Business Conduct Consideration of environmental, social and community matters is integrated in our Code of Business Conduct. Our code is reviewed by the Board on an annual basis. Refer to page 120 for more information.
Payment policy It is our Group policy to agree terms of payment when orders for goods and services are placed, and to pay in accordance with those terms.
£7.5m In 2010, the Group spent £7.5 million supporting community activities
100 Board of directors 104 Governance report: • Corporate governance • Risk governance • Corporate responsibility governance 121 Additional disclosures 122 Index to principal Directors' Report disclosures
Harvey McGrath was appointed as an independent non-executive director of Prudential in September 2008 and became the Chairman and Chairman of the Nomination Committee in January 2009. Harvey has a long and distinguished career in the international financial services industry, having started his career at Chase Manhattan Bank in London and New York. From 1980 to 2007 he worked for the Man Group, first as Treasurer, then Finance Director, then President of Man Inc. in New York before being appointed as Chief Executive of Man Group plc in London in 1990 and then Chairman in 2000. He left Man Group in 2007.
Director, Aviva International. Tidjane spent the first part of his professional career with McKinsey & Company in Paris, London 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 as one of the leaders of their Financial Institutions practice before joining Aviva in 2002.
Tidjane was a non-executive director of Arkema in France until November 2009. He is a member of the Board of the Association of British Insurers (ABI), a member of the International Business Council (IBC) of the World Economic Forum (WEF) and a member of the Council of the Overseas Development Institute (ODI) in London. In January 2011, he was appointed to chair the G20 High Level Panel for Infrastructure Investment until the November 2011 G20 Summit. Tidjane sits on the Africa Progress Panel chaired by Kofi Annan and is a sponsor of Opportunity International. Age 48.
Nicolaos Nicandrou (Nic) has been an executive director of Prudential and Chief Financial Officer since October 2009. Before joining Prudential, he worked at Aviva, where he held a number of senior finance roles, including Norwich Union Life Finance Director and Board Member, Aviva Group Financial Control Director, Aviva Group Financial Management and Reporting Director and CGNU Group Financial Reporting Director. Nic started his career at PriceWaterhouseCoopers where he worked in both London and Paris. Age 45.
Michael McLintock has been an executive director of Prudential since September 2000. He is also Chief Executive of M&G, a position he held at the time of M&G's acquisition by Prudential in 1999. Michael joined M&G in 1992. He previously also served on the board of Close Brothers Group plc as a non-executive director from 2000 to 2008. Since October 2008, he has been a Trustee of the Grosvenor Estate. Age 50.
Barry Stowe has been an executive director of Prudential since November 2006 and Chief Executive, Prudential Corporation Asia since October 2006. He has also been a director of the Life Insurance Marketing Research Association (LIMRA) and the Life Office Management Association (LOMA) since October 2008, and a member of the Board of Visitors of Lipscomb University since May 2009. Previously, Barry was President, Accident & Health Worldwide for AIG Life Companies. He joined AIG in 1995 and prior to that was President
Michael Wells (Mike) has been an executive director of Prudential since January 2011 when he succeeded Clark Manning as 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 highly profitable variable annuity business and been responsible for IT, strategy, operations, communications, distributions, Curian and the retail broker dealers. Age 50.
Before he retired from Unilever in 2005, Keki was Director, Home and Personal Care, responsible for the HPC business of Unilever worldwide, a Board member of Unilever PLC and Unilever N.V., and a member of Unilever's Executive Committee. He joined Hindustan Lever Ltd in India in 1973 and in 1987 he joined the Board of Hindustan Lever and became Chairman in 1996. Age 65.
Sir Howard has been an independent non-executive director of Prudential and Chairman of the Risk Committee since October 2010. He joined the Audit Committee in November 2010. Sir Howard remains the Director of the London School of Economics and Political Science (LSE) and, although he has resigned, will continue in the post until such time as a suitable successor is found. Prior to joining the LSE in September 2003, he was Chairman of the Financial Services Authority, the UK’s financial regulator. He is also a director of Morgan Stanley Inc. Age 60.
Michael remains a director of Nestlé in India and was appointed Chairman of the Evian Group in 2001, a think tank and forum for dialogue promoting free trade. He also serves as a non-executive director on the Boards of the Bobst Group in
Ann is also a non-executive director of Rio Tinto plc, Rio Tinto Limited, UBS AG, Ariel Holdings Limited, Atrium Underwriting Group Limited and Atrium Underwriters Limited. From its nationalisation in 2008 until January 2009, Ann was Interim Chief Financial Officer and Executive Director of Northern Rock. Age 55.
Bridget Macaskill has been an independent non-executive director of Prudential since September 2003. Bridget
Bridget joined First Eagle Investment Management, LLC (formerly Arnhold and S. Bleichroeder Advisers, LLC), a US based investment management firm, as President and Chief Operating Officer in February 2009 and became Chief Executive Officer in February 2010. She is a trustee of the TIAA-CREF funds and was previously also a non-executive director of the Federal National Mortgage Association – Fannie Mae from 2005 to 2008, Scottish & Newcastle PLC from 2004 to 2008 and J Sainsbury Plc from 2002 to 2006. Prior to that she spent 18 years at OppenheimerFunds Inc, a major New York based investment management company, the final 10 years of which she was Chief Executive Officer. Age 62.
Paul Manduca has been an independent non-executive director of Prudential since October 2010 and succeeded James Ross as the Board’s Senior Independent Director in January 2011. He joined the Audit and Remuneration Committees in November 2010 and became a member of the Nomination Committee in January 2011.
Paul was appointed as a non-executive director of Wm Morrison Supermarkets Plc (Morrisons) in September 2005. He is currently the Senior Independent Director, a member of the Nomination Committee and Chairman of the Remuneration Committee of Morrisons. He has previously chaired the Audit Committee and is stepping down from the Board of Morrisons in March 2011. He is also Chairman of Aon Limited, a non-executive director and Chairman of the Audit Committee of KazmunaiGas Exploration & Production Plc, Chairman of Henderson Diversified Income Limited and a director of JPM European Smaller Companies Investment Trust Plc. Paul was a director of Development Securities plc until March 2010, Chairman of
Kathleen O’Donovan has been an independent non-executive director of Prudential since May 2003. She has been a member of the Audit Committee since 2003 and was its Chairman from May 2006 until September 2009. Kathleen joined the Nomination Committee in November 2010. Kathleen is also a director and Chairman of the Audit Committee of Trinity Mirror plc, the Senior Independent Director and Chairman of the Audit Committee of ARM Holdings plc and Chairman of the Invensys Pension Scheme.
Previously, Kathleen was a non-executive director and Chairman of the Audit Committees of Great Portland Estates PLC, EMI Group plc and the Court of the Bank of England, and a non-executive director of O2 plc. From 1991 to 2002, Kathleen was Chief Financial Officer of BTR and Invensys and prior to that she was a partner at Ernst & Young. Age 53.
James is Chairman of the Board of Trustees of the Liverpool School of Tropical Medicine. He was previously a non-executive director of Schneider Electric in France, Chairman of the Leadership Foundation for Higher Education, and a non-executive director of McGraw-Hill and Datacard Inc in the United States. Prior to that he was Chairman of National Grid plc and Littlewoods plc. He was also Chief Executive of Cable and Wireless plc and Chairman and Chief Executive of BP America Inc. and a Managing Director of the British Petroleum Company plc. Age 72.
