A d d itio n al in fo rm atio n 01 Prudential plc Annual Report 2014
The execution of this strategy, driven by the operating principles set out in 2009, is central to the Group’s continued success and reflects the dedication and quality of our people and their focus on meeting the distinct needs of our customers across the business. This has been one of the key factors enabling us to outperform in the markets in which we compete, delivering value for our customers and sustainable returns for our shareholders.
G ro u p overv iew 03 Prudential plc Annual Report 2014 04 Chairman’s statement 06 Group Chief Executive’s report
I am pleased to introduce Prudential’s 2014 Annual Report. The Group has produced another strong performance, delivering value to our customers, benefits to the communities in which we operate and good returns for our shareholders.
Our success is based on a number of key factors. First, we have a clear and disciplined strategy, focused on the long term. Following our success in achieving our previous demanding set of targets, at the end of 2013 our executive team set new objectives to reach by 2017. These are just as testing as their predecessors, and I am pleased to say that we are making solid progress towards them.
Our third key strength is our robust corporate governance. Good governance is critical to success in financial services. It is one of the factors that has allowed Prudential to flourish for more than a century and a half, by ensuring our purpose and values inform the behaviours and culture of our organisation, and that decisions are taken within proper, effective and transparent reporting structures.
In line with that commitment, we have made a number of changes. In April 2014 we announced that our Group Chief Risk Officer, Pierre-Olivier Bouée, was joining the Board. It is important that at a large, complex financial services business such as ours, the Chief Risk Officer is represented, and Pierre-Olivier brings extensive expertise and experience to the Board.
At the same time, our former Chief Risk Officer, John Foley, stepped down from the Board, while continuing in his role as Group Investment Director. I would like to thank John for his contribution and I am pleased that he is continuing to fulfil the vital role of Group oversight of financial investments as a member of the Group Executive Committee.
I am determined to ensure that our Board makes the greatest contribution that it can to Prudential’s success, providing the best possible governance, forming a clear
The Board has decided to rebase the full-year dividend upwards by 10 per cent, reflecting the 2014 financial performance of the Group. In line with this, the directors recommend a final dividend of 25.74 pence per share (2013: 23.84 pence), which brings the total dividend for the year to 36.93 pence (2013: 33.57 pence). This rebase has been made possible by the continued exceptionally strong performance of the Group.
Although the Board has been able to recommend such a rebase in 2014, the Group’s dividend policy remains unchanged. The Board will maintain its focus on delivering a growing dividend from this new higher base, which will continue to be determined after taking into account the Group’s financial flexibility and our assessment of opportunities to generate attractive returns by investing in specific areas of the business. The Board believes that in the medium term a dividend cover of around two times is appropriate.
Alongside the benefits provided by our core activities, we also engage in corporate responsibility programmes in the markets in which we operate around the world. In partnership with charitable organisations, we provide long-term funding and deploy the expertise of the many volunteers from our workforce on projects that help to improve the lives of individuals and strengthen communities in many different ways.
I am particularly proud of the thousands of our employees who take part in these activities. Last year our colleagues contributed more than 62,000 hours of their time to help improve the lives of others.
Many of these volunteers take part in the Chairman’s Challenge, our flagship volunteering programme. Last year I took the opportunity to visit our winning 2013 Chairman’s Challenge project in Hong Kong, and it was highly rewarding to see the great work our people are doing there and the tangible benefits they are creating.
The 2014 Chairman’s Challenge programme was our most successful yet, with more than 6,000 employees volunteering their time across more than 25 projects. These included a workreadiness and financial literacy programme in Michigan, a life skills programme for children in Thailand, a homebuilding project in India and a series of business and enterprise lessons for primary schoolchildren in Tower Hamlets in London.
Finally, I would like to thank all our employees for their contribution to another strong year for Prudential. The skill, commitment and hard work of our people in all our businesses enable us to continue executing our successful strategy and delivering for our customers, our shareholders and the communities in which we operate. I am confident that with that strategy, our strong management and the commitment of our people, we will continue to provide excellent value for our customers and growing returns for our shareholders.
The last two years have seen significant fluctuations in the value of sterling against the local currencies in the US and in some of our key markets in Asia. This has been driven by ongoing speculation about the relative growth trajectories in the world’s major economies, together with often divergent views on the timing, extent and effectiveness of government and central bank intervention. While sterling strengthened significantly in the second half of 2013, driven by expectations that a stronger recovery of the UK economy would lead to an earlier shift in UK monetary policy, the latter part of 2014 has seen a partial reversal of this movement as the relative outlook improved in other areas of the global economy, particularly in the US. However, the negative impact of sterling strength in late 2013 and early 2014 on the financial performance of our overseas businesses is recognised mainly in 2014, as we use average actual exchange rates to report our results in sterling.
In that context, it is important to note that the actual flows that we collect from our customers in Asia and the US are received in local currency. We believe that in periods of currency volatility, the most appropriate way to assess the actual performance of these businesses is to look at what they have achieved on a local currency basis, in other words in terms of the actual flows they have collected, rather than the translation of those flows into sterling. Therefore, in this section, every time we comment on the performance of our businesses, we focus on their performance measured in local currency (presented here by reference to percentage growth expressed at constant exchange rates) unless otherwise stated.
Note 1 The comparative results referenced above and elsewhere in this report have been prepared using constant exchange rates basis except where otherwise stated. Comparative results on an actual exchange rate basis are also shown in financial tables in the Chief Financial Officer’s report on our 2014 financial performance.
— UK life IFRS operating profit grew by 7 per cent to £752 million, benefiting from higher contributions from bulk annuities, which outweighed the impact of significantly lower sales of individual annuities following UK market reforms; and
— M&G delivered operating profit of £488 million2, an increase of 11 per cent, reflecting continued strong third-party net inflows combined with favourable market movements in the period, which together have increased M&G’s external funds under management by £11.0 billion to a record £137.0 billion.
Net cash remittances from our businesses increased by 11 per cent to £1,482 million, driven by strong organic cash generation and supported by robust local capital positions. Cash remittances of £400 million from Asia were consistent with 2013, the US was up 41 per cent to a record of £415 million, the UK remitted cash of £325 million, as we have been increasing our level of investment in the business in response to the UK market reforms, while M&G (including Prudential Capital) delivered an increase of 17 per cent to a new high of £342 million. Such levels of cash generation are the bedrock of our financial strength. Underlying free surplus generation from our life and asset management businesses, a key indicator of cash production in these businesses, was 9 per cent higher at £2,579 million after reinvestment in new business. We deliberately run the Group to seek to generate organically significant amounts of cash in each of our businesses. The successful implementation of this approach gives us added strategic and financial £3,186m IFRS operating profit increase1 on 2013
— The UK ‘savings gap’ and ageing population in need of returns and income.
Our consistent delivery in Asia is underpinned by our focus on regular premium, protection-orientated solutions that genuinely address the long-term financial needs of Asia’s growing middle classes in the ‘sweet spot’ markets5 of South-east Asia and Hong Kong. Our strategy is to be strongly diversified in terms of geography, products and distribution in a world economy that is increasingly hard to predict. That diversification is at the heart of our ability to continue to perform well across a broad range of metrics as the breadth of our portfolio provides considerable resilience against the impacts of short-term market disturbances in individual countries, such as the elections and natural disasters experienced during 2014.
Our multichannel distribution platform continues to play a key role in our strategy: — In the agency channel we continued to add to the existing scale of our platform during 2014 through recruitment. In parallel we also improved individual productivity, thanks to our investments in agency management technology and analytics; and
— Regarding our bank partnerships, we announced in the first quarter that we extended and expanded our longestablished and market-leading partnership with Standard Chartered Bank for another 15 years to 2029, effective since July 2014. Encouragingly, second-half APE sales via Standard Chartered Bank grew over 33 per cent compared to the same period in 2013, including a record month in December. The distribution channel mix remained in line with prior year, with agency generating 61 per cent, bancassurance 32 per cent and other channels, mainly direct and telemarketing, 7 per cent.
Group objective 3. Group cumulative underlying free surplus Cumulative Group underlying free surplus generation of at least £10 billion over the four-year period from 2014 to end-2017 > £10bn £2.6bn > £10bn 2014–2017 objective
In Taiwan and Korea we remain selective in our participation and as a result we are content to experience fluctuations in new business volumes. Both businesses have generated higher IFRS operating profit in 2014.
In 2014, Asia EEV life operating profit3 increased by 12 per cent to £1,900 million, largely as a result of the growth in new business profit and a 10 per cent increase in the contribution from the larger in-force book.
Eastspring Investments, our Asia asset management business, generated record third-party net inflows of £5.4 billion, 3.8 times higher than in 2013, with success in securing new equity flows, particularly from institutional clients, mitigating lower net inflows in fixed income. Including internal funds, total funds under management as at 31 December 2014 were a record £77.3 billion, up 28 per cent on the prior year as a result of net inflows and positive market movements. IFRS operating profit increased 32 per cent to £90 million, driven by the positive impact on revenue from higher levels of average assets under management.
In Malaysia, our decision to refocus our agency business on health and protection and to grow distribution by Bumiputra agents (‘Bumi’), delivered an encouraging 17 per cent increase in agency activity. The overall increase in APE sales of 6 per cent during 2014 reflects structurally lower average case sizes in the Bumi channel, where we are determined to grow in the next phase of development of our strategy in the country. We deliberately de-emphasised sales of some top-up products that negatively impacted top-line growth – an indicator which for us always comes second to growth in new business profit. Finally, fuel reforms and the prospect of the introduction of a new goods and services tax generated market uncertainty, which weighed on the economy and on our sector.
Thailand includes the first full year of operation of our exclusive bancassurance agreement with Thanachart Bank, which together with our other bancassurance partners, UOB and Standard Chartered Bank, has driven a 36 per cent increase in APE sales. The transformation of our business in the Philippines is continuing, with a significant increase in agency activity. Reflecting this, regular premium sales were up 30 per cent on prior year and protection business increased by 36 per cent. Vietnam also had a good year, growing APE sales by 20 per cent on higher levels of agency activity.
£2,126m EEV new business profit increase1 on 2013 £2,579m underlying free surplus generation increase1 on 2013
During 2014, the US continued to see signs of an improving economy, with declining unemployment rates, evidence of recovery in the housing market and stronger GDP growth. The S&P 500 Index rose 11 per cent and the 10-year Treasury rate remained above the 2012 low levels, but declined significantly during the course of the year. Overall, the US competitive landscape has been more stable than in recent periods, as most annuity writers appear to have committed to a particular course of action for the near term. Variable annuity providers continue to modify their product offerings through reductions in fund availability and increased fees. In addition, an increasing number of investment-only variable annuity products have been launched, following the success of Elite Access, our variable annuity without living benefits.
Jackson achieved total retail APE sales of £1,491 million in 2014, an increase of 6 per cent compared to 2013. These sales were achieved while continuing to write new business at aggregate internal rates of return in excess of 20 per cent and with a payback period of one year. Including institutional sales, total APE sales increased 4 per cent to £1,556 million, driving new business profit3 growth of 4 per cent to £694 million.
Total variable annuity APE sales increased 10 per cent to £1,401 million in 2014. Within this, APE sales of Elite Access rose 26 per cent to £311 million. The economics of our variable annuity business continue to be very attractive. With the success of Elite Access, we continue to improve the diversification of our product mix, contributing to an increase in the share of non-living benefit variable annuity sales to a new high of 34 per cent of total variable annuity APE sales (2013: 31 per cent).
Jackson remains focused on proactively managing sales volumes of variable annuities with living benefits to match our annual risk appetite. Jackson’s statutory separate account assets increased by 17 per cent, from £69.8 billion in 2013 to £81.7 billion in 2014 (up 24 per cent on an actual exchange rate basis), reflecting both positive net flows and the growth in the underlying market value of the separate account assets.
IFRS operating profit increased 13 per cent to £446 million in 2014, marking the fifth consecutive year of record profits. Over this period operating profit has grown by a compound annual growth rate of 16 per cent. While higher equity markets and buoyant bond markets have both contributed to improving profitability, strong net inflows of client assets since 2009, particularly in the retail market, have been a key driver of the increase in profit achieved by M&G. Reflecting this continued strong operating performance, M&G remitted £285 million of cash to Group in 2014, 21 per cent more than in 2013.
In total, PruFund assets under management increased 27 per cent to £11.6 billion in 2014.
On 10 November 2014, Prudential Assurance Company Limited announced the sale of its 25 per cent equity stake in the PruHealth and PruProtect businesses to Discovery Group Europe Limited for £155 million in cash, generating an IFRS profit on disposal of £86 million. This transaction enabled Prudential UK to realise its investment at attractive terms and creates strategic flexibility for future participation in the UK protection market.
During 2014, we completed the acquisition of Express Life in Ghana and Shield Assurance Company in Kenya, marking the Group’s entry into the nascent African life insurance industry. We are positive about the long-term opportunities in Africa, where we see many of the favourable structural characteristics of our preferred Asia markets, although most sub-Saharan life insurance markets are in the very early stages of development and therefore are not likely to be material in the short term.
On an economic capital basis12 our surplus at 31 December 2014 of £9.7 billion (2013: £11.3 billion) is equivalent to an economic capital ratio of 218 per cent (2013: 257 per cent). These results are based on outputs from our Solvency II internal model, which has not yet been approved by the Prudential Regulation Authority. The results assume US equivalence, place no restrictions on the economic value of overseas surplus, and incorporate a number of other working assumptions. Certain aspects of the methodology and assumptions underpinning these results will differ from those which are applied in obtaining final Solvency II Pillar I internal model approval. The eventual Solvency II Pillar I ratio, therefore, remains uncertain and is expected to be lower than our economic capital ratio.
Group Chief Risk Officer’s report on the risks facing our business and our capital strength page 51
The recent increase in headcount and investment in operational infrastructure required to preserve service quality as the scale of the business grows, has been more than matched by revenue growth in 2014. As a result the cost-income ratio11 of 58 per cent in 2014 has improved slightly over the prior year (2013: 59 per cent).
M&G remains focused on producing superior long-term investment returns for clients, while continuing to diversify its business by geography and asset class and providing capital-efficient profits and cash generation for the Group.
Notes 1 The comparative results referenced above and elsewhere in this report have been prepared using constant exchange rates basis except where otherwise stated. Comparative results on an actual exchange rate basis are also shown in financial tables in the Chief Financial Officer’s report on our 2014 financial performance.
5 ‘Sweet spot’ markets are Indonesia, Singapore, Hong Kong, Malaysia, Philippines, Vietnam and Thailand.
8 Asia 2012 IFRS operating profit of £924 million is based on the retrospective application of new and amended accounting standards as at 31 December 2013, and excludes the 2012 one-off gain of £51 million from the sale of the Group’s holding in China Life Insurance Company of Taiwan.
12 The methodology and assumptions used in calculating the economic capital results are set out in note II (c) of Additional unaudited financial information. The economic capital ratio is based on outputs from the Group’s Solvency II internal model which will be subject to Prudential Regulation Authority review and approval before its formal adoption in 2016. We remain on track to submit our Solvency II internal model to the Prudential Regulation Authority for approval in 2015 but given the degree of uncertainty remaining these economic capital disclosures should not be interpreted as outputs from an approved internal model.
In the US and the UK, we continue to utilise our established market position, distribution strength and distinctive products to ensure the delivery of earnings and cash, with strict allocation of capital to segments of the market that offer higher, capital-efficient margins. The UK life insurance market has been subject to significant reform, the ramifications of which are still playing out, but which we believe will ultimately lead to greater customer demand for savings and retirement solutions and create new opportunities for Prudential UK and M&G to leverage their existing expertise.
We remain confident in our ability to produce profitable growth over the long term and to continue to create value for our customers and shareholders.
Strategic rep o rt 15 Prudential plc Annual Report 2014 16 Our world 18 Our strategy and operating principles 19 How our business works 20 Measuring our performance 22 Our businesses and their performance 22 Asia 27 United States 31 United Kingdom 35 Asset management 39 Chief Financial Officer’s report on our 2014 financial performance 51 Group Chief Risk Officer’s report on the risks facing our business and our capital strength 61 Corporate responsibility review
The US ‘baby boomer’ generation is the wealthiest demographic group in the global economy. Over the next 20 years they will be retiring at a rate of 10,000 per day, creating significant demand for retirement services.
US$13.9 trillion – global growth * IMF World Economic Outlook – October 2014
The Asian middle class population is forecast to double between 2009 and 2020 and will by then represent over half of the global middle class. This group is getting wealthier and will have significant and growing needs for protection against illness and accident.
Prudential Corporation Asia Prudential is a leading international life insurer in Asia with operations in 14 markets and serving the emerging middle class families of the region’s outperforming economies. We have built a high-performing business with effective multichannel distribution, a product portfolio centred on regular savings and protection, award-winning customer services and a well-respected brand.
Europe is home to the second-largest retail asset management industry in the world, with over £6.2 trillion of assets. Asset managers with trusted brands and superior investment performance will see increasing demand for their products.
M&G M&G has been investing money for individual and institutional clients for over 80 years. M&G has grown to be one of Europe’s largest retail and institutional fund managers by developing its enduring expertise in active investment. M&G has a conviction-led and long-term approach to investment, developing a deep understanding of the companies and organisations in whose equities, bonds or property M&G invests.
Proactive risk management 18 Prudential plc Annual Report 2014 Strategic report
Focus on customers and distribution We believe that in order to do well for our shareholders we must first do good for our customers. Hence, customers are at the centre of our operating principles.
Disciplined capital allocation We rigorously allocate capital to the highest-return products and geographical locations with the shortest payback periods, in line with our risk appetite. This has had a positive and significant impact. Over the last five years, our new business profits have increased by 48 per cent (on an actual exchange rate basis) even though we invested 6 per cent less capital. This has, in turn, transformed the capital dynamics of our Group: for example, the free capital generated from our existing life and asset management operations reached £3.2 billion in 2014 compared to £2.3 billion five years ago (on an actual exchange rate basis). This transformation enabled our business operations to remit £1,482 million to the Group in 2014, nearly double the level of remittance five years ago.
Proactive risk management Balance sheet strength and proactive risk management enable us to make good our promises to customers and are therefore key drivers of long-term value creation and relative performance. We have continuously strengthened our capital position since 2008, in spite of the challenging macroeconomic environment that followed. Management actions that have been taken over this period include: — The sale of our capital-intensive
Taiwan agency business in 2009, improving our IGD capital position; — The establishment of £2.2 billion of credit default reserves1 in the UK annuity business; and
capabilities to generate value for our customers and shareholders 19 Prudential plc Annual Report 2014 Strategic rep o rt
We provide protection and savings opportunities to our customers, social and economic benefits to the communities in which we operate, jobs and opportunities to our employees, and long-term value for our investors. By offering security, pooling savings and making investments, we help to drive the cycle of growth.
We create financial benefits for our investors and deliver economic and social benefits for our customers, employees and the societies in which we operate
Employees Providing an environment with equal opportunities, career potential and reward means that we have the best people to deliver our strategy
Life insurance Prudential provides savings, protection and retirement products, which offer security for individuals and benefit societies
Markets Operate in suitable markets and identify investment opportunities with attractive risk-return profile
Products Design products that meet our customers’ savings, income and protection needs
Brands and distribution Develop trusted brands and effective distribution channels that enable us to better understand and service customers’ financial needs
Customers Invest customers’ savings in a way that reflects their personal needs and risk tolerance. Provide financial protection to customers for adverse events
Customers Generate valuable returns for our customers through good investment performance
Shareholders Generate value for shareholders through being rewarded for managing customers’ savings and through insurance profits from the protection given to policyholders
To create sustainable economic value for our shareholders we focus on delivering growth and cash while maintaining appropriate capital.
Prudential takes a balanced approach to performance management across IFRS, EEV and cash. We aim to demonstrate how we generate profits under different accounting bases, reflecting the returns we generate on capital invested, and highlight the cash generation of our business.
IFRS operating profit2 (£m) IFRS operating profit is our primary measure of profitability. This measure of profitability provides an underlying operating result based on longerterm investment returns and excludes nonoperating items.
— Group IFRS operating profit in 2014 increased by 14 per cent on a constant exchange rate basis (8 per cent on an actual exchange rate basis), compared to 2013, reflecting strong growth in Asia and the US. IFRS operating profit in both business units was up 17 per cent, on a constant exchange rate basis.
— Group EEV operating profit in 2014 increased by 4 per cent on a constant exchange rate basis (decreased 3 per cent on an actual exchange rate basis), compared to 2013, reflecting higher new business profits and higher contributions from the in-force business.
Group free surplus generation4 (£m) Free surplus generation is used to measure the internal cash generation of our business units. For insurance operations it represents amounts maturing from the in-force business during the period less investment in new business and excludes other non-operating items. For asset management it equates to post-tax IFRS operating profit for the period.
— Underlying free surplus in 2014 increased by 9 per cent, on a constant exchange rate basis (5 per cent on an actual exchange rate basis), compared to 2013, driven by growth of the in-force portfolio, and continued discipline in the investments made to support new business growth.
2 The basis of IFRS operating profit based on longer-term investment returns is discussed in note B1.3 of the IFRS financial statements. The IFRS profit before tax attributable to shareholders have been prepared in accordance with the accounting policies discussed in note A of the IFRS financial statements.
3 The EEV basis results have been prepared in accordance with the EEV principles discussed in note 1 of EEV basis supplementary information. The 2014 EEV results of the Group are presented on a post-tax basis, and accordingly, prior years’ results are shown on a comparable basis.
5 Estimated. 6 Excludes subordinated debt issues that qualify as capital. 7 The objectives assume exchange rates at December 2013 and economic assumptions made by Prudential in calculating the EEV basis supplementary information for the half year ended 30 June 2013, and are based on regulatory and solvency regimes applicable across the Group at the time the objectives were set. The objectives assume that the existing EEV, IFRS and Free Surplus methodology at December 2013 will be applicable over the period.
9 Asia 2012 IFRS operating profit of £924 million is based on the retrospective application of new and amended accounting standards, and excludes the oneoff gain of £51 million from the sale of the Group’s holdings in China Life Insurance Company in Taiwan.
Cumulative Group underlying free surplus generation from 2014 onwards £2.6bn > £10bn
Life insurance is a key driver in the development of economies. We provide financial protection for families and also offer them savings opportunities tailored to their needs. We then channel these savings into investments in the economy which help to drive further economic growth. We are very much an organisation that does well by doing good.
The—degree—of—state-sponsored—financial— provision—for—healthcare—and—other—social— services—varies—by—market,—but—is—typically— very—basic—and—it—is—widely—appreciated—that— the—private—sector—has—a—very—important— complementary—role.—Protection—gaps— remain—high—across—the—region—and—the— regulators—have—tasked—the—industry—with— improving—levels—of—financial—literacy—and— addressing—this—issue.—Consequently—the— regulations—governing—the—industry— continue—to—evolve—in—largely—positive—ways— with—good—outcomes—for—customers—and— shareholders.—
Attractive demographics Economic—growth—is—translating—into—the— rapid—increase—of—the—Asian—middle—class.— Between—2009—and—2020—it—is—estimated—that— there—will—be—over—1.2—billion—people—who— will—have—been—elevated—from—rural— subsistence—to—urban—lifestyles.—Within—our— preferred—‘sweet—spot’—markets—of—Southeast —Asia—and—Hong—Kong,—the—middle—class— will—be—represented—by—over—400—million— people.—Families—are—getting—smaller,—life— expectancies—are—lengthening—and—the— incidence—of—chronic—diseases—is—increasing— significantly.—
Prudential’s strategy ‘to accelerate’ in Asia is well established and prioritises long-term, profitable growth driven by: —— Focus—on—the—long-term—protection—and— savings—needs—of—Asia’s—rapidly—growing— middle—classes;—
Drivers of wealth creation4 Asia (excluding Japan) 2013–2018 $tn 2013 Existing asset growth
Prudential customer % of middle class6 403m +112m 24 Prudential plc Annual Report 2014 Strategic report
Ranked* 1 Ranked* 1 Ranked* 3 Ranked* 1 www.prudential.co.id www.prudential.com.sg www.prudential.com.hk www.prudential.com.my
2 Agency excluding India. 3 Prudential estimates based on IMF data – October 2013. 4 Source: BCG Global Wealth 2014
— Strong demand for savings and protection products As—people—move—into—the—middle—class,— their—increased—wealth—and—higher—income— provide—the—incentive—to—make—financial— plans.—Typically—the—first—stage—is—to—provide— protection—for—the—family—and—establish—a— regular—savings—plan—through—a—life— insurance—policy.
Social—welfare—provisions—vary—by— market,—but—generally—fall—well—below—the— levels—people—need—to—sustain—their—families’— lifestyle—in—the—event—of—a—personal—tragedy— such—as—the—diagnosis—of—a—critical—illness.— Also,—while—basic—medical—services—may—be— provided—by—the—state,—there—can—be—a—high— level—of—out-of-pocket—expenses,—creating— demand—for—financial—solutions—to— significantly—improve—an—individual’s— experience—through—access—to—private— medical—services.—Therefore,—critical—illness— and—medical—riders—are—popular—additions—to— life—insurance—policies.
PRUhealthcare assist (PHA), launched in May 2014, is a first-tomarket helpline service available exclusively to PRUshield medical insurance customers in Singapore; the first such service in this market.
Customers Prudential—Corporation—Asia—has—over— 13—million—life—insurance—customers—and—over— 22—million—in-force—policies.—We—actively— monitor—customer—satisfaction—levels—across— multiple—indicators,—but—key—statistics—are—the— numbers—of—customers—who—keep—their— policies—(our—retention—rate—is—over— 90—per—cent),—and—the—number—of—customers— who—buy—more—policies—from—us—(in—2014— more—than—40—per—cent—of—APE—sales—were— from—existing—customers).—This—reflects—the— success—of—our—advice-driven—approach—and— shows—that—customers—appreciate—the—value— of—the—products—we—provide.
u r bu sin esses an d th eir p erfo rm an ce 27 Prudential plc Annual Report 2014
Net cash remittances £m Growth in statutory admitted assets US$bn 122*
*One-off release of excess surplus www.jackson.com Measuring our performance page 20
Mike Wells President and Chief Executive Officer Jackson National Life Insurance Company
‘Baby boomer’ retirement opportunities The—United—States—is—the—world’s—largest— retirement—savings—market—with—total—assets— in—the—annuity—sector—of—over—US$2.6—trillion2.— Each—year,—many—of—the—77—million—‘baby— boomers’—reach—retirement—age,—which—is— triggering—a—shift—from—savings—accumulation— to—retirement—income—generation—of—more— than—US$10—trillion3—of—accumulated—wealth— over—the—next—decade.—This—demographic— transition—constitutes—a—significant— opportunity—for—those—companies—that—are— able—to—provide—the—‘baby—boomers’—with— long-term—retirement—solutions.—
US economic environment In—2014,—the—US—economy—continued—to— show—signs—of—improvements,—with—stronger— GDP—growth,—declining—unemployment— rates,—and—evidence—of—a—recovery—in—the— housing—market.—The—S&P—500—Index—rose— 11—per—cent,—following—a—30—per—cent—jump—in— 2013.—In—late—October,—the—Federal—Reserve— announced—an—end—to—its—Quantitative— Easing—programme—due—to—an—improved—US— economy.—As—part—of—quantitative—easing,— the—Federal—Reserve—purchased—trillions—of— dollars—of—bonds—in—order—to—add—more— money—to—the—US—economy.—Despite—these— signs—of—strength—domestically,—longerdated —treasury—yields—pulled—back—in— 2014,—but—remained—above—the—lows— experienced—in—2012.
the—industry—while—generating—healthy— margins.—Variable—annuity—providers— continue—to—modify—their—product—offerings— through—reductions—in—fund—availability—and— increased—fees.—Several—insurers—with— challenging—legacy—blocks—of—variable— annuity—business—continue—to—implement— policy—changes—to—help—mitigate—the—risk—of— their—back—book—of—business,—including—fee— increases—on—older—benefits,—changes—to—the— availability—of—investment—options,— subsequent—premium—restrictions—on— in-force—contracts—and—buyback—offers—to— their—existing—policyholders.—Despite— positive—demographic—trends,—these— activities—have—the—potential—to—lead—to— overall—contraction—in—the—industry,—and— likely—further—market—share—adjustments,—as— customers—and—distributors—seek—insurers— that—offer—consistency,—stability—and— financial—strength.
Regulatory environment The—financial—services—industry—continues— to—deal—with—a—multitude—of—emerging— regulatory—initiatives—in—response—to—the— financial—crisis.—Many—of—these—broader— financial—services—initiatives—specifically— impact—the—insurance—industry.—Within—the— insurance—industry,—we—are—seeing—evolving— supervisory—structures,—new—global—group— supervision—standards,—focus—on—the— reduction—of—systemic—risk,—and—amplified— focus—on—enterprise—risk—management,—as— well—as—initiatives—in—the—area—of—financial— reporting.—While—discussions—continue— across—many—initiatives,—they—are—resulting— in—significant—resources—being—expended— across—the—industry.—Finding—the—appropriate— path—through—all—of—the—regulatory—changes— clearly—remains—a—challenge.
Product suite Jackson—develops—and—distributes—products— that—address—the—retirement—needs—of—our— customers—through—various—market—cycles.— These—include—variable—annuities,—fixed— annuities,—fixed-index—annuities,—and— separately—managed—accounts.—As—would— be—expected—in—the—current—historically—low— interest—rate—environment,—variable— annuities—continue—to—outsell—fixed-rate— products.—The—main—attraction—of—a—variable— annuity—product—is—the—optional—lifetime— guarantee—where—customers—can—access— a—stream—of—payments—with—downside— protection—while—still—being—able—to—invest—in— a—broad—range—of—assets—as—well—as—the— benefit—of—tax—deferral—on—the—investment— growth—within—the—product.—The—breadth— of—our—product—offering,—strength—of—our— distribution—relationships,—and—our—ability— to—maintain—financial—stability—through—the— crisis—and—remain—as—a—consistent—presence— within—the—market,—has—resulted—in—Jackson— being—the—number—one4—writer—of—variable— annuities—in—the—US.
Additionally,—Jackson—developed—and— launched—Elite—Access—in—March—2012.— Elite—Access—is—a—variable—annuity—without— guarantees,—offering—customers—taxdeferred —growth—and—access—to—a—wide— range—of—alternative—investments.—In—less— than—three—years—after—its—launch,—Elite— Access—is—the—fourth—best-selling—variable— annuity—product—in—the—US.—As—of—third— quarter—of—2014,—Jackson—offers—three—of—the— top—10—best-selling—variable—annuity— products—across—the—industry.—
While—sales—of—fixed—annuities—and—fixed— index—annuities—have—been—lower,—though— relatively—in—line—with—the—market,—they—still— make—up—a—significant—portion—of—our— balance—sheet—and—earnings.—Jackson— stopped—selling—life—insurance—products—in— 2012;—however,—we—continue—to—look—for— opportunistic—‘bolt-on’—acquisitions—to— diversify—our—earnings—and—balance—sheet— risks—further.—The—purchase—of—Reassure— America—Life—Insurance—Company—(REALIC)— in—2012—has—contributed—significantly—to— shape—Jackson’s—earnings—while—helping—to— diversify—Jackson’s—overall—risk—profile.—We— continue—to—proactively—balance—value,— volume,—capital—and—balance—sheet—strength— across—our—suite—of—product—offerings—which— allows—us—to—compete—effectively— throughout—the—economic—cycle.—
National—Planning—Holdings,—an—affiliate— of—Jackson,—is—the—sixth5—largest—independent— broker-dealer—network—in—the—country.— Leveraging—the—collective—strength—of—the— four—broker-dealers—within—the—network,— National—Planning—Holdings—is—able—to—meet— the—specific—needs—of—three—key—distribution— channels:—independent—representatives,— financial—institutions,—and—tax—and— accounting—professionals.—We—offer— registered—representatives—and—investment— advisers—access—to—industry-leading—mutual— fund/asset—management—companies,— insurance—carriers,—and—to—thousands—of— brokerage—products.—National—Planning— Holdings—provides—significant—benefits— for—Jackson—by—being—an—outlet—for— Jackson—products—and—providing— market—intelligence.
Disciplined approach Jackson—operates—within—a—well-defined— risk—framework—aligned—with—the—overall— Prudential—Group—risk—appetite.—The—type— and—number—of—products—we—sell—remains— balanced—with—the—acceptance—of—risks—we— retain.—Our—conservative—and—disciplined— economic—approach—to—pricing—is—designed— to—achieve—both—adequate—returns—on—our— products—and—sufficient—resources—to— support—our—hedging—programme.
2 According to LIMRA, U.S. Individual Annuities Survey Participant’s Report (Q3 2014).
Individual Annuities Survey Participant’s Report (Q3 2014). Jackson is ranked first in total variable annuities sales out of 30 participating companies in LIMRA’s quarterly sales survey.
5 Investment News Broker-Dealer Rankings – April 2014 (as reported at the 2014 Investor Conference).
u r bu sin esses an d th eir p erfo rm an ce 31 Prudential plc Annual Report 2014
The evolution of saving in the UK The—configuration—of—the—UK—market—is— unchanged,—characterised—by—an—ageing— population—with—wealth—concentrated—in—the— 50+—age—group—and—a—younger—generation—of— savers—who—are—typically—less—well-funded.— While—the—announcement—of—pensions— freedoms—in—the—2014—Budget—has— significantly—reduced—restrictions—on—how— these—individuals—will—access—their—savings— to—help—fund—an—income—in—retirement,—the— need—to—accumulate—savings—remains.—It— constitutes—a—significant—opportunity—for— companies—with—a—strong—brand—and—a—solid— track—record—in—the—long-term—savings—market.
The changing regulatory landscape The—UK—life—and—pensions—industry— continues—to—undergo—significant—change.— The—announcement—by—the—UK—Chancellor— in—the—2014—Budget—to—remove—compulsory— annuitisation—and—introduce—new—pension— freedoms—from—April—2015—has—been— described—as—a—once—in—a—100-year—change.— We—are—supportive—of—this—change—and—more— generally—of—policy—initiatives—that—will—help— encourage—people—to—save—in—greater— numbers,—and—more—often,—particularly—in— an—environment—where—there—is—a—significant— savings—gap.—Simultaneously,—we—are— witnessing—a—shift—in—how—customers—view— retirement.—The—distinction—between— accumulating—funds—and—then—using—
Valuable customer franchise With—a—pedigree—stretching—back—over—more— than—166—years,—the—Prudential—UK—business— has—built—the—foundation—of—the—Group’s— iconic—brand—and—its—cash,—capital—and— credit-ratings—performance.—Our—approach— in—the—UK—is—driven—by—a—focus—on—providing— long-term—value—to—our—customers—based— on—our—longevity—experience,—multi-asset— investment—capabilities—and—our—financial— strength.—In—the—UK—the—Prudential—brand— is—long—established,—well-known—and,— importantly,—well-trusted—both—in—the— intermediary—financial—adviser—and—the—retail— marketplaces.—This—trust—and—recognition— positions—us—favourably—to—help—customers— save—with—confidence—and—to—understand— how—to—secure—a—dependable—retirement— income,—through—our—range—of—marketleading —with-profits—and—retirement— income—products.——
u r bu sin esses an d th eir p erfo rm an ce 33 Prudential plc Annual Report 2014
—— Driving—year-on-year—improvement— in—service—for—both—customers—and— intermediaries.—Our—ongoing— commitment—to—customer—service— improvement—was—recognised—at—the— Financial—Adviser—Service—Awards,— where—we—retained—our—two—five—star— ratings—in—the—Life—&—Pensions—and— Investment—categories—while—also— receiving—the—Outstanding— Achievement—Award—for—2014.
When investing or saving for retirement, many of our customers value the potential for both growth and a degree of security against losing money. Prudential UK’s PruFund offers these features.
With—its—market-leading—multi-asset— fund—offering,—Prudential—UK—provides— access—to—our—fund—management— expertise,—with: —— Funds—with—innovative—designs—that— spread—risk—by—investing—in—many— different—assets; —— A—smoothing—process—that—offers— potential—growth—in—the—value—of—the— funds,—while—helping—to—manage— short-term—volatility;—and
Company C with-pro�ts 15 years 10 years 5 years 34 Prudential plc Annual Report 2014 Strategic report
u r bu sin esses an d th eir p erfo rm an ce 35 Prudential plc Annual Report 2014
M&G external net flows £bn M&G European retail funds under management £bn 9.0*
M&G’s objective is to produce superior long-term investment returns for its clients – individual and institutional investors – and its shareholder. We continue to diversify our business by geography and asset class, while providing capital efficient profits and cash generation for the Group.
The—European—asset—management—market—is— the—second—largest—region—in—the—world—with— total—assets—of—£6.2—trillion2.—Demand—for— asset—management—services—is—expected— to—continue—to—grow—as—governments—and— employers—increasingly—pass—the— responsibility—for—retirement—planning—and— other—long-term—savings—to—individuals.— Asset—managers—with—records—of—strong— investment—performance—and—wellregarded —brands—are—in—a—good—position— to—attract—flows—of—new—money.
Prudential believes the value of M&G’s asset management capabilities is allowing the business to focus on the generation of superior long-term returns for investors.
u r bu sin esses an d th eir p erfo rm an ce 37 Prudential plc Annual Report 2014 17—countries—and—retail—products—which—are— distributed—in—22—jurisdictions.
M&G’s institutional market position Institutional—clients—require—investment— strategies—that—help—them—meet—future— outgoings,—from—a—pension—scheme—making— payments—to—retired—employees—to—a— sovereign—wealth—fund—that—finances— schools,—transport—and—other—infrastructure— developments.—M&G’s—ability—to—design— and—commercialise—investment—strategies— for—such—clients—is—founded—on—the—quality— of—its—people—and—their—acknowledged—
Since establishing the business in 2012, Italy is now the biggest market for M&G outside the UK with just under £10 billion of retail funds under management at the end of 2014.
These—assets—represent—a—7—per—cent4— share—of—the—Italian—cross-border—market— and—have—been—sourced—through—organic— business—development.—Business—growth— has—been—especially—strong—in—the—past— few—years—as—Italian—savers—have—embraced— our—market-leading—fixed-income—and— multi-asset—products—as—alternatives— to—government—bonds.—M&G—is—the— number-one4—cross-border—choice—for— fixed-income—funds—as—at—the—end— of—December—2014.
A history of innovation Since—launching—the—UK’s—first—open-ended— fund—in—1931,—we—have—brought—a—succession— of—new—investment—strategies—to—the—retail— and—institutional—markets.—In—combination— with—this—tradition—of—innovative—investment— thinking,—M&G—has—a—proven—ability—to— convert—ideas—into—significant—fund—flows.— It—is—these—two—qualities—that—make— M&G—distinctive.
Our—latest—offering,—the—M&G—Global— Floating—Rate—High—Yield—Bond—Fund,—was— successfully—launched—in—September—2014— and—registered—in—the—UK—and—across— Continental—Europe.—We—believe—that— this—is—the—first—time—that—retail—investors— have—been—given—access—to—the—high—yield— floating—rate—note—market—through—a— collective—fund.—For—bond—investors— concerned—about—the—risk—of—an—increase— in—interest—rates,—this—fund—offers—a—means— not—only—to—protect—their—savings—but—also— to—benefit—from—rising—yields.
—— Client—type:—retail—customers—and— institutional—clients—including—pension— funds,—sovereign—wealth—funds,—and— Prudential’s—own—long-term— insurance—funds; —— Investment—strategy:—over—60—pooled— retail—funds—covering—domestic,—global— and—emerging—market—strategies,—13—of— which—have—funds—under—management— of—over—£1—billion.—Institutional—clients— benefit—from—a—wide-range—of—pooled— and/or—segregated—fixed-income,—equity— and—real—estate—strategies;—and
Notes 1 Excludes Prudential Capital. 2 Based on data as at Q3 2014. European Fund &
4 Source: Assogestioni as of 31 December 2014. Cross-border market is based on assets and flows of funds domiciled outside Italy and managed by foreign groups only.