LORD TURNBULL KCB CVO INDEPENDENT NON-EXECUTIVE DIRECTOR AND MEMBER OF THE RISK AND REMUNERATION COMMITTEES
Lord Turnbull is Chairman of BH Global Limited and a non-executive director of Frontier Economics Limited and The British Land Company PLC, and was formerly a non-executive director of the Arup Group from 2006 to 2007. He also worked part-time as a Senior Adviser to the London partners of Booz and Co (UK) until February 2011. Age 66.
Compliance with Corporate Governance Codes As a UK company with primary listings on the London Stock Exchange and on the Stock Exchange of Hong Kong, Prudential is subject to the governance rules set out in the Combined Code 2008 (for reporting periods commencing prior to 29 June 2010) and the Code on Corporate Governance Practices in Appendix 14 to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (together the Corporate Governance Codes).
The Combined Code is issued by the Financial Reporting Council and can be viewed on their website: www.frc.org.uk/corporate/
The Code on Corporate Governance Practices is issued by the Stock Exchange of Hong Kong and can be viewed on their website: www.hkex.com.hk/eng/rulesreg/listrules/
The Board supports the Corporate Governance Codes and confirms that it has complied with the provisions set out in the Combined Code 2008 throughout the financial year ended 31 December 2010.
The Board further confirms that it has complied with the Code on Corporate Governance Practices in Appendix 14 to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited from the date of listing on the exchange, except that it has deviated in respect of the Terms of Reference of the Remuneration Committee. The remit of the Remuneration Committee is limited to considering the remuneration of the Chairman and executive directors and does not extend to making recommendations to the Board in respect of the remuneration of the non-executive directors. The reason for the deviation is that it would be inconsistent with the principles of the Combined Code 2008 (and the provisions of the new UK Corporate Governance Code) for the Remuneration Committee to be involved in setting the fees of non-executive directors.
The principles of the Corporate Governance Codes have been applied as set out below and in the Directors’ Remuneration Report.
Board of directors Role of the Board The Board is collectively responsible for the success of the Group and provides leadership within a framework of effective controls which enables suitable risk management. The executive directors are responsible for running the business operations and the non-executive directors for bringing independent judgement and scrutiny to decisions taken by the Board.
In performing its duties, the Board has direct access to the services of the Company Secretary who advises on corporate governance matters, Board procedures and compliance with applicable rules and regulations.
Directors have the right to seek independent professional advice at the Company’s expense and copies of such advice are circulated to other directors where applicable and appropriate.
The Board may exercise all powers conferred on it by the 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.
In order to ensure that it exercises control over the Group’s affairs, the Board’s terms of reference are regularly reviewed and set out those matters specifically reserved to it for decision. These include approval of the annual and interim results, strategy and corporate objectives, operating plans, significant transactions and matters affecting the Company's share capital. Under its internal governance framework all business units are required to seek approval from the Board for matters above pre-determined authority limits.
On 15 October 2010, Howard Davies and Paul Manduca were appointed as independent non-executive directors. From 1 January 2011, Paul Manduca succeeded James Ross as the Board’s Senior Independent Director. James will retire from the Board at the conclusion of Prudential’s Annual General Meeting to be held on 19 May 2011. On 1 January 2011, Mike Wells replaced Clark Manning as an executive director and as President and Chief Executive Officer of Jackson National Life Insurance Company. In addition, John Foley was appointed an executive director and Group Chief Risk Officer with effect from 1 January 2011.
The Board, or the members in a general meeting, may appoint directors up to a maximum total number of 20 as set out in the Company’s Articles of Association. The removal and resignation of the Company’s directors is governed by the relevant provisions of the Companies Act 2006, the Corporate Governance Codes and the Company’s Articles of Association.
Non-executive directors are usually appointed for an initial three-year term commencing with their election by shareholders at the first Annual General Meeting following their appointment by the Board. Each appointment is reviewed towards the end of the three-year term against performance and the requirements of the Group's businesses. 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.
Non-executive directors are typically expected to serve for two terms of three years from their initial election by shareholders, although the Board may invite them to serve for an additional period. Directors serving a third term are subject to rigorous annual review.
Directors appointed to the Board since the 2010 Annual General Meeting will stand for election for the first time and in accordance with the provisions of the UK Corporate Governance Code all other directors, with the exception of James Ross who has announced his intention to retire, will offer themselves for re-election at the Annual General Meeting to be held on 19 May 2011.
The Board is actively engaged in succession planning for both executive and non-executive roles to ensure that Board composition is periodically renewed and that the Board retains its effectiveness at all times. This is delivered through an established review process that is applied across all businesses and covers both director and senior management succession and development and also through the work of the Nomination Committee as described more fully on page 112. The Board considers annually the outcome of the review and actions arising from the review are implemented as part of the management development agenda. We believe that our non-executive directors bring a wide range of business, financial and international experience to the Board and its committees. Our executive directors, who head up the main businesses of the Group, each bring an in-depth understanding to the Board of their particular business, its markets and its challenges, ensuring coverage of the breadth and depth of the Group’s principal activities.
The Chairman is responsible for the leadership and governance of the Board and the Group Chief Executive for the management of the Group and the implementation of Board strategy and policy on the Board’s behalf. In discharging his responsibilities, the Group Chief Executive is advised and assisted by the Group Executive Committee which comprises all the business unit heads and a Group Head Office team of functional specialists.
Independence The independence of the non-executive directors is determined with reference to the Corporate Governance Codes. Prudential is required to affirm annually the independence of the nonexecutive directors under the rules of the Hong Kong Stock Exchange 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.
Prudential is one of the UK’s largest institutional investors and the Board does not believe that this situation compromises the independence of those non-executive directors who are on the boards of companies in which the Group has a shareholding. The Board also believes that such shareholdings should not preclude the Company from having the most appropriate and highest calibre non-executive directors.
Throughout their period in office directors are regularly updated on the Group’s businesses and the regulatory and industryspecific environments in which it operates as well as on their legal and other duties and obligations as directors where appropriate. These updates can be in the form of written reports to the Board or presentations by senior executives or external sources 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.
Performance evaluation Prudential continued its programme of annual evaluation of the performance of the Board and its Committees in respect of 2010, in line with the requirements of the Combined Code 2008. The aim is to continue to improve the effectiveness of the Board and its Committees and enhance the Group’s performance.
Following an internal performance review for 2009, Prudential once again made the decision to use an external adviser to facilitate the evaluation for 2010. The review was carried out by Egon Zehnder International in consultation with the Chairman, the Senior Independent Director and the Group Chief Executive. A key element of the evaluation process was the use of individual meetings with each of the directors. This proved an effective and informative mechanism for capturing feedback.
The Group also uses Egon Zehnder International as executive search consultants, but does not believe there is a conflict of interest, particularly as the Group has relationships with other search firms.
Each year at least one Board meeting is held at a Group business operation in order to facilitate a fuller understanding of that business. In November 2010 a Board meeting was held in Jakarta, Indonesia where the directors met with senior members of the Asia management team and attended a series of presentations on the business.
The table above details the number of Board and Committee meetings attended by each director throughout the year. Where directors were not able to attend a meeting, their views were canvassed by the Chairman prior to the meeting. A further ten ad hoc Board Committee meetings took place during the year which had been convened to finalise arrangements for matters discussed by the Board, such as approvals of periodic financial reports and corporate transactions.