Prudential aims to have clarity and consistency in the performance indicators that drive our businesses. Alongside this, we develop our financial disclosures to enable our external stakeholders to fairly assess our long-term performance. We have three objectives: —— To—demonstrate—how—we— generate—profits;—
The resilience of our earnings during another year of market volatility and macroeconomic uncertainty, is underpinned by our focus on business with high-return, fast-payback characteristics and by our cautious approach to risk management.
In—evaluating—the—2014—financial— performance—of—the—Group,—I—have— presented—percentage—growth—rates— before—the—impact—of—the—pronounced— fluctuations—in—the—value—of—sterling—against— local—currencies—in—the—US—and—Asia,—as—this— approach—allows—a—more—meaningful— assessment—of—underlying—performance— trends.—This—is—because—our—businesses—in— the—US—and—Asia—receive—premiums—and— pay—claims—in—local—currencies—and—are,— therefore,—not—exposed—to—any—crosscurrency —trading—effects.—Growth—rates— based—on—actual—exchange—rates—are—also— shown—in—the—financial—tables—presented—in— this—report.—As—the—assets—and—liabilities—of— our—overseas—businesses—are—translated—at— period-end—exchange—rates,—the—effect—of— these—currency—movements—has—been—fully— incorporated—within—reported—shareholders’— equity—as—at—31—December—2014.
The—key—financial—highlights—of—2014—were: —— Group IFRS operating profit—of— £3,186—million,—up—14—per—cent; —— Group profit before tax attributable to shareholders—on—an—IFRS—basis— increased—to—£2,614—million—from— £1,532—million—in—2013,—including—the— financial—impact—of—short-term— movements—in—investment—values—and— other—items—reported—outside—the— operating—result; —— Underlying free surplus generation9— (net—of—investment—in—new—business)—of— £2,579—million,—9—per—cent—higher; —— On—the—European—Embedded—Value— (EEV)—basis—of—reporting—performance,— new business profit1—increased— 10—per—cent—to—£2,126—million,— contributing—to—a—4—per—cent—increase— in—EEV operating profit1—to— £4,096—million;—and
The—resilience—of—our—earnings—during— another—year—of—market—volatility—and— macroeconomic—uncertainty,—is— underpinned—by—our—focus—on—business—with— high-return,—fast-payback—characteristics— and—by—our—cautious—approach—to—risk— management.—Prudential’s—balance—sheet— remains—conservatively—positioned—and—the— Group—is—strongly—capitalised,—with— sufficient—capital—available—to—both—fund— new—growth—opportunities—and—absorb—the— effects—of—unexpected—market—shocks.
in an cial O ffi cer’s rep o rt o n o u r 20 14 fi n an cial p erfo rm an ce 41 Prudential plc Annual Report 2014
Operating profit before tax Long-term—business: Long-term—business—operating—profit2 3,233 2,950 10 2,792 16
Note B1: Analysis of performance by segment page 143 and Note B6: Earnings per share page 163
Note C4: Policyholder liabilities and unallocated surplus of with-profits funds page 204
Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver6
* The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholderbacked business.
In—2014,—alongside—growing—our—overall—level— of—life—operating—profit,—we—continued—to— focus—on—improving—its—quality.—We—achieved— this—by—maintaining—our—bias—for—sources—of— income—such—as—insurance—margin—and—fee— income,—ahead—of—spread—income:—insurance— margin—because—it—is—relatively—insensitive—to— the—equity—and—interest—rate—cycle,—and—fee— income—because—it—is—capital-efficient.—Our— strategic—emphasis—on—growing—our—offering— of—risk—products—such—as—health—and— protection,—drove—insurance—margin— 14—per—cent—higher—(6—per—cent—on—an—actual—
exchange—rate—basis),—while—fee—income—was— up—23—per—cent—(16—per—cent—on—an—actual— exchange—rate—basis)—primarily—reflecting— the—growth—in—the—level—of—assets—that—we— manage—on—behalf—of—our—customers.—In— contrast,—the—contribution—to—our—profits— from—spread—income—increased—at—a—more— subdued—rate—of—10—per—cent—(5—per—cent— on—an—actual—exchange—rate—basis).—The—fact— that—insurance—margin—and—fee—income— generated—a—higher—and—growing—proportion— of—our—income—represents—a—healthy— evolution—in—the—quality,—resilience—and—
IFRS—operating—profit—from—our—portfolio— of—life—insurance—operations—in—Asia—was—up— 16—per—cent—to—£1,050—million,—driven—by—the— increasing—scale—of—the—in-force—business—and— our—regular—premium—health—and—protectionoriented —product—focus.—Indonesia—IFRS— operating—profit,—our—largest—market—on— this—measure,—was—up—by—27—per—cent—to— £309—million,—reflecting—growth—in—insurance— and—fee—income—following—the—high—level—of— protection—and—savings—product—sales—in— recent—years.—We—are—also—encouraged—to— see—further—progress—among—our—smaller,— fast-growing—businesses—in—South-east—Asia,— with—Thailand,—the—Philippines—and—Vietnam— now—accounting—for—15—per—cent—of—Asia’s—life— operating—profit—compared—to—just—5—per—cent— only—two—years—ago.
primarily—as—a—result—of—a—26—per—cent— increase—in—fee—income,—which—is—now— Jackson’s—main—source—of—income.—The— uplift—in—fee—income—reflects—the—growth—in— average—separate—account—assets—from— £57.1—billion—in—2013—to—£72.5—billion—in—2014,— equating—to—an—increase—of—27—per—cent—on—a— constant—exchange—rate—basis,—driven—by— variable—annuity—net—premium—inflows—and— appreciation—in—US—equity—markets.—The— contribution—from—insurance—margin—has— also—increased—by—20—per—cent,—as—we— continue—to—realise—the—benefits—of—the— REALIC—acquisition.—We—remain—focused— on—improving—the—balance—of—Jackson’s— profits—and—diversifying—its—sources—of— earnings,—and—we—are—pleased—with—the— growing—contribution—to—sales—of—Elite— Access,—our—variable—annuity—product— without—living—benefits.
Note 1(c): Analysis of asset management operating profit based on longer-term investment returns page 319
IFRS short-term fluctuations IFRS—operating—profit—is—based—on—longerterm —investment—return—assumptions.—The— difference—between—actual—investment— returns—recorded—in—the—income—statement— and—the—assumed—longer-term—returns—is— reported—within—short-term—fluctuations—in— investment—returns.—In—2014—the—total— short-term—fluctuations—in—investment— returns—relating—to—the—life—operations—were— negative—£461—million,—comprising—positive— £178—million—for—Asia,—negative— £1,103—million—in—the—US—and—positive— £464—million—in—the—UK.—
Negative—short-term—fluctuations—of— £1,103—million—in—the—US—mainly—reflected— the—net—value—movement—on—the—guarantees— offered—by—Jackson—and—the—associated— derivatives—held—to—manage—market— exposures.—Under—IFRS—accounting—the— movement—in—the—valuation—of—derivatives,— which—are—fair—valued,—is—asymmetrical—to— the—movement—in—the—guarantee—liabilities,— which—are—not—fair—valued—in—all—cases.—The— rise—in—equity—markets—in—2014—generated— negative—value—movements—on—the—equity— derivatives—that—are—held—to—mitigate—against— the—downside—risk—of—a—decline—in—equity— markets.—Due—to—IFRS—accounting—practice,— the—corresponding—offset—in—the—valuation— of—obligations—to—customers—is—not—fully— recognised,—leading—to—a—negative—overall—
movement—within—IFRS—profits.—Declining— interest—rates—and—unfavourable— movements—in—implied—volatility—also—led—to— net—negative—value—movements,—due—to— similar—accounting—asymmetries.—Jackson— designs—its—hedge—programme—to—protect— the—economics—of—the—business—from—large— movements—in—investment—markets,—and— therefore—accepts—variability—in—the— accounting—results.—Viewed—through—the— local—regulatory—risk-based—capital—lens,— the—hedge—programme—was—essentially— break-even—on—this—basis,—as—movements— in—hedge—assets—and—guarantee—reserves— broadly—offset.—As—a—result,—Jackson’s— regulatory—risk-based—capital—ratio—was— broadly—unchanged—at—456—per—cent—at—the— end—of—2014—(31—December—2013:— 450—per—cent).
Corporation—taxes—include—amounts—paid—on— taxable—profits—which,—in—certain—countries— such—as—the—UK,—include—policyholder— investment—returns—on—certain—life—insurance— products.—Other—taxes—include—property— taxes,—withholding—taxes,—employer—payroll— taxes—and—irrecoverable—indirect—taxes.— Taxes—collected—are—other—taxes—that— Prudential—remits—to—tax—authorities—which— it—is—obliged—to—collect—from—employees,— customers—and—third—parties—which—include— sales—taxes,—employee—and—annuitant— payroll—taxes.
Free—surplus—generation—is—the—financial— metric—we—use—to—measure—the—internal—cash— generation—of—our—business—operations.—For— life—insurance—operations—it—represents— amounts—maturing—from—the—in-force— business—during—the—year,—net—of—amounts— reinvested—in—writing—new—business.—For— asset—management—it—equates—to—post-tax— IFRS—profit—for—the—year.—In—2014—underlying— free—surplus—generation,—after—investment—in— new—business,—increased—by—9—per—cent—to— £2,579—million.—
We—invested—£606—million—of—the—free— surplus—generated—during—the—year—in— writing—new—business—(2013:—£597—million— on—a—constant—exchange—rate—basis)— equivalent—to—a—re-investment—rate10—of— 19—per—cent,—which—is—in—line—with—recent— periods.—Asia—remained—the—primary— destination—of—our—new—business— investment,—given—the—superior—profitable— growth—opportunities—available—in—that— region.—In—the—US,—new—business—investment— decreased—despite—higher—new—business— volumes,—mainly—due—to—proactive—actions—to— reduce—commissions—and—changes—in— product—mix.—New—business—investment—
Basic—earnings—per—share—based—on—post-tax—operating—profit 160.7 165.0 (3) 154.4 4 Basic—earnings—per—share—based—on—post-tax—total—profit 170.4 171.0 –— 161.7 5
In—Asia,—EEV—life—operating—profit—was—up— 12—per—cent—to—£1,900—million2,—with—in-force— profit—up—10—per—cent—to—£738—million2,— benefiting—from—increased—scale—across—all— our—operations.—Asia—new—business—profit— was—13—per—cent—higher—at—£1,162—million,— reflecting—volume—growth—from—the— continued—build—out—of—our—distribution— platform,—as—well—as—management—actions—to— improve—product—mix,—geographic—mix—and— pricing.—The—increase—in—new—business—profit— continues—to—be—driven—by—our—seven—‘sweet— spot’—markets14—of—South-east—Asia— including—Hong—Kong,—which—increased— their—combined—contribution—by—16—per—cent,— despite—a—broadly—unchanged—result— from—Indonesia.—
Jackson’s—EEV—life—operating—profit— increased—by—5—per—cent—to—£1,528—million,— driven—by—growth—in—the—scale—of—our—in-force— book—and—higher—new—business—profit.— In-force—profit—increased—by—7—per—cent— compared—to—the—prior—year,—reflecting— higher—unwind—from—the—larger—book—of— existing—business—and—an—increased— contribution—from—spread,—persistency—and— mortality—experience—profits,—the—result—of— our—disciplined—approach—to—the—way—we— manage—and—reserve—for—the—risks—of—this— business.—US—new—business—profit—was—up— 4—per—cent—to—£694—million,—consistent—with— the—4—per—cent—increase—in—sales—volume.— Jackson’s—ongoing—product—and—pricing— actions—have—mitigated—the—adverse—impact— on—new—business—profit—of—the—88—basis— points—reduction—in—10-year—treasury—yields— since—the—end—of—2013.
On—an—IFRS—basis,—the—Group’s—core— structural—borrowings—at—31—December— 2014—were—£4,304—million—(31—December— 2013:—£4,636—million—on—an—actual—exchange— rate—basis)—and—comprised—£3,869—million— (31—December—2013:—£4,211—million—on—an— actual—exchange—rate—basis)—of—debt—held—by— the—holding—company,—and—£435—million— (31—December—2013:—£425—million—on—an— actual—exchange—rate—basis)—of—debt—held—by— the—Group’s—subsidiaries,—Prudential—Capital— and—Jackson.—The—Group—redeemed— US$750—million—of—11.75—per—cent—perpetual— subordinated—capital—securities—during— the—year.
Prudential’s—holding—company—currently— has—access—to—£2.6—billion—of—syndicated—and— bilateral—committed—revolving—credit— facilities,—provided—by—19—major— international—banks,—expiring—in—2018—and— 2019.—Apart—from—small—drawdowns—to—test— the—process,—these—facilities—have—never— been—drawn,—and—there—were—no—amounts— outstanding—at—31—December—2014.—The— medium-term—note—programme,—the—SEC— registered—US—shelf—programme,—the— commercial—paper—programme—and—the— committed—revolving—credit—facilities—are—all— available—for—general—corporate—purposes— and—to—support—the—liquidity—needs—of— Prudential’s—holding—company—and—are— intended—to—maintain—a—strong—and—flexible— funding—capacity.
Bancassurance partnership with Standard Chartered Bank PLC On—12—March—2014—the—Group—announced— that—it—had—entered—into—an—agreement— expanding—the—term—and—geographic—scope— of—its—strategic—pan-Asia—bancassurance— partnership—with—Standard—Chartered—Bank— PLC.—Under—the—new—15-year—agreement,— which—commenced—on—1—July—2014,—a—wide— range—of—Prudential—life—insurance—products— are—exclusively—distributed—through— Standard—Chartered—Bank—branches—in— nine—markets—–—Hong—Kong,—Singapore,— Indonesia,—Thailand,—Malaysia,—the— Philippines,—Vietnam,—India—and—Taiwan—–— subject—to—applicable—regulations—in—each— country.—In—China—and—South—Korea,— Standard—Chartered—Bank—distributes— Prudential’s—life—insurance—products—on—a— preferred—basis.—Prudential—and—Standard— Chartered—Bank—have—also—agreed—to— explore—additional—opportunities—to— collaborate—in—due—course—elsewhere—in—Asia— and—in—Africa,—subject—to—existing—exclusivity— arrangements—and—regulatory—restrictions.
Domestication of Hong Kong Branch On—1—January—2014,—the—Group—completed— the—process—of—domestication—of—the—Hong— Kong—branch—of—The—Prudential—Assurance— Company—Limited.—The—branch—was— transferred—on—1—January—2014—to—two—new— Hong—Kong-incorporated—Prudential— companies,—one—providing—life—insurance— and—the—other—providing—general—insurance— –—Prudential—Hong—Kong—Limited—and— Prudential—General—Insurance—Hong—Kong— Limited.—On—the—Prudential—Regulation— Authority’s—Pillar—1—Peak—2—basis,— £12.1—billion—of—assets,—£12.0—billion—of— liabilities,—net—of—reinsurers’—share—(including— policyholder—asset—share—liabilities—and— £1.2—billion—of—inherited—estate)—and— £0.1—billion—of—shareholders’—funds—(for—the— excess—assets—of—the—transferred—nonparticipating —business)—were—transferred.
Disposal of Japan life business In—February—2015—the—Group—completed—the— disposal—of—its—closed—book—life—insurance— business—in—Japan,—PCA—Life—Insurance— Company—Limited—(PCA—Life—Japan),—to— SBI—Holdings—for—US$85—million—cash— consideration,—of—which—US$17—million—is— deferred—and—is—dependent—upon—the—future— performance—of—PCA—Life—Japan.— ——
Although—the—Board—has—been—able—to— recommend—such—a—rebase—in—2014,—the— Group’s—dividend—policy—remains— unchanged.—The—Board—will—maintain—its— focus—on—delivering—a—growing—dividend— from—this—new—higher—base,—which—will— continue—to—be—determined—after—taking—into— account—the—Group’s—financial—flexibility—and— our—assessment—of—opportunities—to— generate—attractive—returns—by—investing—in— specific—areas—of—the—business.—The—Board— believes—that—in—the—medium—term— a—dividend—cover—of—around—two—times— is—appropriate.
6 For basis of preparation, see note I (a) of additional unaudited IFRS financial information.
7 Includes Group’s proportionate share in PPM South Africa and the Asia asset management joint ventures.
13 Refer to the EEV basis supplementary information – post-tax operating profit based on longer-term investment returns and post-tax summarised consolidated income statement, for the breakdown of other income and expenditure, and other non-operating items.
14 ‘Sweet spot’ markets are Indonesia, Singapore, Hong Kong, Malaysia, Philippines, Vietnam and Thailand.
ffi cer’s rep o rt o n th e risk s facin g o u r bu sin ess an d o u r cap ital stren gth
Prudential retains material risks only where consistent with our risk appetite and risk-taking philosophy, that is: —— They—contribute—to—value—creation;—
Group Chief Risk Officer’s report on the risks facing our business and our capital strength
Risk governance (Unaudited) Our—Group—Risk—Framework—requires—that— all—our—businesses—and—functions—establish— processes—for—identifying,—evaluating—and— managing—the—key—risks—faced—by—the—Group.— The—framework—is—based—on—the—concept—of— ‘three—lines—of—defence’—comprising— risk-taking—and—management,—risk—control— and—oversight—and—independent—assurance.— The—diagram—overleaf—outlines—the—Group— level—framework.
Group Executive Committee (GEC) Purpose: Supports the Group Chief Executive in the executive management of the Group and is comprised of the Chief Executives of each of the Group’s major business units, as well as a number of functional specialists.
Group-wide Internal Audit (GwIA) The third line of defence comprises the Group-wide Internal Audit function, which provides independent and objective assurance to the Board, its Audit and Risk Committees and the Group Executive Committee, to help protect the assets, sustainability and reputation of the Group.
Technical Actuarial Committee (TAC) Purpose: Sets the methodology for valuing Prudential’s assets, liabilities and capital requirements under Solvency II and the Group’s internal economic capital basis.
Capital requirements:—the—limits—aim—to— ensure—that: a.— —the—Group—meets—its—internal—economic— capital—requirements; b.— —the—Group—achieves—its—desired—target— rating—to—meet—its—business—objectives;—and c.— supervisory—intervention—is—avoided.
—In—Jackson,—investment—risk—arises—in— relation—to—the—assets—backing—the—policies.— In—the—case—of—the—‘spread—business’,— including—fixed—annuities,—these—assets—are— generally—bonds.—For—the—variable—annuity— business,—these—assets—include—equities—as— well—as—other—assets—such—as—bonds.—In—this— case—the—impact—on—the—shareholder—comes— from—value—of—future—mortality—and—expense— fees,—and—additionally—from—guarantees— embedded—in—variable—annuity—products.— Shareholders’—exposure—to—these— guarantees—is—mitigated—through—a—hedging— programme,—as—well—as—reinsurance.—Further— measures—have—been—undertaken—including— repricing—initiatives—and—the—introduction—of— variable—annuities—without—guarantees.— Furthermore,—it—is—our—philosophy—not—to— compete—on—price;—rather,—we—seek—to—sell—at— a—price—sufficient—to—fund—the—cost—incurred— to—hedge—or—reinsure—the—risks—and—to— achieve—an—acceptable—return.
(ii) Interest rate risk (Audited) Long-term—rates—have—declined—over—recent— periods—in—many—markets,—falling—to—historic— lows.—Products—that—we—write—are—sensitive— to—movements—in—interest—rates,—and—while— we—have—already—taken—a—number—of—actions— to—de-risk—the—in-force—business—as—well—as— reprice—and—restructure—new—business— offerings—in—response—to—historically—low— interest—rates,—persistently—low—rates—may— impact—policyholders’—savings—patterns— and—behaviour.—
We—retain—revenues—locally—to—support— the—growth—of—our—business—and—capital—is— held—in—the—local—currency—of—the—business— to—meet—local—regulatory—and—market— requirements,—accepting—the—balance— sheet—translation—risks—this—can—produce.— However,—in—cases—where—a—surplus—arising— in—an—overseas—operation—supports—Group— capital—or—where—a—significant—cash— remittance—is—due—from—an—overseas— subsidiary—to—the—Group,—this—exposure—is— hedged—where—we—believe—it—is—economically— optimal—to—do—so.—We—do—not—have—appetite— for—significant—shareholder—exposures—to— foreign—exchange—risks—in—currencies— outside—the—local—territory.—Currency— borrowings,—swaps—and—other—derivatives— are—used—to—manage—exposures.