Conflicts of interest Directors have a statutory duty to avoid conflicts of interest with the Company. The Company’s Articles of Association allow the directors to authorise conflicts of interest and the Board has adopted a policy and effective procedures on managing and, where appropriate, approving conflicts or potential conflicts of interest. Under these procedures directors are required to declare all directorships or other appointments to companies which are not part of the Group as well as other situations which could result in conflicts or could give rise to a potential conflict. The Nomination Committee, or the Board where appropriate, evaluates and approves each such situation individually where applicable.
Non-executive directors may serve on a number of other boards provided that they are able to demonstrate satisfactory time commitment to their role at Prudential and that they discuss any new appointment with the Chairman prior to accepting. This ensures that they do not compromise their independence and that any potential conflicts of interest and any possible issues arising out of the time commitments required by the new role can be identified and addressed appropriately. The major commitments of our non-executive directors are detailed in their biographies set out on pages 100 to 103.
Committees The Board has established Audit, Remuneration and Nomination Committees as principal standing committees of the Board with written terms of reference which are kept under regular review. In November 2010 the Board established a further committee, the Risk Committee, to assist the Board in carrying out its duties in respect of monitoring and overseeing Group-wide risk. These committees are key elements of the Group’s corporate governance framework and reports on each committee are included below.
Audit Committee Report This report sets out the responsibilities of the Group Audit Committee (the Committee) and the activities carried out by the Committee during the year.
The Committee’s terms of reference, which are set by the Board and kept under regular review, are available on our website at www.prudential.co.uk/prudential-plc/aboutpru/ corporategovernance/ Alternatively, copies may be obtained upon request from the Company Secretary at the Company’s registered office.
A detailed forward agenda has been in operation for a number of years and is reviewed and updated continually to ensure that all matters for which the Committee is responsible are addressed at the appropriate time of year. The Committee’s principal business during the year consisted of the following: • review of half-year and full-year results, the annual report and accounts and other significant announcements, where appropriate; • examination of critical accounting policies and key judgmental areas; • review of changes in and implementation of Group Accounting Policies in compliance with International Financial Reporting Standards and practices; • review of the Group’s tax matters; • approval of the external auditor’s management representation letter, review of the external auditor’s full-year memorandum and external audit opinion; • review of US filings and related external audit opinions; • monitoring of 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 making recommendations for the re-appointment of the external auditor; • monitoring of the framework and effectiveness of the Group’s systems of internal control, including the Turnbull compliance statement and Sarbanes-Oxley procedures; • monitoring the effectiveness of both the Group’s risk framework and the management of key financial and operational risks; • review of the internal audit plan and resources, and monitoring of the audit framework and internal audit effectiveness; • monitoring the effectiveness of compliance processes and controls, and performance against the Group Compliance Plan; • review of anti-money laundering procedures and allegations received via the employee confidential reporting lines; and
In addition, the Committee received in-depth presentations on a range of topics. Throughout the year, the Committee received the minutes of the Disclosure Committee and the Group Operational Risk Committee and noted their activities. From November, the Committee further noted the minutes and activities of the Assumptions Approvals Committee. Further information on the Disclosure Committee and on risk governance appears on pages 119 and 115 to 116 respectively.
The Chairman reported to the Board on matters of particular significance after each Committee meeting and the minutes of Committee meetings were circulated to all Board members.
Business unit audit committees Each business unit has its own audit committee whose members and chairmen comprise primarily senior management and are independent of the respective business unit. The minutes of these committees are reported regularly to the Committee and their meetings are attended by senior management of the respective business unit, including the business units' heads of finance, risk, compliance and Group-wide internal audit. Business unit audit committees have adopted standard terms of reference across the Group with minor variations to address overseas requirements or particular requirements of the business. The terms of reference of those committees were reviewed during the year and all include escalation of significant matters to the Committee, recommendations for approval of the business unit internal audit plans and overseeing the adequacy of internal audit resources. Also included are presentations from the external auditor. During the year the business unit audit committees reviewed their respective internal audit plans, resources and the results of internal audit work, and both external and internal auditors were able to discuss any relevant matters with the Chairman and members of the Committee as required.
Pursuant to the requirements of Section 404 of the SarbanesOxley Act, the Group undertakes an annual assessment of the effectiveness of internal control over financial reporting. Further details are provided below.
Fees payable to the auditor For the year ended 31 December 2010 the Committee approved fees of £10.4 million to its auditor, KPMG Audit Plc, for audit services and other services supplied pursuant to relevant legislation. In addition, the Committee approved fees of £7.3 million to KPMG for services not related to audit work which accounted for 42 per cent of total fees paid to the external auditor in the year. Excluding services relating to the AIA transaction, this amounted to £1.8 million for services not related to audit work which in turn amounted to only 10 per cent of fees paid to the external auditor. In accordance with the Group’s Auditor Independence Policy, all services were approved prior to work commencing and each of the non-audit services was confirmed to be permissible for the external auditor to undertake as defined by the Sarbanes-Oxley Act. The Committee reviewed the non-audit services being provided to the Group by KPMG at regular intervals during 2010. A summary of audit fees is provided in Note I6 of the Group Financial Statements.
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. It again considered this in February 2011 and concluded that there was nothing in the performance of the auditor requiring a change. In 2007 a new lead audit partner was appointed by KPMG Audit Plc, in line with the Auditing Practices Board Ethical Statements and the Sarbanes-Oxley Act.
Review of Committee effectiveness As part of the performance evaluation of the Board, the Committee undertook an externally facilitated performance assessment of the qualitative aspects of its performance during the year. The results of this assessment were reported to the Board in February 2011. In addition, an internal evaluation was carried out addressing compliance with various regulations and codes of conduct applicable to the Committee, and the results of that assessment were reported to the Committee in February 2011. The Committee is satisfied, based on the findings of both the internal and external review, that it had been operating as an effective audit committee throughout the year. Further reviews of the effectiveness of the Committee will be undertaken regularly and will, from time to time, be conducted by external consultants.
Remuneration Committee Report Role of the Committee The Remuneration Committee (the Committee) determines the remuneration packages of the Chairman and executive directors. It also agrees the principles and monitors the level and structure of remuneration for a defined population of management as determined by the Board. In framing its remuneration policy, the Committee has given full consideration to the provisions of Schedule A to the Combined Code 2008. The Directors’ Remuneration Report prepared by the Board is set out in full on pages 123 to 148. In preparing the report, the Board has followed the provisions of the Combined Code 2008, the Code of Corporate Governance Practices in Appendix 14 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong, the Listing Rules of the Financial Services Authority and the Companies Act 2006.
Membership The Committee is comprised exclusively of independent non-executive directors of the Company as set out below.
Full biographical details of the members of the Committee, including their relevant experience are set out on pages 100 to 103.
Nomination Committee Report Role of the Committee The Nomination Committee (the Committee), in consultation with the Board, evaluates the balance of skills, knowledge and experience on the Board and identifies the roles and capabilities required at any given time taking into account the Group’s business and with due regard for the benefits of diversity on the Board, including gender. Candidates are considered on merit against those criteria and the Committee makes recommendations to the Board regarding suitable candidates for appointments. In appropriate cases search consultants are used to identify candidates. The Committee also reviews conflicts of interest or potential conflicts of interest raised by directors between Board meetings or for prospective new Board members. In cases where there might be an actual or potential conflict of interest the Committee has powers to authorise any such actual or potential conflict situation on behalf of the Board, imposing any terms and conditions it deems appropriate, or to make recommendations to the Board as to whether the conflict or potential conflict should be authorised and on what terms.
During 2010 the Committee met six times and recommended to the Board that Howard Davies and Paul Manduca, who were both appointed with the assistance of external search consultants, be appointed as non-executive directors. The Committee further recommended the appointment of Mike Wells and John Foley as executive directors with effect from January 2011. Full biographical details of the directors are set out on pages 100 to 103.
The process of evaluating the skills and composition of the Board is ongoing and is kept under regular review in order to ensure appropriate plans for succession to the Board are in place.
Risk Committee Report Role of the Committee The Risk Committee was established in November 2010 and has responsibility for providing leadership, direction and oversight with regard to the Group’s overall risk appetite and tolerance and risk management framework, including risk policies and processes and controls, and to providing oversight in respect of the Group Chief Risk Officer’s responsibilities.
The Committee has terms of reference which are set by the Board and will be kept under regular review. The terms are available on our website at www.prudential.co.uk/prudential-plc/aboutpru/ corporategovernance/ Alternatively, copies may be obtained from the Company Secretary at the Registered Office.
Membership The Committee is comprised of independent non-executive directors as set out below: Howard Davies (Chairman) Ann Godbehere James Ross Lord Turnbull
• Group risk framework: Provides an overview of the Groupwide philosophy and approach to risk management and sets out the key risk management processes which support the Group’s compliance with internal, statutory and regulatory requirements.
• Corporate responsibility framework: Provides an overview of the Group-wide philosophy and approach to corporate responsibility; supports the Group’s commercial focus and the increasing challenges faced including changes in stakeholder expectations. A key element is the Group Code of Business Conduct which sets out the ethical standards the Board requires of itself, employees, agents and others working on behalf of the Group, in their dealings with employees, customers, shareholders, suppliers, and competitors, in the wider community and in respect of the environment.
Further details on the procedures for the management of risk and the systems of internal control operated by the Group are given in the section on Risk Governance on pages 115 to 116. The governance framework principally relates to the operational management of the Group’s businesses and includes predetermined authority limits delegated by the Board in respect of matters which are necessary for the effective day-to-day running and management of the business. The Group Chief Executive has been delegated management authority by the Board and in turn grants authority to the executive, including the chief executive officers of each business unit who report to him for the management of that business unit. In addition, each of those chief executives has established a management board comprising the business unit’s most senior executives.
The chief executive and chief financial officer of each business unit annually certifies compliance with the Group’s governance, internal control and risk management requirements. The risk management function reviewed any matters identified by business units in their certification, and also assessed the risk and control issues that arose and were reported during the year. This included: routine and exception-based risk reporting; matters identified and reported by other Group Head Office oversight functions and the findings from the work of the internal audit function, who execute risk-based audit plans throughout the Group. The results were reported to, and reviewed by, the Group Audit Committee.
The internal control and risk management systems described above and also under the sections on Risk Governance on page 115 and the Group Audit Committee on page 109, cover the Company’s financial reporting process and the Group’s process for the preparation of consolidated financial statements.
Group Executive Risk Committee: Meets monthly to oversee the Group’s risk exposures (market, credit, liquidity, insurance and operational risks) and to monitor capital.
1st Line of Defence 2nd Line of Defence 3rd Line of Defence
GEC: Group Executive Committee BSCMC: Balance Sheet & Capital Management Committee GERC: Group Executive Risk Committee GCRC: Group Credit Risk Committee GORC: Group Operational Risk Committee STOC: Solvency II Technical Oversight Committee (permanent successor to Technical Assurance Committee)
Group Credit Risk Committee: Reports to the Group Executive Risk Committee and meets monthly to review the Group’s investment and counterparty credit risk positions.
Group Risk: Establish and embed 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.
Material risks will only be retained where this is consistent with Prudential’s risk appetite framework and its philosophy towards risk-taking, that is: • the retention of the risk contributes to value creation, • the Group is able to withstand the impact of an adverse outcome, • the Group has the necessary capabilities, expertise, processes and controls to manage the risk.
Monitoring: Establish a ‘no surprises’ risk management culture by identifying the risk landscape, assessing and monitoring risk exposures and understanding change drivers.
Control: Implement risk mitigation strategies and remedial actions where exposures are deemed inappropriate and manage the response to extreme events.
Culture: Foster a risk management culture, providing quality assurance and facilitating the sharing of best practice risk measurement and management across the Group and industry.
The Group Audit Committee and Group Risk Committee are provided with regular reports on the activities of Group Risk. These reports include information on the activities of the Group Operational Risk Committee and Group Credit Risk Committee.
Annual General Meeting The Annual General Meeting will be held in the Churchill Auditorium at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on 19 May 2011 at 11.00am. The Company believes the Annual General Meeting is an important forum for both institutional and private shareholders and encourages all its shareholders to vote. Shareholders are given the opportunity during annual general meetings to put questions to the Board on matters relating to the Group’s operations and performance.
Rights and obligations The rights and obligations attaching to the Company’s shares are set out in full in the Company’s 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, unless the proxy is appointed by more than one member in which case the proxy has one vote for and one vote against if the proxy has been instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution.
Restrictions on transfer In accordance with English company law, shares may be transferred by an instrument of transfer or through an electronic system (currently CREST) and transfer is not restricted except that the directors may, in certain circumstances, refuse to register transfers of shares, but only if such refusal does not prevent dealings in the shares from taking place on an open and proper basis. If the directors make use of that power, they must send the transferee notice of the refusal within two months.
Some of the Company’s employee share plans include restrictions on transfer of shares while the shares are subject to the plan. As described in the Directors’ Remuneration Report, non-executive directors use a proportion of their fees to purchase shares in the Company which may not normally be transferred during a director’s period of office. In addition, all directors are required to obtain a number of qualification shares within one year of appointment, which they would also be expected to retain during their tenure of office. Executive directors are also required to build up their shareholding in the Company.
Significant shareholdings As at 8 March 2011, the Company had received notification, in accordance with Rule 5.1.2 R of the Disclosure and Transparency Rules of the Financial Services Authority, from Capital Research and Management Company, Blackrock Inc., Norges Bank and Legal and General Group plc that they held 11.65 per cent, 5.01 per cent, 4.01 per cent and 3.99 per cent respectively of the Company’s issued ordinary share capital at the time of notification.
Authority to issue shares The directors require authority from shareholders in relation to the issue of shares by the Company. Whenever shares are issued the Company has to offer the shares to existing shareholders pro rata to their holdings unless it has been given authority by shareholders to issue shares without offering them first to existing shareholders. The Company seeks authority from its shareholders on an annual basis to issue shares up to a maximum amount and to issue up to five per cent of its issued share capital without observing pre-emption rights, in line with relevant regulations and best practice. Dis-application of statutory pre-emption procedures is also sought for rights issues. The Company’s existing authorities to issue shares and to do so without observing pre-emption rights are due to expire at the end of this year’s Annual General Meeting. An ordinary resolution and a special resolution to approve the renewal of these authorities respectively, will be put to shareholders at the Annual General Meeting on 19 May 2011.
Details of shares issued during 2009 and 2010 are given in note H11 on page 321.
In accordance with the terms of a waiver granted by the Hong Kong Stock Exchange, the Company confirms that it complies with the applicable law and regulation in the UK in relation to the holding of shares in treasury and with the conditions of the waiver in connection with the purchase of own shares and any treasury shares it may hold.
Model Code for Securities Transactions by Directors Prudential has adopted share dealing rules which incorporate the UK Model Code on share dealing and the Hong Kong Model Code for Securities Transactions by Directors. Prudential operates various employee share plans and has obtained a number of waivers from the Stock Exchange of Hong Kong in order to facilitate the normal operation of those plans.