Credit risk (Audited) We—invest—in—fixed—income—assets—in—order—to— match—policyholder—liabilities—and—enter—into— reinsurance—and—derivative—contracts—to— mitigate—various—types—of—risk.—As—a—result,— we—are—exposed—to—credit—and—counterparty— credit—risk—across—our—business.—We—employ— a—number—of—risk—management—tools—to— manage—credit—risk,—including—limits—defined— on—an—issuer/counterparty—basis—as—well—as— on—average—credit—quality,—and—collateral— arrangements—in—derivative—transactions.— The—Group—Credit—Risk—Committee— oversees—credit—and—counterparty—credit— risk—across—the—Group.
Group Chief Risk Officer’s report on the risks facing our business and our capital strength continued
The—Group’s—credit—exposure—to—the—oil— and—gas—sector—represents—circa—5—per—cent— or—£3.4—billion—of—the—shareholder—portfolio.— Some—counterparties—may—experience— stress—from—ongoing—low—oil—prices—but—this—is— not—currently—expected—to—have—a—material— adverse—impact—on—the—Group’s—exposure.— The—oil—and—gas—sector—is—subject—to—ongoing— monitoring—and—regular—management— information—reporting—to—the—Group’s— risk—committees.
Note C3.3: Debt securities page 190 Note C3.4: Loans portfolio page 197
There—is—significant—uncertainty— regarding—the—final—outcome—from—this— process.—In—particular,—certain—detailed— aspects—of—the—Solvency—II—rules—relating—to— the—determination—of—the—liability—discount— rate—for—UK—annuity—business—remain—to—be— clarified—and—our—capital—position—is—sensitive— to—these—outcomes.—Further,—the—effective— application—of—a—number—of—key—measures— incorporated—in—the—Omnibus—II—Directive,— including—the—provisions—for—third-country— equivalence—and—whether—restrictions—are— placed—on—the—economic—value—of—overseas— surplus,—are—subject—to—supervisory— judgement—and—approval.—There—is—a—risk— that—the—effect—of—the—measures—finally— adopted—could—be—adverse—for—us,—including— potentially—a—significant—increase—in—the— capital—required—to—support—our—business— and—that—we—may—be—placed—at—a—competitive— disadvantage—to—other—European—and— non-European—financial—services—groups.— We—are—actively—participating—in—shaping—the— outcome—through—our—involvement—in— industry—bodies—and—trade—associations,— including—the—Pan-European—Insurance— Forum,—Chief—Risk—Officer—Forum—and—Chief— Financial—Officer—Forum,—together—with—the— Association—of—British—Insurers—and— Insurance—Europe.—
In—July—2013,—the—Financial—Stability— Board—announced—the—initial—list—of—nine— insurance—groups—that—have—been— designated—as—Global—Systemically— Important—Insurers.—Following—another— assessment—in—2014,—the—Financial—Stability— Board—confirmed—the—same—nine—insurance— groups—as—Global—Systemically—Important— Insurers—on—6—November—2014.—This—list— included—Prudential—as—well—as—a—number—of— its—competitors.—Designation—as—a—Global— Systemically—Important—Insurer—has—led—to— additional—policy—measures—being—applied— to—the—designated—group.—Based—on—the— policy—framework—released—by—the—IAIS— and—subsequent—guidance—papers—these— additional—policy—measures—include— enhanced—group-wide—supervision,— effective—resolution—measures—of—the—group— in—the—event—of—failure,—loss—absorption,—and— higher—loss—absorption—capacity.—This— enhanced—supervision—commenced— immediately—and—included—the—annual— submission—of—a—Systemic—Risk—Management— Plan—(SRMP),—a—group—Recovery—Plan—(RCP)— and—Liquidity—Risk—Management—Plan— (LRMP).—Prudential—is—monitoring—the— development—and—potential—impact—of—the— framework—of—policy—measures—and—is— continuing—to—engage—with—the—Prudential— Regulation—Authority—on—the—implications— of—the—policy—measures—and—Prudential’s— designation—as—a—G-SII.—The—G-SII—regime— also—introduces—two—types—of—capital— requirements;—the—first,—a—Basic—Capital— Requirement—(BCR),—designed—to—act—as—a— minimum—group—capital—requirement—and— the—second,—a—Higher—Loss—Absorption— (HLA)—requirement,—that—should—reflect—the— drivers—of—the—assessment—of—G-SII— designation.—A—consultation—paper—on—BCR— was—released—in—July—2014—and—the—Group— participated—in—field—testing—ahead—of—the— —
— BCR—being—agreed—with—the—FSB—and— G20—in—2014.—The—IAIS—has—published—a—list— of—principles—on—HLA—and—a—more—detailed— consultation—paper—is—expected—in—June— 2015—ahead—of—the—IAIS—finalising—HLA—by— the—end—of—2015.—Implementation—of—the— regime—is—likely—to—be—phased—in—over—a— number—of—years—with—the—BCR—being— introduced—in—2015—on—a—confidential— reporting—basis—to—group-wide—supervisors.— The—HLA—requirement—is—expected—to—apply— from—January—2019—to—the—insurance—groups— identified—as—G-SIIs—in—November—2017.
ComFrame—is—also—being—developed— by—the—IAIS—to—provide—common—global— requirements—for—the—supervision—of— insurance—groups.—The—framework—is— designed—to—outline—a—set—of—common— global—principles—and—standards—for—group— supervision—and—may—increase—the—focus—of— regulators—in—some—jurisdictions.—One—of— the—framework’s—key—components—is—an— Insurance—Capital—Standard—(ICS)—which— would—be—expected—to—form—the—group— solvency—capital—standard—under— ComFrame.—In—December—2014,—the—IAIS— issued—a—comprehensive—consultation— paper—on—ICS—and—a—quantitative—field—test— is—planned—during—2015,—which—will—be— followed—by—another—consultation— in—December—2015.—Further—field—testing— exercises—are—planned—until—2018—to—assess— the—impact—of—the—quantitative—and— qualitative—requirements—proposed—under— ComFrame.—ComFrame—is—expected—to—be— implemented—in—2019.
Offset—by: —— The—cost—of—new—intangibles—acquired—in— the—year—including—renewal—of—the— bancassurance—partnership—agreement— with—Standard—Chartered—Bank—of— £0.8—billion; —— £0.4—billion—of—subordinated—debt— repayment; —— £0.2—billion—due—to—reduction—in—the— shareholders’—interest—in—future—transfers— from—the—UK’s—with-profits—fund—asset— allowance—(as—discussed—below)—and— other—smaller—one-off—items; —— Final—2013—dividend—of—£0.6—billion—and— interim—2014—dividend—of—£0.3—billion;— and
(Unaudited) We—continue—to—have—further—options— available—to—manage—available—and—required— capital.—These—could—take—the—form—of— increasing—available—capital—(for—example,— through—financial—reinsurance)—or—reducing— required—capital—(for—example,—through—the— mix—and—level—of—new—business)—and—the—use— of—other—risk—mitigation—measures—such—as— hedging—and—reinsurance.—A—number—of— such—options—were—utilised—through—the—last— financial—crisis—in—2008—and—2009—to—enhance— the—Group’s—IGD—surplus.—One—such— arrangement—allowed—the—Group—to— recognise—a—proportion—of—the—shareholders’— interest—in—future—transfers—(SHIFT)—from—the— UK’s—with-profits—business—and—this— remained—in—place,—contributing—£0.2—billion— to—the—IGD—at—31—December—2013.—As—per— guidance—received—from—the—PRA—in—January— 2013,—credit—taken—for—the—SHIFT—asset—was— reduced—to—zero—in—January—2014.
—— A—40—per—cent—fall—in—equity—markets— (comprising—an—instantaneous— 20—per—cent—fall—followed—by—a—further— 20—per—cent—fall—over—a—four-week—period)— would—reduce—the—IGD—surplus—by— £950—million; —— A—100—basis—points—reduction—(subject—to— a—floor—of—zero)—in—interest—rates—would— reduce—the—IGD—surplus—by—£450—million;— and
The—impact—of—the—100—basis—points— reduction—in—interest—rates—is—exacerbated— by—the—current—regulatory—permitted— practice—used—by—Jackson,—which—values—all— interest—rate—swaps—at—book—value—rather— than—fair—value—for—regulatory—purposes.— At—31—December—2014,—removing—the— permitted—practice—would—have—increased— reported—IGD—surplus—to—£5.1—billion.—As—at— 31—December—2014,—it—is—estimated—that—a— 100—basis—point—reduction—in—interest—rates— (subject—to—a—floor—of—zero)—would—have— resulted—in—an—IGD—surplus—of—£4.9—billion,— excluding—the—permitted—practice.—
All—of—our—subsidiaries—continue—to— hold—strong—capital—positions—on—a—local— regulatory—basis.—Jackson’s—risk-based— capital—ratio—level—as—of—31—December—2014— was—456—per—cent—after—remitting— £415—million—to—the—Group—in—2014—while— supporting—its—balance—sheet—growth—and— maintaining—adequate—capital.—The—value—of— the—estate—of—our—UK—With-Profits—fund—as—at— 31—December—2014—is—estimated—at— £7.2—billion—after—the—effect—of—completing— the—domestication—of—the—Hong—Kong— branch—business—of—the—PAC—With-Profits— fund,—which—was—effective—on—1—January— 2014—(1—January—2014:—£6.8—billion,—after—the— effect—of—the—transfer).—The—value—of—the—
Economic capital position (based on our Solvency II internal model) (Unaudited) Following—ratification—of—the—Solvency—II— Omnibus—II—Directive—on—16—April—2014,— Solvency—II—is—scheduled—to—come—into—force— on—1—January—2016.—Our—economic—capital— results—are—based—on—outputs—from—our— Solvency—II—internal—model.—Although—the— Solvency—II—and—Omnibus—II—Directives,— together—with—the—Level—2—‘Delegated—Act’— published—on—17—January—2015,—provide—a— framework—for—the—calculation—of—Solvency—II— results,—there—remain—material—areas—of— policy—uncertainty—and—in—many—areas—the— Group’s—methodology—and—assumptions—are— subject—to—review—and—approval—by—the— Prudential—Regulation—Authority,—the— Group’s—lead—regulator.—We—remain—on—track— to—submit—our—Solvency—II—internal—model—to— the—Prudential—Regulation—Authority—for— approval—in—2015—but—given—the—degree—of— uncertainty—remaining—the—economic—capital— position—disclosed—below—should—not—be— interpreted—as—output—from—an—approved— internal—model.
—— Model changes negative £0.3 billion:—a— negative—impact—to—Group—surplus,—for—the— estimated—impact—of—evolving—the—liability— discount—rate—for—UK—shareholder-backed— annuity—business—from—one—based—on—a— liquidity—premium—to—one—based—on—the— matching—adjustment,—and—other—internal— model—refinements.—
Notes 1 Excludes Group’s proportionate share in joint ventures and unit-linked assets and holdings of consolidated unit trusts and similar funds.
o rp o rate resp o n sib ility rev iew 61 Prudential plc Annual Report 2014
Performance highlights £19.6m total community investment children in Asia supported to read over three years through First Read programme 62,309 hours volunteered by employees across the Prudential Group donated by employees through payroll giving across the Group
Our long-term sustainable approach to business is reinforced by our Group-wide corporate responsibility strategy. While we believe that corporate responsibility is best managed on the ground by those closest to the customer and local stakeholders, our Group approach is underpinned by four global themes: —— Serving—our—customers; —— Valuing—our—people; —— Supporting—local—communities;—and
Supporting local communities We—seek—to—make—a— positive—contribution— to—our—communities— through—long-term— partnerships— with—charitable— organisations— that—make—a—real— difference—
We create social value through our day-to-day operations, by providing savings, income, investment and protection products and services. We offer customers ways to help manage uncertainty and build a more secure future. Furthermore, in seeking to match the long-term liabilities we have towards our customers with similarly long-term financial assets, we are able to provide capital that finances businesses, builds infrastructure and fosters economic and social development.
—— Valuing our people: we—aspire—to— retain—and—develop—highly—engaged— employees; —— Supporting local communities:— we—seek—to—make—a—positive—contribution— to—our—communities—through—long-term— partnerships—with—charitable— organisations—that—make—a—real— difference;—and
Jackson—is—committed—to—ensuring— customers—are—well—informed—and—have— access—to—the—most—up-to-date—information,— and—in—2013—launched—the—Center—for— Financial—Insight—website.—This—aims—to— ensure—that—consumers—have—the—knowledge— and—confidence—needed—to—make—informed— decisions—regarding—their—financial—future,— regardless—of—whether—they—choose—Jackson— products.—For—example,—to—help—meet—the— growing—need—for—knowledge—related—to— Alzheimer’s—disease,—the—centre—has—featured— articles—relating—to—the—risks—posed—by—the— condition,—which—currently—affects—one—in— nine—older—Americans,—and—actions—people— can—take—to—prepare—for—a—future—affected—by— dementia.—While—some—of—the—most—popular— content—appealed—to—a—pre-retiree—or— retirement—age—demographic,—other—popular— articles—were—geared—more—towards—younger— generations—of—investors—developing—an— interest—in—their—financial—future.
UK and Europe The—UK—Government’s—2014—Budget—saw— the—announcement—of—the—most—widespread— changes—to—pensions—regulations—for—more— than—a—generation.—The—business—welcomed— the—changes—as—a—boost—to—help—address—the— ‘savings—gap’—in—the—UK,—while—recognising—it— would—also—provide—significant—long-term— opportunities—for—our—business.
Prudential—Hong—Kong—introduced— PRUmyhealth cancer protector,—a—lifetime— guaranteed—renewable—cancer—protection— plan—which—offers—customers— reimbursement—of—both—inpatient—and— outpatient—cancer—treatment—costs,— from—diagnostic—tests—to—post-treatment— monitoring,—at—an—affordable—premium—rate.— Specifically—designed—for—the—Hong—Kong— market,—PRUmyhealth cancer protector— also—covers—the—costs—of—chemotherapy,— radiotherapy,—targeted—therapy—and— hormonal—therapy—conducted—on—an— outpatient—basis,—which—are—usually—not— covered—under—traditional—medical— insurance—plans.—
Prudential—UK—&—Europe—acted—quickly— after—the—Budget—and—proactively—contacted— customers—who—had—recently—purchased—an— annuity—and—were—immediately—impacted—by— the—changes.—The—‘cooling-off’—period—was— extended—and—the—necessary—product—and— system—modifications—were—made—to— accommodate—the—new—rules—for—pension— drawdown—customers—–—all—in—just—a—few— days.—This—proactive—approach—and—ability— to—give—customers—the—information—they— needed—at—a—very—uncertain—time— demonstrated—the—commitment—of—the— business—to—‘doing—the—right—thing’—for— customers.—The—most—significant—changes— from—the—2014—Budget—come—into—force— from—April—2015—and—will—allow—savers— greater—choice—over—how—they—take—their— pensions.—We—have—undertaken—a—wide— ranging—and—challenging—body—of—work—to— ensure—our—readiness—to—accommodate— these—changes—and—keep—our—customers—at— the—heart—of—everything—we—do.—
This—commitment—to—quality—is—reflected— in—Prudential—UK—&—Europe’s—continued— success—in—the—Financial—Adviser—Service— Awards.—These—awards—are—highly—regarded— in—the—industry—and—recognise—the— importance—of—the—service—given—by—product— providers—to—financial—advisers—and— intermediaries.—Product—providers—are—rated— across—a—number—of—core—criteria—and—only— those—that—perform—consistently—well—in—all— areas—are—considered—for—a—five—star—award.— For—the—fourth—year—running—Prudential—UK— &—Europe—retained—its—two—five—star—ratings— –—in—the—Life—and—Pensions,—and—Investments— categories.—Due—to—the—consistently—strong— performance—over—the—last—four—years,—the— business—was—also—presented—with—an— outstanding—achievement—award.
M&G—continues—to—provide—market— insights—to—clients,—intermediaries—and— others—through—a—number—of—channels,— including—a—programme—of—roadshows—and— events—such—as—Meet the Managers—and—the— Annual Investment Forum,—and—its—Bond Vigilantes—blog.—The—recently—launched— M&G—Client—Council—is—an—innovative—new— way—for—investors—to—communicate—what— they—want—from—M&G—and—help—to—shape—the— products—and—services—offered.—A—group—of— investors—has—been—invited—to—join—the—first— council—and—take—part—in—regular—online— surveys—and—interviews—throughout—the— year.—More—than—300—M&G—direct—clients—are— currently—taking—part.—The—feedback—is—used— to—make—changes—and—improvements—to—
Talent development We—recognise—that—people—are—our—key— resource,—that—investment—in—their— development—is—essential—to—deliver—our— strategy,—and—that—the—quality—of—leadership— across—the—Group—is—fundamental—to—the— future—growth—and—success—of—the—business.— We—review—our—talent—annually—and—offer—a— range—of—programmes—that—enable—our— people—to—continue—to—grow—and—develop.— The—majority—of—these—are—managed—by—our— business—units,—while—Group—Human—Resources— focuses—on—tailored—programmes—for—
Diversity and inclusion Prudential—believes—that—a—diversity—of—skill— sets—and—backgrounds—enriches—the— organisation.—As—a—company,—we—believe—in— supporting—human—rights,—acting—responsibly— and—with—integrity.—We—monitor—the—diversity— of—our—leadership—and—our—leadership— pipeline,—with—diversity—and—inclusion—KPIs— reported—to—the—Board—annually.
Within—our—businesses—there—are—many— examples—of—our—continuing—commitment—to— talent—development.—Prudential—Corporation— Asia—is—driving—organisational—change— through—mobilising—talent—pool—networks—to— coordinate—on—strategic—business—projects,— and—in—the—US,—a—Women—in—Business— Symposium—was—held—internally—to—provide— career—development—education—and— opportunities—for—women—to—network—with— senior—colleagues.—Within—Prudential—UK,— the—Leading—Managers—Programme—was— launched—for—individuals—who—are— transitioning—to—managing—managers,—and—a— range—of—online—business—skills—programmes— have—been—refreshed—and—are—available—to— all.—M&G—continues—to—develop—individuals— with—the—potential—to—excel—as—investors,— leaders—and—managers,—through—a—diverse— range—of—innovative—programmes,—and—at— Group—Head—Office,—all—employees—have— access—to—sessions—that—focus—on—crosscultural —awareness,—building—effective— partnerships—and—self-motivation.