In discharging these objectives, the Committee helps to support the certifications by the Group Chief Executive and the Chief Financial Officer of the effectiveness of disclosure procedures and controls required by Section 302 of the Act.
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 153 to 352 and pages 375 to 386 and the supplementary information on pages 389 to 433. 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 388 and 435.
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 page 387.
The directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware; and each director has taken all the steps that he or she ought to have taken as a director to make himself or herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006.
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.
Customers The five largest customers of the Group constituted in aggregate less than 30 per cent of its total sales for each of 2010 and 2009.
Directors in office during the year Board of directors 100-103; 104
Creditors – policy on payment and practice Corporate responsibility review 97
In addition, the risk factors set out on pages 438 to 442 and the additional unaudited financial information set out on pages 353 to 374 are incorporated by reference into this directors' report.
This report has been drawn up in accordance with the Combined Code on Corporate Governance, Schedule 8 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008, the UK Listing Authority Listing Rules and the Code on Corporate Governance Practices in Appendix 14 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong. KPMG Audit Plc has audited the sections contained on pages 138 to 148.
Dear Shareholder I am pleased to present the Remuneration Committee’s report on directors’ remuneration for the year to 31 December 2010.
Firstly, I would like to welcome Lord Turnbull and Paul Manduca to the Committee. I would also like to thank James Ross, who has stepped down from the Committee after six years, for his contribution.
In May 2010, we listed our shares in Hong Kong and Singapore. As a result, you will find that some additional information is provided in this year’s Directors’ Remuneration Report and that the format used to present some data has been revised to comply with these new listing requirements.
2010 was another successful year for the Group. As you will see from our results, we have delivered outstanding business performance, achieving strong sales and profits. This demonstrates the success of the Group’s strategy of focusing on value over volume and capitalising on growth opportunities in our chosen markets around the world. The Group’s prudent but proactive risk based approach has ensured that our capital position remains robust and resilient. We have significantly out-performed our international peer group over the last three years, which resulted in full vesting under the Group Performance Share Plan.
In the Group Chief Executive's Report, Tidjane Thiam set out three Group-wide operating principles which have underpinned the sound management of the Group. These principles are reflected in the reward policies operated by the Group and in the way that the Remuneration Committee makes its decisions, as set out below: Balanced approach to performance management The Group believes that sustainable growth requires new business profitability, IFRS profitability and cash generation to develop in parallel; no one of these measures should be achieved at the expense of the others. The basket of annual bonus plan measures rewards the simultaneous delivery of these key indicators. Bonuses are also determined by the achievement of personal measures which assess executives’ individual non-financial contributions to the development of the Group and to the execution of our strategy.
Disciplined capital allocation The Group has a rigorous focus on allocating capital to the geographies and products with the best returns and shortest payback opportunities. Our objective is to create the highest possible sustainable returns for shareholders, as reflected in our share price and dividends. To align the interests of our executives with those of our shareholders and to reward them for delivering these returns, the Group Performance Share Plan is based on total shareholder return and only rewards participants if the Group’s share price growth and dividends are superior to those provided by other international insurance organisations over a three-year period.
I trust that you will endorse the policies outlined in our report.
The Committee’s terms of reference are available on the Company’s website and a copy may be obtained from the Company Secretary. These terms of reference are reviewed annually.
The members of the Committee during 2010 are listed below. All are independent non-executive directors: Bridget Macaskill (Chairman) Keki Dadiseth FCA Michael Garrett James Ross (until 9 November 2010) Lord Turnbull KCB CVO (from 9 November 2010) Paul Manduca (from 9 November 2010)
The Chairman and the Group Chief Executive attend meetings by invitation. The Committee also had the benefit of advice from the Chief Financial Officer, Group Chief Risk Officer, Group Human Resources Director and Director of Group Reward and Employee Relations. Individuals are never present when their own remuneration is discussed.
In making its decisions, the Committee called on advice from Deloitte LLP and PricewaterhouseCoopers LLP. Market data was sourced from Deloitte LLP, Towers Watson and McLagan Partners. Linklaters and Slaughter & May provided legal counsel, including advice on employment law and the operation of the Company’s share plans. Some of these firms also provided other services to the Company: Deloitte LLP, PricewaterhouseCoopers LLP and Slaughter & May in relation to taxation and other financial matters, Towers Watson in relation to actuarial advice and Slaughter & May in relation to commercial, corporate and general legal advice.
Remuneration principles In determining remuneration policy, the Committee applies the following principles: • A substantial portion of total remuneration is delivered through performance-related reward with the highest levels of reward only being paid for the highest levels of achievement; • A significant element of performance-related reward is provided in the form of shares; • The total remuneration package for each executive director is set with reference to the relevant employment market; • The performance of business unit executive directors is measured at both a business unit and Group level; • Performance measures include absolute financial measures and relative measures, as appropriate, to provide alignment between achieving results for shareholders and the rewards for executives; • Reward structures are designed to deliver fair and equitable remuneration for all employees; and
These principles shape remuneration policies and practices which are aligned with our business model. They are designed to ensure that a strong governance approach is adopted and applied across all business units. The Committee continues to review these principles regularly.
Summary of main components of remuneration and related requirements The table below summarises the Company’s policies as they were applied during 2010. The Committee intends to adopt the same approach in 2011: ELEMENT PURPOSE APPROACH
Total compensation Adopts appropriate compensation structures and reward payouts to attract high calibre executive directors.
Benchmarked against the relevant market for the role, taking into account the individual’s contribution and experience. Market position is compared with companies of similar size and complexity to Prudential in the relevant market for the role.
The Committee reviews salaries annually. Any changes in base salaries are effective from 1 January.
Annual bonus Rewards the achievement of business results and individual objectives in a given year.
Executive directors have annual bonus plans based on the achievement of Group and business unit financial performance measures and individual contribution. 2010 Group and business unit targets focused on profitability, cash flow and capital preservation.
Deferred bonus Reinforces the need for annual results to be grounded in business performance which is sustained over the longer term.
Long-term incentive Rewards executive directors for delivering sustainable long-term returns for shareholders.
All executive directors participate in the Group Performance Share Plan under which awards vest based on relative TSR performance against a peer group of international insurers.
Business unit Chief Executives also participate in business unit plans which focus on financial measures which contribute to the long-term success of the business unit and, therefore, the Group.
Benefits Provide health and security benefits as part of the fixed element of remuneration. Set at an appropriate level compared with peers.
Executive directors receive benefits, for example participation in medical insurance schemes, the use of a car and driver, and security arrangements. No benefits are pensionable.
The level of Company contribution is related to competitive practice in the executive directors’ employment markets.
Components of remuneration Base salary The limited increases to executive directors’ base salaries effective on 1 January 2010 were detailed in the 2009 Remuneration Report. No executive director has been awarded a salary increase effective on 1 January 2011.
Mike Wells’s salary on his appointment as Chief Executive of Jackson is $1,000,000. John Foley’s salary on his appointment as Group Chief Risk Officer is £550,000. Mike Wells’s and John Foley’s salaries will next be reviewed with effect from 1 January 2012.
Annual bonus The 2010 annual bonus plans for the majority of executive directors included Group and business unit performance measures based on: • IFRS operating profit • EEV operating profit • Holding company cash flow; and • Insurance Group Directive (IGD) Capital Surplus.
The table opposite sets out the proportion of each executive director’s annual bonus which must be deferred. This portion is deferred for three years in the form of the Company’s shares and is used to reinforce executive directors’ focus on the sustained success of the Company.
Long-term incentives All executive directors participate in the Group Performance Share Plan (GPSP). Awards vest on the basis of the Group’s relative Total Shareholder Return (TSR) performance against a peer group of international insurers. Those executive directors with responsibility for a business unit also participate in plans linked to the long-term success of the relevant unit. The Committee will continue to keep the performance measures used in the long-term incentive plans under review to ensure their continued relevance.
Prudential’s TSR performance over the performance period is compared with the TSR performance of an index composed of 10 international insurers (see box below). This performance measure was selected because it focuses on the value delivered to shareholders. TSR is measured on a local currency basis since this has the benefits of simplicity and directness of comparison.
The peer group used for the 2008 and 2009 GPSP awards was comprised of the organisations listed below plus Friends Provident (Friends Provident was removed from the comparator group for outstanding and future awards in November 2009 when it delisted). The organisations listed will also comprise the peer group used for 2011 GPSP awards.
The vesting schedule for GPSP awards is set out below: % of award vesting 120%110%100%
Peer Companies within the Index used for 2010 GPSP awards Aegon, Allianz, Aviva, Axa, Generali, ING, Legal & General, Manulife, Old Mutual and Standard Life
Executive directors’ bonus opportunities, the weighting of performance measures for 2010 and the proportion of annual bonuses deferred
Notes 1 Clark Manning’s annual bonus figures and the weighting of measures shown include a notional figure for his 10 per cent share of the
3 For 2010, it was agreed with the Group Chief Executive that the portion of his bonus (50%) which would normally be payable in cash would be converted into shares and deferred for three years.
On 31 December 2010, the performance period for the 2008 GPSP award (which began on 1 January 2008) came to an end. Prudential’s TSR performance over this period was equal to 133.7 per cent of the peer index. The Committee, having satisfied itself about the quality of the Company’s underlying financial performance, confirmed vesting of 100 per cent of the 2008 GPSP award (in 2009, 100 per cent of the 2007 GPSP award vested).
The line chart below compares Prudential’s Total Shareholder Return (TSR) during the five years from 1 January 2005 to 31 December 2010 with that of the peer group against which TSR is measured for the purposes of the Group Performance Share Plan. Our performance is also shown relative to the FTSE 100 since Prudential is a major company within this Index.
Business Unit Performance Plans (BUPP) For executives with regional responsibilities, the Business Unit Performance Plans (BUPPs) deliver shares subject to performance over a three-year period.
For the Asia and Jackson BUPPs, the performance measure applied to all outstanding awards is the increase in the relevant region’s Shareholder Capital Value (SCV) over the performance period. SCV represents shareholders’ capital and reserves on a European Embedded Value (EEV) basis for each business unit, and was selected as a performance measure since it reflects the value contributed to the Group and its shareholders by each business unit.
The levels of SCV growth required for vesting of outstanding BUPP awards are set out in the table below. The SCV growth rates required in Prudential’s business regions vary to reflect the relative maturity of each market and business environment.
For any BUPP award to vest, the Committee must be satisfied that the quality of underlying financial performance of the relevant business unit justifies the level of reward delivered at the end of the performance period. To ensure close alignment with our shareholders’ long-term interests, participants receive the value of reinvested dividends over the performance period for those shares that ultimately vest. If the performance conditions are not achieved in full, the unvested portion of any award lapses and is not available for retesting.
On 31 December 2010, the performance periods for the 2008 BUPP awards (which began on 1 January 2008) came to an end. Over the period, the SCV of the Asia and Jackson business units grew by 15 per cent per annum and 3.9 per cent per annum respectively (on a compound basis). The Committee, having satisfied itself about the quality of the Asia business unit’s underlying financial performance, confirmed vesting of 30 per cent of the 2008 Asia BUPP award. No part of the Jackson 2008 BUPP award vested (in 2009, 63.6 per cent of 2007 Asia BUPP award vested while no part of the 2007 UK and Jackson BUPP awards vested). Please see page 143 for details.
The rules of the GPSP and BUPP set a limit on the value of shares which may be awarded to an executive in a financial year. The combined value of shares awarded under the two plans may not exceed 350 per cent of salary (550 per cent of salary for executives based in the US). The awards made in a particular year are often below this limit. On a change in control of Prudential, vesting of awards made under these arrangements would be prorated for performance and to reflect the elapsed portion of the performance period.
The value of the vested phantom shares will be paid in cash after the end of the three-year performance period.
On 31 December 2010, the performance period for the 2008 awards under the M&G Executive Long-Term Incentive Plan (which began on 1 January 2008) came to an end. M&G’s profit grew by 52 per cent over the period and M&G’s investment performance was in the second quartile. The Committee, having satisfied itself about the quality of M&G’s underlying financial performance, confirmed vesting of the 2008 award with a value of £2.62 per share (in 2009, the 2007 award vested with a value of £1.68 per share).
Clark Manning is eligible to participate in Jackson’s Defined Contribution Retirement Plan, a qualified 401(k) retirement plan, on the same basis as all other US based employees. The Company provides matching contributions of 6 per cent of base salary (Clark Manning's salary for pension purposes is limited to $245,000). He is also eligible to participate in the profit sharing element of the plan which provides eligible participants with an annual profit sharing contribution, depending on the financial results of Jackson for the plan year, to a maximum of an additional 6 per cent of pensionable salary. An annual profit sharing contribution equivalent to 5 per cent of pensionable salary was made in 2010 (6 per cent of pensionable salary in 2009). Clark Manning is provided with life assurance cover of two times salary.
In 2010, the Long Term Savings Plan (LTSP) and the Alternative Retirement Benefit Scheme (ARBS) were established to provide long-term savings vehicles for executive directors and other employees. The LTSP was established under ordinary UK tax legislation for Employee Benefit Trusts and the ARBS was established under specific UK tax legislation relating to Employer Financed Retirement Benefit Schemes. If the trustees accept annual discretionary contributions to either of these plans, no cash supplement for pension purposes will be paid to UK based executive directors. No further payments will be made into these plans.
Non-executive directors’ letters of appointment Non-executive directors do not have service contracts but are appointed pursuant to letters of appointment with notice periods of six months without liability for compensation.
– additional fee 10,000 Risk Committee Chairman – additional fee2 50,000 Risk Committee member – additional fee2 20,000 Senior Independent Director – additional fee 30,000
Rob Devey 1 July 2009 12 months 12 months John Foley 8 December 2010 12 months 12 months Clark Manning(note 1) 7 May 2002 12 months 12 months Michael McLintock 21 November 2001 6 months 12 months Nic Nicandrou 26 April 2009 12 months 12 months Barry Stowe 18 October 2006 12 months 12 months Tidjane Thiam 2 September 2007 12 months 12 months Mike Wells(note 1) 15 October 2010 12 months 12 months
Note 1 The contracts for Clark Manning and Mike Wells are renewable one year fixed term contracts. The contract is renewable automatically upon 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.
Notes 1 Subject to re-election 2 James Ross will retire from the Board at the AGM on 19 May 2011.
Paul Manduca(note 1) – 1,260 1,260 Clark Manning(note 3) 277,273 473,069 –
6 Part of Mike Wells’s interest in shares is made up of 146,921 ADRs (representing 293,842 ordinary shares). Mike became an executive director on 1 January 2011.