Employee engagement An—array—of—initiatives—is—in—place—within—our— different—businesses—to—drive—employee— engagement.—These—include—colleague— appreciation—days,—employee—focus—groups,— induction—programmes—for—colleagues—to— learn—about—the—history—and—strategy—of—the— Group,—opportunities—to—meet—senior— managers,—and—facilities—to—network—with— other—colleagues.—We—also—have—policies—to— encourage—and—support—volunteering—for— charitable—causes,—including—a—programme— in—Jackson—for—colleagues—to—support—public— school—systems—and—improve—STEM— (science,—technology,—engineering,— mathematics)—education.—
Our community programmes are grouped around the broad theme of ‘Strong foundations’. This reflects our focus on helping communities establish those fundamental building blocks essential for their long-term futures. Our three ‘building blocks’ represent areas of primary need: Education and life skills
Education and life skills In—Asia,—the—Prudence—Foundation—provides— a—unified—charitable—platform—for—aligning— our—regional—philanthropic—activities—to—our— business,—maximising—the—impact—of—our— efforts—in—the—countries—where—we—have—a— presence.—Its—mission—is—to—make—a—lasting— contribution—to—Asian—societies—through— sustainable—initiatives—focused—on—three— pillars:—children,—education,—and—disaster— preparedness—and—recovery.—
There—are—several—recognition—initiatives— running—across—our—businesses,—including— the—High Five—recognition—programme—in— the—US,—which—allows—associates—to—choose— from—a—list—of—‘badges’—for—actions—such—as— teamwork,—innovation—and—inspiration,—to— formally—recognise—when—colleagues—have— gone—above—and—beyond—expectations.— Similarly,—at—Group—Head—Office—the— Prudential—Stars—awards—are—made—to— individuals—nominated—by—their—colleagues— for—outstanding—examples—of—execution,— impact—and—engagement.
o rp o rate resp o n sib ility rev iew 65 Prudential plc Annual Report 2014 promote—cognitive—development,—enabling— children—to—benefit—from—future—schooling,— and—preventing—repetition—of—grades—and— drop-outs.—First Read—also—works—closely— with—local—book—publishers—to—help—develop— and—create—new—books—written—in—local— languages.—Over—three—years,—the— programme—will—benefit—over—170,000— children—up—to—six—years—old—as—well—as—adults,— through—learning—and—reading—materials— with—home-based—early—childhood—care— and—development.—
Prudence—Foundation—launched— Cha-Ching,—a—multi-media—programme—built— around—a—series—of—three-minute—animated— music—videos,—in—2011—to—help—parents—instil— ‘money-smart—skills’—in—children—aged—seven— to—12.—This—was—developed—with—Cartoon— Network—and—children’s—education— specialist,—Dr—Alice—Wilder,—to—help—children— learn—the—fundamental—money—management— concepts—of—earn,—save,—spend—and—donate.— The—programme—has—gained—international— recognition—for—promoting—financial—literacy— and—won—several—industry—awards.—Over—the— past—few—years—it—has—grown—to—become—one— of—the—top-rated—children’s—television— programmes—in—Asia.—In—2014,—Cha-Ching— began—airing—in—Korea,—making—it—now— available—in—nine—languages—through— Cartoon—Network,—reaching—26—million— households—a—day—across—Asia.—Two—new— episodes—were—launched—during—the—year,— including—Sweet Pepper Designs,—which— has—received—almost—one—million—views—on— YouTube.—The—Cha-Ching—school—contact— programme,—which—brings—Cha-Ching— directly—to—school—children—across—Asia,— continues—to—develop—and—expand.—To—date— it—has—reached—157,000—school—children—in— nine—countries.—We—have—also—started—to— work—with—Junior—Achievement—on— developing—a—standardised—school— curriculum—for—Cha-Ching.—This—will—help— meet—the—need—for—stronger—financial—literacy— capabilities—in—students—across—Asia.—
At—Jackson’s—operations—in—Nashville,— employees—are—collaborating—with—public— schools—to—foster—a—passion—for—IT—among— students.—At—the—start—of—the—2014—to—2015— school—year,—Jackson—became—an—official—IT— academy—partner—with—Overton,—a—local— public—high—school.—Overton—is—one—of— Nashville’s—many—academy—high—schools;— schools—that—follow—the—state—curriculum— while—also—offering—focused—classes—in— specific—areas—including—science,— engineering,—performing—arts—and— technology.—Academy—schools—integrate— traditional—curriculum—with—professional— experiences—such—as—job—shadowing,—field— trips—to—Jackson’s—offices—and—career—fairs.—
Prudential—UK—&—Europe’s—awardwinning —Business Class—programme—is—now— firmly—established.—As—national—champion—of— the—programme,—Prudential—UK—is—at—the— core—of—helping—to—promote—and—set— direction—for—a—nationwide—programme—and,— through—the—commitment—of—its—colleagues,— directly—partners—with—three—schools.—The— Business Class—programme—provides—a—rich— vein—of—skilled—volunteering—opportunities,— with—around—70—colleagues—being—involved— with—partner—schools.
In—our—new—markets—in—Africa—we—have— committed—to—provide—support—for— academically—able—but—financially— disadvantaged—high—school—students,—and— to—help—build—capacity—for—training—in— actuarial—sciences—at—local—universities.—We— have—worked—with—Plan—Ghana—to—introduce— a—scholarship—programme—for—senior—high— school—students.—Over—five—years,—the— programme—aims—to—support—at—least—500— disadvantaged—but—academically—able— senior—high—school—students.—In—addition—we— have—established—the—Prudential—Actuarial— Support—System—(PASS)—awards—for— actuarial—science—in—two—Ghanaian— universities—to—support—the—top—10—
In—2013—the—Prudence—Foundation— pledged—a—total—of—£1.25—million—to—help—with— recovery—efforts—in—the—Philippines—after—the— devastating—impact—of—Typhoon—Haiyan.— The—funds—were—used—not—only—to—provide— immediate—emergency—relief—(working—with— Plan—International—and—Save—the—Children),— but—also—for—longer-term—focused—recovery— programmes.—These—programmes—aim—to— help—build—greater—resilience—in—the— communities—so—they—can—withstand—the— impact—of—future—typhoons.—
for—our—customers,—our—people—and—our— communities.—For—example,—Jackson— employees—are—actively—engaged—in—our— commitment—to—communities—by—leading— giving—programmes—such—as—the—Jackson— National—Community—Fund—Advisory— Committee—and—the—employee—nominated— matching—programme.—The—Jackson— National—Community—Fund—(JNCF)—funds— charities—that—support—the—elderly—and— children—through—quarterly—grants—in— locations—where—Jackson’s—four—largest— offices—are—located.—Jackson’s—matching— programme—offers—a—two-to-one—match—on— all—employee—donations—made—to—approved— charities.—This—programme—ensures—that— causes—important—to—employees—are—given— charitable—consideration—and—ensures— Jackson’s—support—is—received—by— responsible—organisations—where—funding— will—create—a—significant—impact.
In Thailand, 60 Prudential volunteers worked with more than 2,500 school children to enhance their financial knowledge through a banking project and delivered a series of disaster relief reduction and preparedness activities. Over three years the project will provide 4,500 girls and boys from eight schools in Chiang Mai Province, Thailand, with financial literacy knowledge by setting up school and environmental banks.
o rp o rate resp o n sib ility rev iew 67 Prudential plc Annual Report 2014 personal—history—and—shared—interests.—Each— volunteer—is—provided—with—full—training—and— ongoing—support.—Through—the—Call—in—Time— programme—in—2014,—66—lonely—and—isolated— older—people—have—been—supported—by— Prudential—volunteers,—with—58—volunteers— actively—calling—and—totalling—more—than— 1,250—hours—of—volunteering—time.
Age—UK—and—Prudential’s—Planning—for— Later—Life—programme—has—already—helped— over—5,000—older—people—across—the—UK.— Launched—in—April—2012,—this—scheme— provides—help—with—financial—planning,— advice—on—benefits—and—support—during—hard— times,—such—as—a—move—into—a—care—home,—or— following—the—death—of—a—loved—one.—The— funding—of—this—programme—was—increased— by—100—per—cent—to—support—22—local— Age—UK—centres—in—the—neediest—areas—of— the—UK—to—help—deliver—this—much-needed— advice—programme.—
The Chairman’s Challenge and employee volunteering Many—of—our—employees—play—an—active—role— in—their—communities—through—volunteering,— charitable—donations—and—fundraising.— In—the—UK,—the—US—and—Asia—we—offer—our— employees—the—opportunity—to—support— charities—through—payroll—giving.—
—As—well—as—volunteering—efforts—on— behalf—of—the—Chairman’s—Challenge,— employees—around—the—Group—volunteered— on—a—number—of—other—charitable—projects.— Prudential—Corporation—Asia—employees— donated—nearly—36,000—hours—of—their— time—to—support—activities—across—Asia.— An—example—is—the—financial—literacy— programme—run—for—women—in—Indonesia— as—a—collaboration—between—the—Prudence— Foundation—and—three—government— ministries.—In—2014,—there—were—25—sessions— led—by—volunteers,—conducted—in—12—cities— with—6,320—women—participating.—Financial— literacy—is—a—key—area—of—focus—for—the— Prudence—Foundation—in—Indonesia—and— its—local—community—investment—efforts.— Since—2009,—it—has—helped—more—than— 19,000—women.
Jackson—is—dedicated—to—supporting— Walks—to—End—Alzheimer’s—across—the— country—and—engaging—associates—in— educational—events,—fundraising—and— awareness—efforts.—Last—autumn,— Jackson—employees—across—the—country— volunteered—more—than—160—hours—towards— ending—Alzheimer’s—disease—and,—with— additional—support—from—the—Jackson— National—Community—Fund,—raised— more—than—US$151,500—to—support—the— Alzheimer’s—Association.—
M&G—also—recognises—the—valuable— contribution—made—by—employees—by—their— charitable—activities.—To—support,—encourage— and—recognise—the—contribution—made—by— employees,—every—M&G—employee—is— eligible—to—apply—for—a—donation,—payable—to— their—nominated—charity,—of—up—to—£500—per— calendar—year—in—recognition—of—either—their— participation—in—an—event—to—raise—funds—for— charity—or—in—recognition—of—time—they—have— volunteered—on—an—ongoing—basis—to—a— charity.—In—2014,—M&G—employees—spent—a— total—of—2,081—hours—volunteering.—
Prudential RideLondon The—second—Prudential—RideLondon—event— was—held—in—August—2014.—The—number—of— cyclists—who—took—part—rose—from—65,000— in—2013—to—a—total—of—80,000—with—the— number—of—participants—in—the—flagship— 100-mile—ride—rising—from—16,000—to—over— 20,000.—Furthermore,—a—total—of—more—than— £10—million—was—raised—for—charities,—up—from— £7—million—the—year—before.—
In—addition—to—our—own—internal—reduction— targets,—we—also—participate—in—the—Carbon— Disclosure—Project.—This—survey—captures— data—on—a—whole—range—of—different—aspects— of—an—organisation’s—impact—on—the—global— environment.—Over—the—last—three—years—we— have—been—able—to—provide—increasing—levels— of—detail—and—this—has—improved—our— disclosure—score—from—70—per—cent—in—2013—to— 97—per—cent—in—2014—and—our—performance— rating—from—D—to—B.—In—2014,—Prudential—was— recognised—as—a—leader—for—the—depth—and— quality—of—our—climate—change—disclosure—to— investors—and—was—awarded—a—position—on— the—FTSE—350—Climate—Disclosure— Leadership—Index.—
Reducing our direct impact: occupied properties We—monitor—energy—consumption—and— carbon—dioxide—emissions—globally—for—all— sites—where—we—have—operational—control.— We—have—strategies—in—place—to—reduce— energy,—waste—generated,—water— consumption—and—paper—use.—
In—the—past—year—several—environmental— improvement—activities—have—taken—place— across—the—Group,—including—recycling—and— energy-saving—initiatives,—as—well—as—new— office—builds—utilising—innovative— environmental—construction—practices.— Prudential’s—UK—Occupied—estate—has—been— certified—to—the—international—Environmental— Management—standard—ISO—14001—by—the— British—Standards—Institute—since—2008.— Prudential—was—re-certified—for—the—standard— in—August—this—year—and—commended—for— its—performance.—
M&G—Real—Estate’s—focus—on—embedding— Responsible—Property—Investment— principles—into—its—investment—activities—has— achieved—some—significant—results.—In—the— past—year,—M&G—Real—Estate—has: —— Reduced—global—energy—consumption— and—carbon—emissions—by—6—per—cent— at—properties—held—consistently—for— two—years; —— Achieved—three—Green—Stars—in—the— Global—Real—Estate—Sustainability— Benchmark—survey—in—recognition—of— its—market-leading—performance;—and
o rp o rate resp o n sib ility rev iew 69 Prudential plc Annual Report 2014
Overall—Scope—1—and—2—emissions—in—the— global—Occupied—estate—have—reduced—by— 2—per—cent.—Other—regional—movements—are: —— Asia:—while—activities—to—reduce— emissions—have—taken—place,—a—more— material—proportion—of—the—reduction—has— resulted—from—an—improvement—in—the— data—capture—process,—with—a—greater— proportion—of—actual—versus—estimate—data; —— Continental—Europe:—a—growing— presence—in—this—region—has—resulted—in— an—overall—increase—in—combined—Scope—1— and—2—emissions;—
Section 3 72 Board of Directors 76 Chairman’s introduction 77 Board governance 80 Group governance 81 Board committee reports 89 Additional information 90 Statutory and regulatory disclosures 91 Index to principal Directors’ Report disclosures
Paul was the Senior Independent Director prior to his appointment as Chairman. He was also a member of the Audit and Remuneration Committees from October 2010 to June 2012 and joined the Nomination Committee in January 2011.
Current external appointments Paul is a member of the Securities Institute and Chairman of Henderson Diversified Income Limited. Age 63.
Tidjane was the Chief Financial Officer from March 2008 until his appointment as Group Chief Executive.
Current external appointments Tidjane is a member of the Board of the Association of British Insurers (ABI) and was Chairman from July 2012 to October 2014. He is a member of the Council of the Overseas Development Institute (ODI) in London, a member of the Africa Progress Panel chaired by Kofi Annan and a sponsor of Opportunity International. Tidjane is a member of the UK-ASEAN Business Council and of the Strategic Advisory Group on UK Trade and Investment. In January 2012, Tidjane was appointed to the Prime Minister’s Business Advisory Group and has been a member of the European Financial Services Round Table since 2013. He was elected to the Board of Directors of 21st Century Fox, Inc. on 12 November 2014, where he serves as a non-executive director. Tidjane was awarded the Légion d’Honneur by the French President in July 2011 and the 2013 Grand Prix de l’Economie by the French newspaper Les Echos. In January 2014, Tidjane was appointed as a British Business Ambassador by invitation from the Prime Minister. Age 52.
Nic is Chief Financial Officer, a position he has held since October 2009.
Relevant skills and experience Before joining Prudential, Nic 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
Pierre-Olivier is Group Chief Risk Officer, a position he has held since August 2013.
Michael is the Chief Executive of M&G, a position he held at the time of M&G’s acquisition by Prudential in 1999.
Relevant skills and experience Michael joined M&G in 1992. He also served on the Board of Close Brothers as a non-executive director from 2001 to 2008.
Barry is the Chief Executive of Prudential Corporation Asia, a position he has held since October 2006.
Current external appointments Barry is a member of the Board of Directors of the International Insurance Society. Age 57.
Relevant skills and experience Philip was a senior adviser at Credit Suisse until December 2013. Philip was previously a Vice Chairman of Credit Suisse First Boston (CSFB) Europe and Head of the UK Investment Banking Department. Philip was seconded to the role of Director General of the
Relevant skills and experience Sir Howard has a wealth of experience in the financial services industry, across civil service, consultancy, asset management, regulatory and academia.
Current external appointments Sir Howard is Chairman of the Phoenix Group, and a Professor at Institut d’Études Politiques (Sciences Po). He is also Chairman of the UK Government’s Airports Commission. He chairs the International Advisory Board of the China Securities Regulatory Commission and is a member of the International Advisory Board of the China Banking Regulatory Commission. In addition, Sir
Howard is an independent director of Morgan Stanley Inc and a Director of the National Theatre. Age 64.
North America in 1995. Between 1996 and 2003 Ann held a number of CFO and CEO posts in different businesses within Swiss Re and from 2003 until February 2007, Ann was Chief Financial Officer of the Swiss Re Group. From its nationalisation in 2008 until January 2009, Ann was Interim Chief Financial Officer and Executive director of Northern Rock. She was also a director of Atrium Underwriting Group Limited and Atrium Underwriters Limited (until March 2014), as well as Arden Holdings Limited (until November 2014).
Relevant skills and experience Alistair was a partner of KPMG from 1986 to 2010. He joined KPMG (then Peat Marwick Mitchell) in 1973 and held a number of senior leadership positions. These included Vice Chairman of UK Financial Services and Head of UK Insurance Practice,
International Managing Partner – Global Markets and UK Vice Chairman. Latterly he served as a Global Vice Chairman of KPMG from 2007 to 2010.
Relevant skills and experience Kai was the non-executive Chairman of Credit Suisse Asia Pacific until December 2011, having joined Credit Suisse in 2008 as a member of the Executive Board and CEO of the Asia Pacific region. From 1998 to 2007,
Current external appointments Kai is a non-executive director and lead independent director of Singapore Telecommunications Limited, a member of the Board of the Casino Regulatory Authority of Singapore, a non-executive director of PSA International Pte. Limited and a director and Chairman of Clifford Capital Pte. Limited. Kai was appointed as a director of Credit Suisse Group AG in April 2013 and became a member of the Singapore Capital Markets Committee of the Monetary Authority of Singapore in January 2014. Age 64.
Current external appointments Anthony is a non-executive director of Schindler Holding AG and China Xintiandi Limited. He is a Hong Kong representative to the APEC Business Advisory Council and Chairman of The Hong Kong- APEC Trade Policy Study Group. He is also a member of the Securities and Futures Commission Committee on Real Estate Investment Trusts, a council member of the Employers’ Federation of Hong Kong, a member of the UK-ASEAN Business Council Advisory Panel, a non-official member of the Commission on Strategic Development in Hong Kong and Chairman of the Mission to Seamen in Hong Kong. Age 67.
Current external appointments Alice is CEO of WebTurnerCorp. and a member of the National Association of Corporate Directors and of WomenCorporateDirectors. Age 58.
Relevant skills and experience Lord Turnbull entered the House of Lords as a Life Peer in 2005. In 2002 he became Secretary of the Cabinet and Head of the Home Civil Service until he retired in 2005. Prior to that he held a number of positions in the Civil Service, including Permanent
In line with our listings on the London and Hong Kong stock exchanges, we apply the principles of both the United Kingdom and Hong Kong corporate governance codes (‘the Codes’), complying with the relevant provisions set out in the Codes. We also work to ensure that our board composition and Group governance continue to be appropriate for the business and the markets in which we operate around the world, while supporting our strategic goals.
It is vital to us that, as well as being strong and effective, our governance is transparent. We are committed to reporting on our governance and ensuring that it remains as effective as it can be and continues to contribute to the long-term strength of the Group.
Chaired by the Chairman of the Board, all other members are independent non-executive directors
Ensuring that the Board retains an appropriate balance of skills to support the strategic objectives of the Group, has a formal rigorous and transparent approach to the appointment and re-election of directors and maintains an effective framework for succession planning.
Determining the overall remuneration policy for the Group, including the individual remuneration packages of the Chairman and executive directors, as well as overseeing the remuneration arrangements of the senior management.
h airm an ’s in tro d u ctio n B
The Board has delegated authority to a number of Board Committees which assist the Board in delivering its responsibilities and ensuring that there is appropriate independent oversight of internal control and risk management.
Directors have the right to seek independent professional advice at the Group’s expense and copies of such advice are circulated to other directors where applicable and appropriate.
On 1 April 2014, Pierre-Olivier Bouée, Group Chief Risk Officer, was appointed as a director. He replaced John Foley as Group Chief Risk Officer in August 2013, when the latter was appointed to the new role of Group Investment Director.
John stepped down from the Board on 1 April 2014 and continues in his role as Group Investment Director. In October 2014, the Company announced that Lord Turnbull would not be standing for re-election at the 2015 AGM in May and that he would be succeeded as Chairman of the Remuneration Committee by Anthony Nightingale.
The Chairman is responsible for the leadership and governance of the Board and the Group Chief Executive for the management of the Group and implementation of 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 the business unit heads and a Group Head Office team of functional specialists.
The Board is actively engaged in succession planning for both executive and non-executive roles to ensure that Board composition is progressively refreshed and that the Board retains its effectiveness. This is delivered through an established review process applied across all businesses which covers both executive director and senior management succession and development and also through the work of the Nomination Committee as described more fully on page 85. The Board considers annually the outcome of the review and any actions arising from the review are implemented as part of the management development agenda.
The Board undertook an external evaluation of its performance and that of its committees in 2014. The review was facilitated by Independent Board Evaluation, a specialist consultancy which undertakes no other business for the Company. Internal evaluations were carried out in 2012 and 2013, and the Company undertook the external evaluation in 2014, in keeping with the provision in the UK Corporate Governance Code on external evaluations on no less than three-yearly intervals.
The Chairman, together with the Group Chief Executive and Group Company Secretary, provided a comprehensive briefing to the assessment team. The evaluation included attendance and observation at Board and committee meetings, as well as access to additional supporting materials to enhance the assessment team’s understanding of how the Board and its committees operate.
The evaluation concluded that the overall message from the directors was that they believed that the Board and its committees were operating to a very high standard. Directors took their responsibilities seriously and the Board covered all bases thoroughly. While the Board feels the weight of regulatory work acutely, particularly at committee level, high standards were given priority over minimising workload. With a stable strategy and strong business performance against that strategy, the directors are minded to fine-tune rather than materially change Board practices.