Shareholding at 8 March 2011 as % of base salary (note 1)
Notes 1 Based on the share price as at 31 December 2010 (£6.68). Calculated using base salaries on 31 December 2010 or on the date of appointment, if later. 2 Shareholdings for Barry Stowe and Mike Wells include American Depositary Receipts (ADRs). One ADR is equivalent to two
Prudential plc shares. 3 Clark Manning ceased to be an executive director on 31 December 2010.
3 Nic Nicandrou elected not to receive his cash supplement for pension purposes in full during 2010. The Company made a request to the Trustees of the Long Term Savings Plan to accept a contribution equivalent to this supplement. The value of this contribution is included in the table above.
2 Clark Manning's bonus figure excludes a contribution of $14,700 from a profit sharing plan which has been made into a 401(k) retirement plan. 3 As part of Nic Nicandrou's appointment terms, it was agreed that any bonus award would be assessed as if he had been in employment for the whole of 2009. Nic Nicandrou elected not to receive his cash supplement for pension purposes in full during 2009. In March 2010, the Company made a request to the Trustees of the Long Term Savings Plan to accept a contribution equivalent to this supplement. This amount is included in the remuneration table for 2010.
6 Keki Dadiseth was paid allowances totalling £5,398 in respect of his accommodation expenses in London whilst on the Company's business as is the usual practice for directors who are not resident in the UK.
On 31 December 2010, the performance period for Mark Tucker’s 2008 Group Performance Share Plan award came to an end. His GPSP award was prorated for service (21/36ths) and its vesting remained dependent on TSR performance achieved over the three-year performance period. Since this condition was met in full, Mark Tucker’s prorated 2008 GPSP award will vest and will be released at the same time as those of other participants in the plan. This award was the last that Mark Tucker had outstanding under a Prudential long-term incentive plan.
• The long-term incentive plan awards for 2007, 2008 and 2009 have vested or will vest at the end of each relevant three year performance period prorated based on service, i.e. 33/36ths, 21/36ths and 9/36ths respectively. Vesting remains dependent on performance achieved over the relevant performance periods and any shares releases will occur at the same time as for all other participants in the GPSP and BUPP.
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 remains Chairman of Jackson until 30 April 2011 and will act in an advisory role until 31 December 2011. Clark Manning will receive the following payments: • Salary and benefits will continue to be paid to Clark Manning until 31 December 2011; • A prorated 2011 annual bonus opportunity (4/12ths) based on his length of service during 2011 with any payment to be made in cash in March 2012; • The deferred portion of the bonus awarded to Clark Manning in respect of performance in 2007 will be released to him in March 2011. The deferred portions of the bonuses awarded to Clark Manning in respect of performance in 2009 and 2010 will be released in March 2012; • Outstanding awards made under the GPSP and BUPP will vest (subject to the achievement of performance conditions) on the same schedule as awards made to other executive directors. These awards will be prorated to reflect the portion of the performance periods which had elapsed on 31 December 2011. No further awards will be made to Clark under any long term incentive plan during 2011 or in any subsequent year.
Notes 1 The awards in 2009 and 2010 for Clark Manning and Barry Stowe were made in ADRs (1 ADR = 2 Prudential plc shares). The figures in the table are represented in terms of Prudential shares.
2 2010 awards made under the GPSP and the BUPP have a performance period from 1 January 2010 to 31 December 2012. In determining the 2010 conditional share awards the shares were valued at the average share price for the 30 days immediately following the announcement of Prudential’s 2009 results, and the price used to determine the number of shares was 528.39 pence. The awards for Clark Manning and Barry Stowe were made in ADRs (one ADR = 2 Prudential plc shares or $15.97). The figures in the table are represented in terms of Prudential shares.
4 At 31 December 2010, Shareholder Capital Value performance under the 2008 BUPPs was as follows: % compound annual growth in SCV
Business-specific cash-based long-term incentive plans Details of all outstanding awards under cash-based long-term incentive plans up to and including 2010 are set out in the table below. The performance period for all awards is three years.
Conditional share awards outstanding at 31 December 2010 (Number of shares)
CLARK MANNING Deferred 2006 annual incentive award 2007 10,064 10,064 0 31 Dec 09 10,064 9 Mar 10 723 519.5
Other share awards The table below sets out the share deferred annual incentive awards and interests in shares awarded on appointment. The values of the deferred share awards are included in the deferred bonus figures in the table on page 138. The number of shares is calculated using the average share price over the three business days commencing on the day of the announcement of the Group’s annual financial results for the relevant year. For the awards from the 2009 annual bonuses, made in 2010, the average share price was 528.92 pence. Please see the table on page 147 for details of shares acquired under the Share Incentive Plan.
MICHAEL MCLINTOCK Deferred 2006 annual incentive award 2007 90,090 90,090 0 31 Dec 09 90,090 9 Mar 10 723 519.5
Deferred 2007 annual incentive award(note 1) 2008 112,071 112,071 0 31 Dec 10 112,071 9 Mar 10 635 519.5
Deferred 2008 annual incentive award(note 1) 2009 217,410 217,410 0 31 Dec 11 217,410 9 Mar 10 349.5 519.5
Restricted share award based on deferred 2007 annual incentive award(note 1) 2010 66,029 2,356 68,385 31 Dec 10 519.5
Restricted share award based on deferred 2008 annual incentive award(note 1) 2010 128,093 4,571 132,664 31 Dec 11 519.5
Restricted share award based on deferred 2009 annual incentive award(note 2) 2010 118,165 2,484 48,545 72,104 31 Dec 12 48,545 12 Mar 10 552.5 552.5
Restricted share award based on deferred 2009 annual incentive award(note 2) 2010 41,594 874 17,088 25,380 31 Dec 12 17,088 12 Mar 10 552.5 552.5
Restricted share award based on deferred 2009 annual incentive award(note 2) 2010 99,851 2,099 41,022 60,928 31 Dec 12 41,022 12 Mar 10 552.5 552.5
Notes 1 These awards replaced the 2007, 2008 and 2009 deferred share awards which vested during the year. 2 These 2010 awards are a net deferred share award. 3 The Deferred Share Awards in 2010 for Clark Manning and Barry Stowe were made in ADRs (1 ADR = 2 Prudential plc shares).
Dilution Releases from Prudential’s GPSP and BUPP are satisfied using new issue shares rather than by purchasing shares in the open market. Shares relating to options granted under all-employee share plans are also satisfied by new issue shares. The combined dilution from all outstanding shares and options at 31 December 2010 was 0.2 per cent of the total share capital at the time. Deferred shares will continue to be satisfied by the purchase of shares in the open market.
Nic Nicandrou 45 0 Barry Stowe 53 5 Tidjane Thiam 48 0
Outstanding share options The following table sets out the share options held by Tidjane Thiam in the UK Savings Related Share Option Scheme (SAYE) as at the end of 2010. No other directors hold shares in any other option scheme.
Five highest paid individuals (unaudited information) Of the five individuals with the highest emoluments in 2010, one was a director whose emoluments are disclosed in this report (2009: two; 2008: two). The aggregate of the emoluments of the other four individuals for 2010 (2009: three; 2008: three) were as follows: Base salaries, allowances and benefits in kind 1 1 1
Their emoluments were within the following bands: Signed on behalf of the Board of directors
and EEV basis results 152 Index to Group financial statements 153 Consolidated income statement 154 Consolidated statement of comprehensive income 155 Consolidated statement of changes in equity 157 Consolidated statement of financial position 159 Consolidated statement of cash flows 160 Notes on the Group financial statements 354 Additional unaudited financial information 375 Balance sheet of the parent company 376 Notes on the parent company financial statements 387 Statement of directors’ responsibilities in respect of the Annual Report and the financial statements 388 Independent auditor’s report to the members of
Prudential plc 389 EEV basis supplementary information 395 Notes on the EEV basis supplementary information 434 Statement of directors’ responsibilities in respect of the EEV basis supplementary information 435 Independent auditor’s report to Prudential plc on the EEV basis supplementary information
Operating profit based on longer-term investment returns 389 £3,696m £3,090m Short-term fluctuations in investment returns 391 £(30)m £351m Mark to market value movements on core borrowings 391 £(164)m £(795)m Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 391 £(11)m £(84)m Effect of changes in economic assumptions EEV income 391 £(10)m £(910)m Costs of terminated AIA transaction statement 391 £(377)m – Gain on dilution of holding in PruHealth 391 £3m – Profit on sale and results for Taiwan agency business 391 – £91m Profit from continuing operations before tax (including actual investment returns) 391 £3,107m £1,743m
Results bases With the exception of the adoption of IFRS 3 (Revised) on business combinations and associated amendments to other standards and the altered basis of presentation of Jackson’s IFRS operating profit based on longer-term investment returns referred to below, the basis of preparation of the statutory IFRS basis results and supplementary IFRS basis information is consistent with that applied for the 2009 results and financial statements. The EEV basis results have been prepared in accordance with the European Embedded Value Principles issued by the CFO Forum of European Insurance Companies in May 2004. Life insurance products are, by their nature, long-term and the profit on this business is generated over a significant number of years. Accounting under IFRS alone does not, in Prudential’s opinion, fully reflect the value of future profit streams. Prudential considers that embedded value reporting provides investors with a measure of the future profit streams of the Group’s in-force long-term businesses and is a valuable supplement to statutory accounts. With the exception of the presentation of the new business results of the Japan life operation which ceased writing new business in February 2010 there has been no other change to the basis of presentation of the EEV results from the 2009 results and financial statements.
Primary statements 153 Consolidated income statement 154 Consolidated statement of comprehensive income 155 Consolidated statement of changes in equity 157 Consolidated statement of financial position 159 Consolidated statement of cash flows
Section B: Summary of results 182 B1: Segment disclosure – income statement 186 B2: Earnings per share 188 B3: Dividends 189 B4: Exchange translation 189 B5: New business 192 B6: Group statement of financial position
Section E: Asset management (including US broker dealer) and other operations 271 E1: Income statement for asset management operations 273 E2: Statement of financial position for asset management operations 274 E3: Regulatory and other surplus 275 E4: Sensitivity of profit and equity to market and other financial risk 275 E5: Other operations
Section F: Income statement notes 276 F1: Segmental information 278 F2: Revenue 280 F3: Acquisition costs and other expenditure 281 F4: Finance costs: Interest on core structural borrowings of shareholder-financed operations 281 F5: Tax 288 F6: Allocation of investment return between policyholders and shareholders 290 F7: Benefits and claims and movements in unallocated surplus of with-profits funds, net of reinsurance
Section G: Financial assets and liabilities 291 G1: Financial instruments – designation and fair values 300 G2: Market risk 304 G3: Derivatives and hedging 306 G4: Derecognition and collateral 307 G5: Impairment of financial assets
Section I: Other notes 331 I1: Acquisition of United Overseas Bank Life
Assurance Limited 332 I2: Dilution of the Group’s holding in PruHealth in 2010 and sale of Taiwan agency business in 2009 332 I3: Staff and pension plans 345 I4: Share-based payments 349 I5: Key management remuneration 349 I6: Fees payable to auditor 350 I7: Related party transactions 350 I8: Subsidiary undertakings 352 I9: Commitments 352 I10: Discontinued operations 352 I11: Cash flows 352 I12: Post balance sheet events
Acquisition costs and other expenditure F3 (4,799) (4,572) Finance costs: interest on core structural borrowings of shareholder-financed operations F4 (257) (209) Loss on sale of Taiwan agency business I2 – (559)
Available-for-sale securities: Unrealised valuation movements on securities of US insurance operations classified as available-for-sale: D3(a) Unrealised holding gains arising during the year 1,170 2,249 Add back net losses included in the income statement on disposal and impairment 51 420
Related change in amortisation of deferred income and acquisition costs H1 (496) (1,069) Related tax (247) (557)
OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF RELATED TAX 729 848
Attributable to: Equity holders of the Company 2,160 1,524 Non-controlling interests 5 1
Year ended 31 December 2010 Note Share capital Share premium Retained earnings
RESERVES Profit for the year – – 1,431 – – 1,431 5 1,436 Other comprehensive income: Exchange movements on foreign operations and net investment hedges, net of related tax – – – 251 – 251 – 251 Unrealised valuation movements, net of related change in amortisation of deferred income and acquisition costs and related tax – – – – 478 478 – 478
TREASURY SHARES Movement in own shares held in respect of share-based payment plans – – (4) – – (4) – (4) Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS – – 3 – – 3 – 3
RESERVES Profit for the year – – 676 – – 676 1 677 Other comprehensive income: Exchange movements on foreign operations and net investment hedges, net of related tax – – – (195) – (195) – (195) Unrealised valuation movements, net of related change in amortisation of deferred income and acquisition costs and related tax – – – – 1,043 1,043 – 1,043
Total other comprehensive income – – – (195) 1,043 848 – 848
Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes H2(a) 166 124 Deferred acquisition costs and other intangible assets H2(b) 110 106
Other non-investment and non-cash assets: Property, plant and equipment H6 612 367 Reinsurers’ share of insurance contract liabilities H3 1,344 1,187 Deferred tax assets H4 2,188 2,708 Current tax recoverable H4 555 636 Accrued investment income G1,H5 2,668 2,473 Other debtors G1,H5 903 762
TOTAL ASSETS B6 260,806 227,754 * Included within financial investments are £8,708 million (2009: £10,501 million) of lent securities. See note G4.
LIABILITIES Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities H12 171,291 145,713 Investment contract liabilities with discretionary participation features G1 25,732 24,880 Investment contract liabilities without discretionary participation features G1 17,704 15,805 Unallocated surplus of with-profits funds H12 10,253 10,019
CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax (being tax attributable to shareholders’ and policyholders’ returns)note (i) 2,072 1,564 Loss before tax from discontinued operations I10 – (14)
Total profit before tax 2,072 1,550 Changes in operating assets and liabilities: Other non-investment and non-cash assets (1,161) (384) Policyholder liabilities (including unallocated surplus) 24,287 24,932 Other liabilities (including operational borrowings) 1,332 (299) Interest income and expense and dividend income included in result before tax (7,514) (7,267) Other non-cash items (including £559 million in 2009 for the loss on disposal of Taiwan agency business) 139 650 Operating cash items: Interest receipts 6,277 5,734 Dividend receipts 1,412 1,780 Tax paid (302) (200)
CASH FLOWS FROM FINANCING ACTIVITIES Structural borrowings of the Group: I11 Shareholder-financed operations: Issue of subordinated debt, net of costs – 822 Redemption of senior debt – (249) Bank loan 250 – Interest paid (251) (207) With-profits operations: Interest paid (9) (9) Equity capital:note (iii) Issues of ordinary share capital H11 13 3 Dividends paid B3 (449) (344)
Net increase (decrease) in cash and cash equivalents 1,268 (430) Cash and cash equivalents at beginning of year 5,307 5,955 Effect of exchange rate changes on cash and cash equivalents 56 (218)
CASH AND CASH EQUIVALENTS AT END OF YEAR H10 6,631 5,307