Through the evaluation and subsequent discussion at the Board meeting in February 2015, the Board identified areas of particular focus and the related actions set out in the table below: Theme Action
Board composition Prioritise operational experience, gender balance and relevant geographical representation, where possible, in making new appointments to the Board. Keep the balance of executive and non-executive directors under review.
Selection processes Provide more detailed updates and information on potential Board candidates to the whole Board as early as possible.
Board papers Continue to review and streamline Board and committee papers.
All directors will retire from the Board at the 2015 AGM and, with the exception of Lord Turnbull, each wishes to seek re-election. The performance of each director formed part of the overall performance evaluation of the Board and the feedback compiled assisted the Chairman, and the Nomination Committee, in the assessment of the contribution and commitment of the individual directors. This exercise concluded that each director’s performance continued to be effective and supported the Nomination Committee’s recommendation to shareholders to re-elect all directors.
The independence of the non-executive directors is determined with reference to the United Kingdom (UK) and Hong Kong (HK) corporate governance codes. Prudential is required to affirm annually the independence of all non-executive directors under the HK Listing Rules and 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. Additional information on these processes can be found on page 89.
The Chairman is responsible for ensuring that induction programmes are provided for all new directors. These are tailored to reflect the experience of each director and their position as either executive or non-executive directors. On appointment, all directors embark upon a wide-ranging induction programme covering, among other things, the principal bases of accounting for the Group’s results, the role of the Board and its key committees, the Group’s key risks and the risk management framework within which these sit, as well as the compliance environment in which the Group operates. In addition, they receive detailed briefings on the Group’s principal businesses, its product range, the markets in which it operates and the overall competitive environment. These sessions are facilitated through meetings with executive management and other senior members of the management team. Other areas addressed include the directors’ obligations under the different listing regimes, legal and regulatory issues affecting directors of financial services companies, the Group’s governance arrangements and its investor relations programme, as well as its remuneration policies.
In addition, directors were provided with updates throughout the year on other general changes and developments in the legal and regulatory area that could impact the Group.
The Board met on ten occasions during the year, which included an overseas meeting held at the Group’s operations in Jakarta. The Board also held one strategy event during the year. Individual directors’ attendance for meetings throughout the year is set out in the table below.
During the year, the Chairman met with the non-executive directors without the executive directors being present on several occasions.
The Group Governance Manual sets out the policies and processes by which the Group operates within the framework and it takes account of relevant statutory, regulatory and governance matters.
The Group Risk Framework forms a key component of the Group Governance Framework and sets out the Group-wide approach to managing risk, as part of the internal control system.
The Chief Executive and Chief Financial Officer of each business unit, including Group Head Office, annually certify compliance with the Group’s governance, internal control and risk management requirements. The Group Risk function facilitates a review of the matters identified by this certification process. This includes the assessment of any risk and control issues reported during the year, risk and control matters identified and reported by the other Group oversight functions and the findings from the work of the internal audit function, which carries out risk-based audit plans across the Group, and issues arising from any external regulatory engagement. The system of internal control and its effectiveness is reviewed by the Audit Committee as described on page 82.
For the purposes of the effectiveness review, the Group has followed the 2005 Turnbull Guidance on internal control effectiveness. In line with the Turnbull Guidance, the certification provided above
There are five Group Risk Policies covering credit, insurance, liquidity, market and operational risks
The Board has established Audit, Remuneration, Nomination and Risk Committees as principal standing Committees of the Board. These Committees form a key element of the Group governance framework.
Members —— Ann—Godbehere—(Chairman) —— Howard—Davies —— Alistair—Johnston —— Philip—Remnant— —— Alice—Schroeder
The—Chairman—of—the—Board,—the—Group— Chief—Executive,—the—Chief—Financial— Officer,—the—Group—Chief—Risk—Officer,—the— Group—General—Counsel—and—the—Director— of—Group-wide—Internal—Audit,—as—well—as— other—senior—staff—from—the—Group—Finance,— Group-wide—Internal—Audit,—Risk,— Compliance—and—Security—functions— attended—meetings—of—the—Committee—by— invitation—to—contribute—to—the—discussions— relating—to—their—respective—areas—of— expertise.—The—external—auditor—also— attended—all—meetings.—
The—Committee—received—the—minutes— from—the—Disclosure—Committee—(see—the— section—entitled—‘US—regulation—and— legislation’—on—page—89—for—more—information— on—this—Committee)—and—the—Assumptions— Approval—Committee.—The—latter—reviews— the—key—assumptions—used—for—financial— reporting,—business—planning,—forecasting— and—the—IAS—19—valuation—of—the—three— UK-defined—benefit—pension—schemes.— Where—it—affects—the—results—of—the— assurances—under—the—Turnbull—compliance— statement,—the—Committee—also—received— appropriate—reporting—from—Group—Risk.—
Key—assumptions—and—judgements— in—respect—of—the—Group’s—investments,— insurance—liabilities,—and—deferred— acquisition—costs—are—important.—In—this— regard,—the—main—areas—of—focus—were— consideration—of—the—assumptions—applied— and—operation—of—internal—controls—in—the— preparation—of—the—results,—including—in— relation—to—the—following—items: —— Mortality—and—credit—risk—for—UK—annuity— business; —— Economic—and—policyholder—behaviour— assumptions—affecting—the—measurement—
As—part—of—its—assessment—of—the— explanation—of—performance,—the— Committee—considered—judgemental— aspects—of—the—Group’s—reporting—of— non-GAAP—metrics.—In—particular,—in—relation— to—the—Group’s—supplementary—reporting—on— the—European—Embedded—Value—(EEV)— basis,—the—Committee—considered—the— appropriateness—of—the—economic— assumptions—underpinning—the—projected— rates—of—return—and—risk—discount—rates,—and— of—changes—to—EEV—operating—assumptions— and—the—level—of—operating—experience— variances.—The—Committee—reviewed—the— effect—of—moving—EEV—reporting—to—a—
Internal control and risk management The—Committee—reviewed—the—Group’s— system—of—internal—control—and—the— developments—having—an—impact—on—it— over—the—course—of—2014.—The—Committee— considered—the—process—used—to—evaluate— the—effectiveness—of—the—system,—as—well—as— the—findings—of—the—review.—In—light—of—these— findings,—the—Committee—assessed—the— statement—on—internal—control—systems— prior—to—its—endorsement—by—the—Board.— The—Board’s—assessment—as—to—the— effectiveness—of—the—system—can—be—found—on— page—80—under—the—heading—‘Effectiveness’.
— Approving the annual compliance plan for the Group and monitoring its delivery
— Formulating a view as to whether the Annual Report was fair, balanced and understandable
— Considering the statements in the Annual Report regarding the effectiveness of internal control
Auditor independence and objectivity The—Committee—is—responsible—for— monitoring—auditor—independence—and— objectivity—and—is—supported—in—doing—so—by— the—Group’s—Auditor—Independence—Policy— (the—‘Policy’).—The—Policy—sets—out—the— circumstances—in—which—the—external— auditor—may—be—permitted—to—undertake— non-audit—services—and—is—based—on—four—key— principles—which—specify—that—the—auditor— should—not: —— Audit—its—own—firm’s—work;—
Throughout—the—year,—the—Committee— received—detailed—presentations—on—a— range—of—topics—including—updated— financial—accounting—developments,— new—reporting—requirements—and—briefings— on—developments—in—the—regulatory— environment.—Members—of—the—Committee— and—relevant—executive—directors—attended— a—joint—session—with—the—Risk—Committee—in— respect—of—the—results—of—the—internal—model— developed—under—Solvency—II—provisions.
Business unit audit committees The—Committee—is—supported—by—the—work— carried—out—by—the—business—unit—audit— committees.—These—committees—provide— oversight—of—the—respective—business—units— and—are—comprised—primarily—of—senior— management—who—are—independent—of— the—business—unit.—The—minutes—of—these— committees—are—reported—regularly—to— the—Committee,—and—their—meetings—are— attended—by—the—external—auditor—as—well— as—senior—management—from—the—business— unit—(including—the—BU—Chief—Executive,— heads—of—Finance,—Risk,—Compliance— and—Group-wide—Internal—Audit).— Group-wide—Internal—Audit—assesses—the— effectiveness—of—each—business—unit—audit— committee—annually—and—provides— a—report—to—the—Committee.—
Internal—audit—teams—in—each—of—the— business—units—carried—out—the— assessments,—considering—whether— each—of—the—committees—fulfilled—the— responsibilities—as—documented—in—their— terms—of—reference.—Attendance—rates—by— committee—members—and—evidence—of—the— committees’—coverage—of—key—business— unit—issues,—as—well—as—the—appropriate— escalation—of—concerns—to—the—Committee,— formed—part—of—the—criteria—used—for—the— evaluation.—The—assessment—further— factored—in—the—suitability—of—the—business— unit—audit—committee—structures—and—the— appropriateness—of—the—membership—on— each—committee.—
B o ard co m m ittee rep o rts 85 Prudential plc Annual Report 2014
strategic—objectives.—The—Committee—also— considered—whether—any—additional—skills— and—experience—would—be—needed,—either— to—complement—those—already—on—the—Board— or—to—plan—for—filling—vacancies—due—to—future— retirements.—The—Committee—reviewed— the—succession—plans—for—both—executive— and—non-executive—directors,—taking—into— account—the—board—composition—criteria— outlined—previously,—as—well—as—the—level—of— diversity—desirable—for—a—global—Group.— The—process—included—consideration—of— the—anticipated—demands—of—the—business,— and—the—skills—and—knowledge—required—to— successfully—deliver—against—these.—
Conflicts of interest and independence The—Board—has—delegated—authority—to—the— Committee—to—consider,—and—where— necessary—authorise,—any—actual—or—potential— conflicts—of—interest—arising—in—respect—of— the—directors.—The—Committee—considered— potential—conflicts—of—interest—as—they—arose— during—the—course—of—the—year,—and—in—respect— of—the—appointment—of—new—directors.
— Considering the effectiveness of the composition of Board and Committees
— Considering potential conflicts of interest for existing directors and individuals recommended to the Board for appointment as directors
B o ard co m m ittee rep o rts 87 Prudential plc Annual Report 2014
The—Committee—met—on—six—occasions— during—the—year—and—continued—to—maintain— close—links—to—the—Audit—Committee.— Attendance—is—set—out—in—the—table—on— page—79.—Howard—Davies,—the—Committee— Chairman,—is—a—member—of—the—Audit— Committee—and—similarly,—the—Audit— Committee—Chairman—is—a—member—of— the—Committee.—This—cross-membership— facilitates—an—effective—linkage—between— both—Committees,—ensuring—that—any—risk— assurance—relevant—to—financial—reporting— is—referred—to—the—Audit—Committee.— In—addition,—where—there—is—a—perceived— overlap—of—responsibilities—between—these— two—committees,—the—terms—of—reference—
Directors—have—a—statutory—duty—to—avoid— conflicts—of—interest—with—the—Company.— The—Company’s—Articles—of—Association— allow—its—directors—to—authorise—conflicts—of— interest—and—the—Board—has—adopted—a—policy— and—effective—procedures—to—manage—and,— where—appropriate,—approve—conflicts—or— potential—conflicts—of—interest.—Under—these— procedures,—directors—are—required—to— declare—all—directorships—in—companies—which— are—not—part—of—the—Group,—along—with—other— positions—which—could—result—in—conflicts— or—could—give—rise—to—a—potential—conflict.—
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—123—to—269—and—the— supplementary—information—on—pages—277— to—307.—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—271—to—273—and—309.—
In—accordance—with—the—requirements—of—the— guidance—issued—by—the—Financial—Reporting— Council—in—October—2009—‘Going—Concern— and—Liquidity—Risk:—Guidance—for—Directors— of—UK—companies—2009’,—after—making— sufficient—enquiries—the—directors—have—a— reasonable—expectation—that—the—Company— and—the—Group—have—adequate—resources— to—continue—their—operations—for—the— foreseeable—future.—In—support—of—this— expectation,—the—Company’s—business— activities,—together—with—the—factors—likely— to—affect—its—future—development,—successful— performance—and—position—in—the—current— economic—climate—are—set—out—in—the— Strategic—report—on—pages—39—to—50.—The—risks— facing—the—Group’s—capital—and—liquidity—
A d d itio n al in fo rm atio n
D irecto rs’ rem u n eratio n rep o rt 93 Prudential plc Annual Report 2014 94 Annual statement from the Chairman of the Remuneration Committee 96 Our executive remuneration at a glance 98 Summary of Directors’ remuneration policy 101 Annual report on remuneration 116 Supplementary information
The following sections were subject to audit: Salary information table in section entitled ‘Base salary’, Annual Bonus, Long Term Incentive Plans with performance periods ending on 31 December 2014, Pension entitlements, Table of 2014 and 2013 executive director total remuneration ‘The Single Figure’ and related notes, Long-term incentives awarded in 2014, Nonexecutive director remuneration in 2014, Statement of directors’ shareholdings, Outstanding share options, Recruitment Arrangements and Payments to past directors.
Dear shareholder, I am pleased to present the Remuneration Committee’s report for the year to 31 December 2014.
This will be the last report that I present as Chairman of the Remuneration Committee before I step down from the Board at the AGM. I am pleased that Anthony Nightingale, who has served the Remuneration Committee since June 2013, has agreed to undertake this role going forward.
IFRS operating profit Prudential’s primary measure of profitability and a key driver of shareholder value
EEV new business profit A measure of the future profitability of the new business sold during the year and indicates the profitable growth of the Group
All businesses reported strong performance in 2014, notwithstanding the challenges the Group faced which included the decline in long-term interest rates and the UK budget changes announced in March 2014. These results were achieved while maintaining appropriate levels of capital and operating within the Group’s risk appetite and framework. The Committee believes that the bonuses it awarded to executive directors for 2014 appropriately reflect this strong performance.
Executives’ community of interest with other shareholders is fostered by annual and long-term incentive plans and is underscored by their personal shareholdings. Many of the executive directors have shareholdings which far exceed the guidelines that they are asked to meet. For instance, on 31 December 2014, Tidjane Thiam had a beneficial interest in shares with a value of almost 1,000 per cent of his salary.
It was in this context that the Committee reviewed the Chairman’s fee during 2014. Paul Manduca’s fee has been fixed since his appointment as Chairman in July 2012. On his appointment, Mr Manduca agreed that Prudential would be his principal focus but his actual time commitment has been significantly higher than we anticipated at that time. The Committee has decided to increase the Chairman’s fee from £600,000 to £700,000 with effect from 1 July 2015 to recognise the increased demands of the role.
I look forward to your continued support for the Company’s remuneration arrangements.
Our remuneration strategy and principles Our remuneration strategy remains unchanged from that previously approved by shareholders: To attract and retain the high-calibre executives required to lead and develop the Group Reward must be: — Valued by executives; and — Competitive, to engage executives who are in demand in the global talent market, and, if required, support hiring the best external talent.
Stretching IFRS profit ranges set with reference to business plans approved by the Board.
Key elements1 How we implemented the policyKey features of our policy
Awards in 2014 and 2015 are below plan limits: — Group Chief Executive: 400% of salary — CEO JNL: 460% of salary — Other PLTIP awards were 250%
Financial and personal objectives set with reference to business plans approved by the Board.
Notes 1 CEO, JNL also shares in the JNL bonus pool; and CEO, M&G retains separate arrangements. 2 The CEO, PCA received an increase of 5%. 3 Progress against the share ownership guidelines is detailed in the “Statement of directors’
The value of these performance-related elements of remuneration are added to the fixed packages provided to executive directors to calculate the 2014 ‘single figure’ of total remuneration. These are outlined in the table below: Fixed pay Performance-related
Nic Nicandrou Chief Financial Officer 682 267 1,186 2,925 5,060 4,160
Aligning 2015 pay to performance The Remuneration Committee awarded 2015 salary increases to all executive directors in line with the budget for the wider workforce. Some changes have been made to incentive opportunities to reflect the growing scope and impact of these roles. As stated above, no changes have been made to the remuneration architecture. We believe remuneration packages remain strongly aligned with performance over both the short and the long term.
The resultant remuneration packages for 2015 are set out in detail in the Annual Report on Remuneration and summarised in the table below: Maximum AIP (% salary)
Nic Nicandrou Chief Financial Officer 3% £703,000 175% 40% 250% Barry Stowe CEO, PCA 5% HK$8,920,000 180% 40% 250% Tidjane Thiam Group Chief Executive 3% £1,093,000 200% 40% 400% Mike Wells2 President & CEO, JNL 3% US$1,148,000 160% 40% 460%
The pages that follow present a summary of the Remuneration Policy. The complete Policy can be found on our website at www.prudential.co.uk/site-services/governance-and-policies/directors-remuneration-policy
Benefits Executive directors are offered benefits which reflect their individual circumstances and are competitive within their local market, including: — Health and wellness benefits; — Protection and security benefits; — Transport benefits; — Family and education benefits; — All employee share plans and savings plans; and
In addition, the Chief Executive, PCA receives statutory contributions into the Mandatory Provident Fund.
In specific circumstances, the Committee also has the power to recover all (or part of) bonuses and share awards for a period after they are awarded to executives. These clawback powers apply to the cash and deferred elements of 2015 and subsequent bonuses and to long-term incentive awards made on or after 1 January 2015.
Executive directors are required to defer a percentage (currently 40 per cent) of their total annual bonus into Prudential shares for three years. The release of awards is not subject to any further performance conditions. The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding deferred award in specific circumstances. From 2015 and future awards, the Committee also has the power to recover all, or a portion of, amounts already paid in specific circumstances and within a defined timeframe (clawback).
The performance measures attached to each award are dependent on the role of the executive and will be disclosed in the relevant Annual Report on Remuneration. The Chief Executive, M&G’s PLTIP awards are subject only to the TSR performance condition as the IFRS profit of M&G is a performance condition under the M&G Executive LTIP.
Awards made in a particular year are usually significantly below this limit and are disclosed in the relevant Annual Report on Remuneration. The Committee would consult with major shareholders before increasing award levels during the life of this Policy.
The Chief Executive, M&G currently receives awards under this plan. He receives an annual award of phantom shares each with a notional starting share price of £1. The phantom share price at vesting is currently determined by M&G’s profitability with profit and investment performance over the three-year performance period. Awards are settled in cash.
The full Policy sets out the Committee’s powers in respect of executive directors joining or leaving the Board, where a change in performance conditions is appropriate or in the case of corporate transactions (such as a takeover, merger or rights issue). The Policy also describes legacy long-term incentive plans under which some executive directors continue to hold awards.
If, in a particular year, the number of meetings is materially greater than usual, the Company may determine that the provision of additional fees is fair and reasonable.
Travel and expenses for non-executive directors are incurred in the normal course of business, for example in relation to attendance at Board and Committee meetings. The costs associated with these are all met by the Company.
Non-executive directors are expected to attain this level of share ownership within three years of their appointment.
The Chairman receives an annual fee for the performance of their role. On appointment, the fee may be fixed for a specified period of time. Fees will otherwise be reviewed annually with any changes effective from 1 July.
The Chairman has a share ownership guideline of one times their annual fee and is expected to attain this level of share ownership within five years of the date of his appointment.
Shareholder views The Remuneration Committee and the Company undertake regular consultation with key institutional investors on the remuneration policy and implementation. This engagement is led by the Remuneration Committee Chairman and is an integral part of the Company’s investor relations programme. The Committee is grateful to shareholders for their feedback which is provided and takes this into account when determining executive remuneration.
n n u al rep o rt o n rem u n er atio n
Role and responsibility The role and responsibilities of the Committee are set out in its terms of reference, which are reviewed by the Committee and approved by the Board on an annual basis, and which can be found on the Company’s website. The Committee’s role is to assist the Board in meeting its responsibilities regarding the determination of the overall remuneration policy for the Group, including the remuneration of the Chairman and executive directors, as well as overseeing the remuneration arrangements of the senior executives across the Group.
The effectiveness of the Committee was evaluated as part of the overall performance evaluation of the Board. This assessment confirmed that the Committee continued to operate effectively during the year. More information on this exercise can be found under the Performance Evaluation section on page 77.
February 2014 Approve the 2013 directors’ remuneration report; consider 2013 bonus awards for executive directors; consider vesting of the long-term incentive awards with a performance period ending on 31 December 2013; approve 2014 long-term incentive awards, performance measures and Plan documentation; approve changes to the all-employee Sharesave and SIP limits; and consider the package for the Group Chief Risk Officer.
March 2014 Confirm 2013 annual bonuses and the vesting of long-term incentive awards with a performance period ending on 31 December 2013, in light of audited financial results.
Consider performance for outstanding long-term incentive awards, based on the half-year results; review termination arrangements for a member of Senior Management; review the dilution levels resulting from the Company’s share plans; review total proposed 2015 remuneration of executive directors ahead of consultation with shareholders; consider proposed changes to the Chairman's fee; and review the Remuneration Committee's terms of reference.
During the year, the Company has complied with the appropriate provisions of the UK Corporate Governance Code which were then in force regarding directors’ remuneration.
A n n u al rep o rt o n rem u n er atio n
Michael McLintock Chief Executive, M&G McLagan UK Investment Management Survey International Insurance Companies
Note 1 John Foley stepped down from the Board on 1 April 2014.
Pierre-Olivier Bouée1 n/a £630,000 John Foley2 £628,300 £648,000 Jackie Hunt £625,000 £644,000 Michael McLintock £370,800 £382,000 Nic Nicandrou £648,900 £682,000 Barry Stowe HK$8,240,000 HK$8,490,000 Tidjane Thiam £1,030,000 £1,061,000 Mike Wells US$1,081,500 US$1,114,000
Notes 1 Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. 2 John Foley stepped down from the Board on 1 April 2014. He remains a member of the Group Executive Committee.
Annual bonus 2014 annual bonus opportunities Executive directors’ bonus opportunities, the weighting of performance measures for 2014 and the proportion of annual bonuses deferred are set out below: Weighting of measures
Pierre-Olivier Bouée1 160% 40% of total bonus 50% – 50% John Foley2 160% 40% of total bonus 50% – 50% Jackie Hunt 160% 40% of total bonus 20% 60% 20% Michael McLintock3 600% 40% of total bonus 20% 60% 20% Nic Nicandrou 175% 40% of total bonus 80% – 20% Barry Stowe 160% 40% of total bonus 20% 60% 20% Tidjane Thiam 200% 40% of total bonus 80% – 20% Mike Wells4 160% 40% of total bonus 80% – 20%
2 John Foley stepped down from the Board on 1 April 2014. The maximum bonus opportunity shown represents his annual opportunity as an executive director – this was pro-rated for the portion of the year for which he was an Executive director. Please see the section on ‘2014 Annual Incentive Plan Payments’ for details.
Note 1 The weighting of each measure within the Group financial element of the bonuses for all executives excluding the Chief Executive, M&G. In addition, investment performance (measured over a one- and three-year period) forms 30 per cent of the Chief Executive, M&G’s annual bonus weighting.
Pierre-Olivier Bouée1 Group Chief Risk Officer £630,000 160% 99.5% £752,220 John Foley2 Group Investment Director £648,000 160% 98.5% £255,312 Jackie Hunt Chief Executive, UK & Europe £644,000 160% 98.6% £1,015,717 Michael McLintock3 Chief Executive, M&G £382,000 600% 100.0% £2,292,000 Nic Nicandrou Chief Financial Officer £682,000 175% 99.4% £1,186,339 Barry Stowe Chief Executive, PCA HK$8,490,000 160% 98.4% HK$13,370,052 Tidjane Thiam Group Chief Executive £1,061,000 200% 100.0% £2,122,000 Mike Wells4 President & CEO, JNL US$1,114,000 160% 99.8% US$1,778,835
‘Payments to past directors’ section for details. 3 Michael McLintock’s annual bonus opportunity in 2014 was the lower of 0.75 per cent of M&G’s IFRS profit and six times annual salary. M&G’s IFRS profit in 2014 was £446 million. 4 In addition to the AIP Mike Wells also received 10 per cent of the JNL senior management bonus pool. His total bonus including his AIP and JNL Senior
Long-term incentive plans with performance periods ending on 31 December 2014 Our long-term incentive plans have stretching performance conditions which are aligned to the strategic priorities of the Group. In deciding the portion of the awards to be released, the Committee considered actual financial results against these performance targets. The Committee also reviewed underlying Company performance to ensure vesting levels were appropriate. The Remuneration Policy Report contains further details of the design of Prudential’s long-term incentive plans.
M&G Executive Long-Term Incentive Plan The phantom share price at vesting for the 2012 M&G Executive Long-Term Incentive award is determined by the increase or decrease in M&G’s profitability over the three-year performance period with adjustments for the investment performance of its funds. M&G performance and the resulting phantom share price for Michael McLintock are shown below: Award 3-year profit growth of M&G 3-year investment performance 2014 Phantom share price 2012 M&G Executive LTIP 62% Second quartile £2.07
Mike Wells Matching contributions of 6 per cent of base salary capped at US$260,000.
Pierre-Olivier Bouée Contributions into the defined contribution pension scheme and a cash supplement with a total value of 25 per cent of salary.
At the end of 2014 the transfer value of this entitlement was £1,364,404. This equates to an annual pension of £58,990 which will increase broadly in line with inflation in the period before Mr McLintock’s retirement.
During the portion of the year he served as an executive director, John Foley received contributions into the defined contribution scheme and a cash supplement with a total value of 25 per cent of salary.
Notes 1 Jackie Hunt joined the Company on 5 September 2013. Her benefits included a one-off relocation payment of £188,679 to cover additional expenses such as stamp duty and estate agent fees. She also received an ‘Other Payment’ in 2013 (of £801,000) consisting of a cash payment in respect of shares forfeited when leaving Standard Life, the net value of which was used to purchase Prudential shares.
2 Barry Stowe’s benefits relate primarily to his expatriate status, including costs of £224,612 for housing, £35,230 for children’s education, £70,452 for home leave and a £252,142 Executive Director Location Allowance.
Group Chief Executive Mark Tucker Tidjane Thiam Tidjane Thiam Tidjane Thiam Tidjane Thiam Tidjane Thiam Tidjane Thiam
Percentage change in remuneration The table below sets out how the change in remuneration for the Group Chief Executive between 2013 and 2014 compared to a wider employee comparator group: Salary Benefits Bonus
The employee comparator group used for the purpose of this analysis is all UK employees. This includes employees in the UK Insurance Operations business, M&G and Group Head Office and reflects the average change in pay for employees employed in both 2013 and 2014. The salary increase includes uplifts made through the annual salary review as well as any additional changes in the year, for example promotions or role changes.
Relative importance of spend on pay The table below sets out the amounts paid in respect of 2013 and 2014 on all employee pay and dividends: Percentage change
Note 1 All employee pay as taken from note B3.1 to the financial statements.
Pierre-Olivier Bouée1 Group Chief Risk Officer 250% 1,574,992 25% 31 Dec 16 50% 50% Jackie Hunt Chief Executive, UK & Europe 225% 1,449,000 25% 31 Dec 16 50% 50% Michael McLintock2 Chief Executive, M&G 150% 572,993 25% 31 Dec 16 100% Nic Nicandrou Chief Financial Officer 250% 1,704,990 25% 31 Dec 16 50% 50% Barry Stowe Chief Executive, PCA 225% 1,478,933 25% 31 Dec 16 50% 50% Tidjane Thiam Group Chief Executive 400% 4,243,999 25% 31 Dec 16 50% 50% Mike Wells President & CEO, JNL 460% 3,077,728 25% 31 Dec 16 50% 50%
* Awards for executive directors are calculated based on the average share price over the three dealing days prior to the awards being granted (1 April 2014). † The percentage of award released for achieving maximum targets is 100 per cent.
Notes 1 Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The table above shows his entire 2014 award. 2 The awards made under the PLTIP to the Chief Executive, M&G are subject only to the TSR performance condition. The IFRS profit of M&G is a performance condition under the M&G Executive LTIP. 3 John Foley received an LTIP award equivalent to 250% of base salary on 1 April 2014.
2014 cash long-term incentive awards In addition to his PLTIP award, Michael McLintock receives an annual award under the M&G Executive LTIP. In 2014 he received the following award: Executive Role
Michael McLintock Chief Executive, M&G 300% 1,146,000 See note 31 Dec 16
Note The value of the award on vesting will be based on the profitability and investment performance of M&G over the performance period as described in the directors’ remuneration policy.
Mr Manduca’s fee has been fixed since his appointment as Chairman in July 2012. On his appointment, Mr Manduca agreed that Prudential would be his principal focus but his actual time commitment has been significantly higher than we anticipated at the time. The Committee has decided to increase the Chairman’s fee from £600,000 to £700,000 with effect from 1 July 2015 to recognise the increased demands of the role. This fee will next be reviewed in 2016.
Non-executive director fees An increase of just under 3 per cent was made to the basic non-executive director fee with effect from 1 July 2014. There were no changes made to the fees for Committee Chairmanship/Membership. The revised fees are shown below: Annual Fees
The resulting fees paid to non-executives are: £000s 2014 fees 2013 fees 2014 taxable benefits*
Non-executive directors * Benefits include the cost of providing the use of a car and driver, medical insurance and security arrangements. † Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total Remuneration is calculated using the methodology prescribed by Schedule 8 of the Companies Act. The Chairman and non-executive directors are not entitled to participate in annual bonus plans or long-term incentive plans.
Statement of directors’ shareholdings The shareholding requirements and share ownership guidelines are outlined below: Articles of Association Share ownership guideline
Group Chief Executive 2,500 1 year Yes 350% 5 years Yes Other executive directors 2,500 1 year Yes 200% 5 years Yes Chairman 2,500 1 year Yes 100% 5 years Yes Non-executive directors 2,500 1 year Yes 100% 3 years Yes
The Company and its directors, chief executives and shareholders have been granted a partial exemption from the disclosure requirements under part XV of the
SFO. As a result of this exemption, directors, chief executives and shareholders do not have an obligation under the SFO to notify the Company of shareholding interests, and the Company is not required to maintain a register of directors’ and chief executives’ interests under section 352 of the SFO, nor a register of interests of substantial shareholders under section 336 of the SFO. The Company is, however, required to file with the Hong Kong Stock Exchange any disclosure of interests notified to it in the United Kingdom.
Notes 1 Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. 2 John Foley stepped down from the Board on 1 April 2014. 3 For the 1 January 2014 figure Barry Stowe’s beneficial interest in shares is made up of 203,794 ADRs (representing 407,588 ordinary shares), (8,513.73 of these
ADRs are held within an investment account which secures premium financing for a life assurance policy). For the 31 December 2014 figure the beneficial interest in shares is made up of 142,144 ADRs (representing 284,288 ordinary shares).
5 For the 1 January 2014 figure Alice Schroeder’s beneficial interest in shares is made up of 1,000 ADRs (representing 2,000 ordinary shares). For the 31 December 2014 figure her beneficial interest in shares is made up of 1,250 ADRs (representing 2,500 ordinary shares).
Notes 1 No gain was made by directors in 2014 on the exercise of SAYE options. 2 No price was paid for the award of any option. 3 The highest and lowest closing share prices during 2014 were 1,552.5 pence and 1,204 pence respectively. 4 All exercise prices are shown to the nearest pence. 5 John Foley participated in this plan during his time as an executive director.
Directors’ terms of employment Executive directors’ service contracts The Remuneration Policy Report contains further details of the terms included in executive director service contracts. Details of the service contracts of each executive director are outlined below: Executive director Date of contract Notice period to the Company Notice period from the Company
Notes 1 John Foley stepped down from the Board on 1 April 2014. 2 The contract for Mike Wells is a renewable one-year fixed term contract. 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.
Letters of appointment of the Chairman and non-executive directors The Remuneration Policy Report contains further details on non-executive directors’ letters of appointment. Details of their individual appointments are outlined below: Non-executive director/Chairman Appointment by the Board
Note 1 Ann Godbehere was reappointed in 2014 for one year. The Board will consider a further renewal term in May 2015.
External appointments Subject to the Group Chief Executive’s or the Chairman’s approval, executive directors are able to accept external appointments as non-executive directors of other organisations. Fees payable are retained by the executive directors. During 2014: — Jackie Hunt received £59,500 as a non-executive director for another organisation; — Michael McLintock received £65,000 as a trustee and non-executive director of another organisation; and
Other directors served on the boards of educational, development, charitable and cultural organisations without receiving a fee for these services.
As set out in the section on ‘Remuneration in respect of performance in 2014’, the performance conditions attached to Rob Devey’s 2012 GPSP and UK BUPP awards were met in full and 100 per cent of these awards will be released in 2015. These awards were pro-rated based on the time Mr Devey was employed by Prudential as a proportion of the performance periods (22 of 36 months).
Statement of implementation in 2015 Executive directors’ salaries were reviewed in 2014 with changes effective from 1 January 2015. When the Committee took these decisions, it considered the salary increases awarded to other employees in 2014 and the expected increases in 2015. The Committee also took account of the performance and experience of each executive, and the relative size of each director’s role, as well as the performance of the Group. The external markets used to provide context to the Committee were identical to those used for 2014 salaries.
– Chief Executive, PCA; increase in maximum AIP and LTIP awards to 180 per cent and 250 per cent of salary respectively. This reflects the importance of PCA’s 2017 strategic initiatives which are crucial to the achievement of Group wide objectives. The incumbent has also demonstrated considerable personal performance and contribution to the Group.
— In making these adjustments, the Remuneration Committee was mindful to ensure that the majority of the additional opportunity be provided through long-term incentive awards, so that the full value is only realised over the long term and subject to the achievement of stretching performance conditions. Major shareholders were consulted on this change prior to implementation.
— In preparation for the implementation of Solvency II, part of executive directors’ 2015 bonuses will be determined by the achievement of economic capital targets. The performance measures attached to long-term incentive awards remain unchanged from those set out in the ‘Remuneration in respect of 2014’ section of this report.
— From 1 January 2015, the Committee has, at its discretion, the power to recover all (or part of) bonuses and share awards for a period after they are received by executives. These clawback provisions complement the Committee’s existing malus powers which enable unvested share awards to be reduced or cancelled in specific circumstances.
Pierre-Olivier Bouée GPSP 2011 48,517 733.5 4,971 48,517 – 31 Dec 13
Notes 1 The awards for Barry Stowe and Mike Wells were made in ADRs (1 ADR = 2 ordinary shares). The figures in the table are represented in terms of ordinary shares. 2 In 2011, 2012, 2013 and 2014 a DRIP dividend equivalent was accumulated on these awards. 3 The table above reflects the maximum number of shares (150 per cent of the original conditional amount awarded) which could have been subsequently released to Mike Wells under the JNL Performance Share Plan. This maximum number of shares could have been released if stretch performance targets were achieved. For the 2010 award, 121.16 per cent of the original conditional amount awarded was released to Mike Wells.
Business-specific cash-based long-term incentive plans Details of all outstanding awards under cash-based long-term incentive plans are set out in the table below. The performance period for all M&G Executive LTIP awards is three years: Year of initial award
The sterling value of the award has been calculated using the average exchange rate for the year in which the grant was made. The dollar value of conditional awards outstanding on 1 January 2014 and 31 December was US$1,400,000 and nil respectively.
Other share awards The table below sets out executive directors’ deferred bonus share awards.
Pierre-Olivier Bouée Deferred 2010 Group deferred bonus plan award 2011 12,083 12,083 – 31 Dec 13 31 Mar 14 721.5 1,268.5
Deferred 2011 annual incentive award 2012 53,814 1,340 55,154 31 Dec 14 750
Notes 1 The Deferred Share Awards for Barry Stowe and Mike Wells were made in ADRs (1 ADR = 2 ordinary shares). The figures in the table are represented in terms of ordinary shares.
Share Incentive Plan awards held in trust at 31 Dec 2014 (Number of shares)
Five highest paid individuals Of the five individuals with the highest emoluments in 2014, two were directors whose emoluments are disclosed in this report. The aggregate of the emoluments of the other three individuals for 2014 were as follows: Base salaries, allowances and benefits in kind 1,321 Pension contributions 235 Performance-related pay 22,911 Compensation for loss of office1 4,249
Primary statements 123 Consolidated income statement 124 Consolidated statement of comprehensive income 125 Consolidated statement of changes in equity: 2014 127 Consolidated statement of financial position 129 Consolidated statement of cash flows
Section A: Background and accounting policies 130 A1 Basis of preparation and exchange rates 130 A2 Adoption of new accounting pronouncements in 2014 A3 Accounting policies 131 A3.1 Accounting policies and use of estimates and judgements 142 A3.2 New accounting pronouncements not yet effective
C4.1 Movement and duration of liabilities 204 C4.1(a) Group overview 207 C4.1(b) Asia insurance operations 209 C4.1(c) US insurance operations 210 C4.1(d) UK insurance operations C4.2 Products and determining contract liabilities 212 C4.2(a) Asia 213 C4.2(b) US 216 C4.2(c) UK C5 Intangible assets C5.1 Intangible assets attributable to shareholders 220 C5.1(a) Goodwill attributable to shareholders 221 C5.1(b) Deferred acquisition costs and other intangible assets attributable to shareholders 224 C5.2 Intangible assets attributable to with-profits funds C6 Borrowings 225 C6.1 Core structural borrowings of shareholder-financed operations 225 C6.2 Other borrowings 226 C6.3 Maturity analysis C7 Risk and sensitivity analysis 226 C7.1 Group overview 228 C7.2 Asia insurance operations 230 C7.3 US insurance operations 235 C7.4 UK insurance operations 237 C7.5 Asset management and other operations C8 Tax assets and liabilities 238 C8.1 Deferred tax 238 C8.2 Current tax 239 C9 Defined benefit pension schemes 246 C10 Share capital, share premium and own shares C11 Capital position statement 248 C11.1 Life assurance business 253 C11.2 Asset management operations
Benefits and claims (50,736) (42,227) Outward reinsurers’ share of benefit and claims 631 622 Movement in unallocated surplus of with-profits funds (64) (1,549)
Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (50,169) (43,154)
Acquisition costs and other expenditure B3 (6,752) (6,861) Finance costs: interest on core structural borrowings of shareholder-financed operations (341) (305) Remeasurement of carrying value of Japan life business classified as held for sale D1 (13) (120)
Share of profits from joint ventures and associates, net of related tax D6 303 147
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns)* 3,154 2,082 Less tax charge attributable to policyholders' returns (540) (447)
Profit before tax attributable to shareholders B1.1 2,614 1,635 Total tax charge attributable to policyholders and shareholders B5 (938) (736) Adjustment to remove tax charge attributable to policyholders' returns 540 447 Tax charge attributable to shareholders' returns B5 (398) (289)
Other comprehensive income: Items that may be reclassified subsequently to profit or loss Exchange movements on foreign operations and net investment hedges: Exchange movements arising during the year A1 215 (255) Related tax 5 –
Net unrealised valuation movements on securities of US insurance operations classified as available-for-sale: Net unrealised holding gains (losses) arising during the year 1,039 (2,025) Net losses included in the income statement on disposal and impairment (83) (64)
P rim ary statem en ts 125 Prudential plc Annual Report 2014
Total other comprehensive (loss) income – – (10) 220 565 775 – 775
Share capital and share premium New share capital subscribed C10 – 13 – – – 13 – 13
Total comprehensive income (loss) for the year – – 1,298 (255) (1,034) 9 – 9
Other non-investment and non-cash assets: Property, plant and equipment C13 978 920 Reinsurers’ share of insurance contract liabilities C4.1(a)(iv) 7,167 6,838 Deferred tax assets C8.1 2,765 2,412 Current tax recoverable C8.2 117 244 Accrued investment income C1.1 2,667 2,609 Other debtors C1.1 1,852 1,746
Investments of long-term business and other operations: Investment properties C14 12,764 11,477 Investment in joint ventures and associates accounted for using the equity method D6 1,017 809 Financial investments*: Equity securities and portfolio holdings in unit trusts 144,862 120,222 Debt securities C3.3 145,251 132,905 Other investments 7,623 6,265
Assets held for sale D1(b) 824 916 Cash and cash equivalents 6,409 6,785
Total assets C1,C3.1 369,204 325,932 * Included within financial investments are £4,578 million (2013: £3,791 million) of lent securities.
Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities 250,038 218,185 Investment contract liabilities with discretionary participation features 39,277 35,592 Investment contract liabilities without discretionary participation features 20,224 20,176 Unallocated surplus of with-profits funds 12,450 12,061
The consolidated financial statements on pages 123 to 260 were approved by the Board of Directors on 9 March 2015. They were signed on its behalf: Paul Manduca Chairman
P rim ary statem en ts 129 Prudential plc Annual Report 2014
Cash flows from operating activities Profit before tax (being tax attributable to shareholders' and policyholders' returns)note (i) 3,154 2,082 Non-cash movements in operating assets and liabilities reflected in profit before tax: Other non-investment and non-cash assets (1,521) (1,146) Policyholder liabilities (including unallocated surplus) 27,292 21,951 Other liabilities (including operational borrowings) 3,797 1,907
Cash flows from financing activities Structural borrowings of the Group: Shareholder-financed operations:note (iv) C6.1
Interest paid (9) (9) Equity capital: Issues of ordinary share capital 13 6 Dividends paid (895) (781)
Net (decrease) increase in cash and cash equivalents (383) 789 Cash and cash equivalents at beginning of year 6,785 6,126 Effect of exchange rate changes on cash and cash equivalents 7 (130)
(iii) In November 2014 PAC sold its 25 per cent equity stake in the PruHealth and PruProtect businesses to Discovery Group Europe Limited resulting in a net cash inflow of £152 million.
Basis of preparation These statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU) as required by EU law (IAS Regulation EC1606/2032). EU-endorsed IFRS may differ from IFRS issued by the IASB if, at any point in time, new or amended IFRS have not been endorsed by the EU. At 31 December 2014, there were no unendorsed standards effective for the two years ended 31 December 2014 affecting the consolidated financial information of the Group and there were no differences between IFRS endorsed by the EU and IFRS issued by the IASB in terms of their application to the Group.
Except for the adoption of the new and amended accounting standards for Group IFRS reporting as described in note A2 below, the accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group’s consolidated financial statements for the year ended 31 December 2013.
The exchange movement arising during 2014 recognised in other comprehensive income is: Asia operations 109 (319) US operations 243 (37) Unallocated to a segment (central funds)* (137) 101 * The exchange rate movement unallocated to a segment mainly reflects the translation of currency borrowings which have been designated as a net investment hedge against the currency risk of the investment in Jackson.
i Subsidiaries Subsidiaries are those investees which the Group controls. The vast majority of the Group’s subsidiaries are corporate entities where the Group holds the majority of voting rights and are consolidated. The consolidation of other vehicles held by the Group is discussed below: The Group’s insurance operations invest in a number of limited partnerships, either directly or through unit trusts, through a mix of capital and loans. These limited partnerships are managed by general partners, in which the Group holds equity. Such interest in general partners and limited partnerships provide the Group with voting and similar rights to participate in the governance framework of the relevant activities in which limited partnerships are engaged in. Accounting for the limited partnerships as subsidiaries, joint ventures, associates or other financial investments depends on the terms of each partnership agreement and the shareholdings in the general partners. In the context of direct investment in limited partnerships, the following circumstances may indicate a relationship in which, in substance, the Group controls and consequently consolidates a limited partnership: — The Group has existing rights that give it the current ability to direct the relevant activities of the limited partnership, ie activities that significantly affect the generation of economic returns from the limited partnership’s operation; — The Group has the power to obtain the significant benefits of the activities of the limited partnerships. Generally, it is presumed that the Group has significant benefits if its participation in the limited partnership is greater than 20 per cent; and
The Group performs a re-assessment of consolidation whenever there is a change in the substance of the relationship between the Group and a limited partnership. Where the Group is deemed to control limited partnership, it is treated as a subsidiary and its results, assets and liabilities are consolidated. Where the Group holds a minority share in a limited partnership, with no control over their associated general partners, the investments are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position.
The Group does not have subsidiaries with a material percentage of non-controlling interests.
A3: Accounting policies continued ii Joint ventures and associates Joint ventures are joint arrangements arising from a contractual agreement whereby the Group and other investors have joint control of the net assets of the arrangement. In a number of these arrangements, the Group’s share of the underlying net assets may be less than 50 per cent but the terms of the relevant agreement make it clear that control is jointly exercised between the Group and the third party. Associates are entities over which the Group has significant influence, but it does not control. Generally it is presumed that the Group has significant influence if it holds between 20 per cent and 50 per cent voting rights of the entity.
For those entities managed by the Group’s asset managers, it is generally presumed that the Group is exposed to, or has rights, to variable returns from an entity and has ability to use its power to affect its own returns where Group’s holding is greater than 50 per cent and is deemed to have no significant influence over an entity for participation less than 20 per cent. For holdings between 20 per cent and 50 per cent, the Group performs an assessment of power and associated control over an entity on a case by case basis. For these entities, the following circumstances may indicate that the Group controls an entity: — The Group has power over the relevant activities of the entity; and — The exposure, or rights, to variable returns (including administrative and performance fee earned by the Group’s asset manager) from the entity is higher than the Group’s interest.
Where the Group’s asset manager set up the OEICs and UTs as part of asset management operations, the Group’s interest is limited to the administration fees charged to manage the assets of such entities. With no participation in these entities, the Group does not retain risks associated with OEICs and UTs.
ack gro u n d an d acco u n tin g p o licies 133 Prudential plc Annual Report 2014
Other structured entities The Group holds investments in mortgage-backed securities, collateral debt obligations and similar asset-backed securities that are actively traded in a liquid market. The Group is not the sponsor of the vehicles in which it holds investments and has no administrative rights over the vehicle’s activities. The Group generates returns and retains the ownership risks commensurate to its holding and its exposure to the investments. Accordingly the Group does not have power over the relevant activities of such vehicles and all are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position.
Business units Insurance contracts and investment contracts with discretionary participation features
— Minor amounts for a number of small categories of business
While the basis of valuation of liabilities in this business is in accordance with the requirements of the ABI SORP, it may differ from that determined on the modified statutory basis for UK operations with the same features.
UK insurance operations The UK regulated with-profits funds are accounted for by the voluntary application of the UK accounting standard FRS 27 ‘Life Assurance’ that requires liabilities to be calculated as the realistic basis liabilities. The realistic basis liabilities are measured by reference to the PRA’s Peak 2 basis of reporting. This Peak 2 basis requires the value of liabilities to be calculated as: — A with-profits benefits reserve; plus — Future policy related liabilities; plus — The realistic current liabilities of the fund.
ii Investment contracts with discretionary participation features For investment contracts with discretionary participation features, the accounting basis is consistent with the accounting for similar with-profits insurance contracts. Other investment contracts are accounted for on a basis that reflects the hybrid nature of the arrangements, where part is accounted for as a financial instrument under IAS 39 and the investment management service component is accounted for under IAS 18.
Those investment contracts without fixed and guaranteed terms are designated as fair value through profit or loss because the resulting liabilities are managed and their performance is evaluated on a fair value basis. Where the contract includes a surrender option its carrying value is subject to a minimum carrying value equal to its surrender value.
iv Unallocated surplus of with-profits funds Unallocated surplus represents the excess of assets over policyholder liabilities for the Group’s with-profits funds that have yet to be appropriated between policyholders and shareholders. As allowed under IFRS 4, the Group has opted to continue to record unallocated surplus of with-profits funds wholly as a liability with no allocation to equity. The annual excess (shortfall) of income over expenditure of the with-profits funds, after declaration and attribution of the cost of bonuses to policyholders and shareholders, is transferred to (from) the unallocated surplus each year through a charge (credit) to the income statement. The balance retained in the unallocated surplus represents cumulative income arising on the with-profits business that has not been allocated to policyholders or shareholders. The balance of the unallocated surplus is determined after full provision for deferred tax on unrealised appreciation on investments.
As permitted by IFRS 4, Jackson uses shadow accounting to make adjustments to the liabilities or related deferred acquisition costs which are recognised directly in other comprehensive income. Jackson accounts for the majority of its investment portfolio on an available-for-sale basis whereby unrealised gains and losses are recognised in other comprehensive income. To the extent that recognition of unrealised gains or losses on available-for-sale securities causes adjustments to the carrying value and amortisation patterns of deferred acquisition costs and deferred income, these adjustments are recognised in other comprehensive income to be consistent with the treatment of the gains or losses on the securities. More precisely, shadow deferred acquisition costs adjustments reflect the change in deferred acquisition costs that would have arisen if the assets held in the statement of financial position had been sold, crystallising unrealised gains or losses, and the proceeds reinvested at the yields currently available in the market.
i Investment return Investment return included in the income statement principally comprises interest income, dividends, investment appreciation/ depreciation (realised and unrealised gains and losses) on investments designated as fair value through profit or loss, and realised gains and losses (including impairment losses) on Jackson’s debt securities designated as available-for-sale. Movements in unrealised appreciation/depreciation of Jackson’s debt securities designated as available-for-sale are recorded in other comprehensive income. Interest income is recognised as it accrues, taking into account the effective yield on investments. Dividends on equity securities are recognised on the ex-dividend date and rental income is recognised on an accrual basis.
Financial investments measured at fair value are classified into a three level hierarchy as described in note C3.2(b).
iii Determining impairments’ relation to financial assets Available-for-sale securities The majority of Jackson’s debt securities portfolio are accounted for on an available-for-sale basis. The consideration of evidence of impairment requires management’s judgement. In making this determination the factors considered include, for example: Determining factors Consideration of evidence of impairment
Whether the decline of the financial investment’s fair value is substantial
For Jackson’s residential mortgage-backed and other asset-backed securities, all of which are classified as available-for-sale, the model used to analyse cash flows, begins with the current delinquency experience of the underlying collateral pool for the structure, by applying assumptions about how much of the currently delinquent loans will eventually default, and multiplying this by an assumed loss severity. Additional factors are applied to anticipate ageing effects. After applying a cash flow simulation an indication is obtained as to whether or not the security has suffered, or is anticipated to suffer, contractual principal or interest payment shortfalls. If a shortfall applies an impairment charge is recorded. The difference between the fair value and book cost for unimpaired securities designated as available-for-sale is accounted for as unrealised gains or losses, with the movements in the accounting period being included in other comprehensive income.
Assets held at amortised cost Financial assets classified as loans and receivables under IAS 39 are carried at amortised cost using the effective interest rate method. The loans and receivables include loans collateralised by mortgages, deposits and loans to policyholders. In estimating future cash flows, the Group looks at the expected cash flows of the assets and applies historical loss experience of assets with similar credit risks that has been adjusted for conditions in the historical loss experience which no longer exist, or for conditions that are expected to arise. The estimated future cash flows are discounted using the financial asset’s original or variable effective interest rate and exclude credit losses that have not yet been incurred. The risks inherent in reviewing the impairment of any investment include: the risk that market results may differ from expectations; facts and circumstances may change in the future and differ from estimates and assumptions; or the Group may later decide to sell the asset as a result of changed circumstances.
Reversal of impairment loss If, in subsequent periods, an impaired debt security held on an available-for-sale basis or an impaired loan or receivable recovers in value (in part or in full), and this recovery can be objectively related to an event occurring after the impairment, then the previously recognised impairment loss is reversed through the income statement (in part or in full).
The Group may designate certain derivatives as hedges. For hedges of net investments in foreign operations, the effective portion of any change in fair value of derivatives or other financial instruments designated as net investment hedges is recognised in other comprehensive income. The ineffective portion of changes in the fair value of the hedging instrument is recorded in the income statement. The gain or loss on the hedging instrument is recognised directly in other comprehensive income while the foreign operation is held.
For fair value hedges, movements in the fair value of the hedged item attributable to the hedged risk are recognised in the income statement. The Group does not regularly seek to apply fair value or cash flow hedging treatment under IAS 39. The exceptions, where hedge accounting has been applied in 2014 and 2013, are summarised in note C3.5(b).
For derivative instruments of Jackson that are entered into to mitigate economic exposures, the Group has considered whether it is appropriate to undertake the necessary operational changes to qualify for hedge accounting so as to achieve matching of value movements in hedging instruments and hedged items in the performance statements. In reaching the decision a number of factors were particularly relevant. These were: — IAS 39 hedging criteria have been designed primarily in the context of hedging and hedging instruments that are assessable as financial instruments that are either stand-alone or separable from host contracts, rather than, for example, duration characteristics of insurance contracts; — The high hurdle levels under IAS 39 of ensuring hedge effectiveness at the level of individual hedge transactions; — The difficulties in applying the macro hedge provisions under IAS 39 (which are more suited to banking arrangements) to Jackson’s derivative book; — The complexity of asset and liability matching of US life insurers such as those with Jackson’s product range; and finally — Whether it is possible or desirable, without an unacceptable level of costs and constraint on commercial activity, to achieve the accounting hedge effectiveness required under IAS 39.
vi Embedded derivatives Embedded derivatives are present in host contracts issued by various Group companies, in particular Jackson. They are embedded within other non-derivative host financial instruments and insurance contracts to create hybrid instruments. Embedded derivatives meeting the definition of an insurance contract are accounted for under IFRS 4. Where economic characteristics and risks of the
viii Derecognition of financial assets and liabilities The Group’s policy is to derecognise financial assets when it is deemed that substantially all the risks and rewards of ownership have been transferred.
For shareholder-backed business, with the exception of debt securities held by Jackson and assets classified as loans and receivables at amortised cost, all financial investments and investment property are designated as assets at fair value through profit or loss. The short-term fluctuations affect the result for the year and the Group provides additional analysis of results before and after short-term fluctuations in investment returns, together with other items that are of a short-term, volatile or one-off nature. Short-term fluctuations in investment returns on such assets held by with-profits funds, do not affect directly reported shareholder results. This is because (i) the unallocated surplus of with-profits funds is accounted for as a liability and (ii) excess or deficits of income and expenditure of the funds over the required surplus for distribution are transferred to or from unallocated surplus.
A3: Accounting policies continued o Investment properties Investments in leasehold and freehold properties not for occupation by the Group, including properties under development for future use as investment properties, are carried at fair value, with changes in fair value included in the income statement. Properties are valued annually either by the Group’s qualified surveyors or by taking into consideration the advice of professional external valuers using the Royal Institution of Chartered Surveyors valuation standards. Each property is externally valued at least once every three years.
The aggregate of the actuarially determined service costs of the currently employed personnel and the net interest on the net defined benefit liability (asset) at the start of the period, is charged to the income statement. Actuarial and other gains and losses as a result of changes in assumptions or experience variances are recognised as other comprehensive income.
Contributions to the Group’s defined contribution schemes are expensed when due.
Current tax expense is charged or credited based upon amounts estimated to be payable or recoverable as a result of taxable amounts for the current year. To the extent that losses of an individual UK company are not offset in any one year, they can be carried back for one year or carried forward indefinitely to be offset against profits arising from the same company.
Deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting period.
ack gro u n d an d acco u n tin g p o licies 141 Prudential plc Annual Report 2014 s Business acquisitions and disposals Business acquisitions are accounted for by applying the purchase method of accounting, which adjusts the net assets of the acquired company to fair value at the date of purchase. The excess of the acquisition consideration over the fair value of the assets and liabilities of the acquired entity is recorded as goodwill. Expenses related to acquiring new subsidiaries are expensed in the period in which they are incurred. Income and expenses of acquired entities are included in the income statement from the date of acquisition.
t Goodwill Goodwill arising on acquisitions of subsidiaries and businesses is capitalised and carried on the Group statement of financial position as an intangible asset at initial value less any accumulated impairment losses. Goodwill impairment testing is conducted annually and when there is an indication of impairment. For the purposes of impairment testing, goodwill is allocated to cash generating units.
y Foreign exchange The Group’s consolidated financial statements are presented in pounds sterling, the Group’s presentation currency. Accordingly, the results and financial position of foreign subsidiaries must be translated into the presentation currency of the Group from their functional currencies, ie the currency of the primary economic environment in which the entity operates. All assets and liabilities of foreign subsidiaries are converted at year end exchange rates while all income and expenses are converted at average exchange rates where this is a reasonable approximation of the rates prevailing on transaction dates. The impact of these currency translations is recorded as a separate component in the statement of comprehensive income.
For diluted earnings per share, the weighted average number of shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group’s only class of potentially dilutive ordinary shares are those share options granted to employees where the exercise price is less than the average market price of the Company’s ordinary shares during the year. No adjustment is made if the impact is anti-dilutive overall.
a Accounting pronouncements endorsed by the EU but not yet effective Annual improvements to IFRS – 2010-2012 Cycle and 2011-2013 Cycle These improvements include minor changes to ten IFRS standards, and are effective for annual periods beginning on or after 1 July 2014. The amendment to IFRS 2 ‘Share-based Payment’ and IFRS 3 ‘Business Combinations’ included in Annual improvements to IFRSs 2010-2012 cycle are applied to share-based payment transactions for which the grant date is on or after 1 July 2014 and to business combinations for which the date of acquisition is on or after 1 July 2014, respectively. In these financial statements, the Group had no transactions on or after 1 July that were affected by these amendments. The Group is assessing the impact of the remaining amendments, but they are not expected to have a significant impact on the Group’s financial statements.
IFRS 15 ‘Revenue from Contracts with Customers’ This standard effective for annual periods beginning on or after 1 January 2017, provides a single framework to recognise revenue for contracts with different characteristics and overrides the framework provided for such contracts in other standards. The following contracts are exempt from this standard: — Lease contracts within IAS 17; — Insurance contracts within IFRS 4; — Financial instruments as covered within IAS 39, IFRS 9, 10 and 11; and — IAS 27, IAS 28 and IAS 29.
Notes (i) Asia insurance operations In Asia, the positive short-term fluctuations of £178 million (2013: negative £(204) million) primarily reflect net unrealised movements on bond holdings following falls in bond yields across the region during the year. (ii) US insurance operations The short-term fluctuations in investment returns for US insurance operations comprise amounts, net of related change in amortisation of deferred acquisition costs, in respect of the following items: Net equity hedge resultnote (a) (1,574) (255) Other than equity-related derivativesnote (b) 391 (531) Debt securitiesnote (c) 47 42 Equity-type investments: actual less longer-term return 16 89 Other items 17 30
The short-term fluctuations in investment returns shown in the table above are stated net of a credit for the related change in amortisation of deferred acquisition costs of £653 million (2013: credit of £228 million). See note C5.1(b).
US GAAP insurance measurement basis applied for IFRS in a way that substantially does not recognise the effect of equity market and interest rate changes. These represent the majority of the guarantees offered by Jackson; and
The fluctuations for this item comprise the net effect of: – Fair value movements on free-standing, other than equity-related derivatives; – Accounting effects of the Guaranteed Minimum Income Benefit (GMIB) and its reinsurance; and – Related changes to DAC amortisation.
The fluctuations for this item therefore include significant accounting mismatches caused by: – The fair value movements booked in the income statement on the derivative programme being in respect of the management of interest rate exposures of the variable and fixed index annuity business, as well as the fixed annuity business guarantees and durations within the general account; – Fair value movements on Jackson’s debt securities of the general account being booked in other comprehensive income rather than the income statement; and – The mixed measurement model that applies for the GMIB and its reinsurance.
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Note The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with normalised returns included in operating profit with variations from year to year included in the short-term fluctuations category. The risk margin reserve charge for longer-term credit-related losses included in operating profit based on longer-term investment returns of Jackson for 2014 is based on an average annual risk margin reserve of 24 basis points (2013: 25 basis points) on average book values of US$54.5 billion (2013: US$54.4 billion) as shown below: Average book
Moody’s rating category (or equivalent under NAIC ratings of mortgage-backed securities) US$m % US$m £m US$m % US$m £m
Related amortisation of deferred acquisition costs (see below) 25 15 25 16
The Group’s operating segments are also its reportable segments for the purposes of internal management reporting with the exception of Prudential Capital (PruCap) which has been incorporated into the M&G operating segment for the purposes of segment reporting.
Performance measure The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based on longer-term investment returns, as described below. This measurement basis distinguishes operating profit based on long-term investment returns from other constituents of the total profit as follows: — Short-term fluctuations in investment returns; — Gain on sale of the Group’s stake in PruHealth and PruProtect businesses in 2014 as explained in note D1; — Amortisation of acquisition accounting adjustments arising on the purchase of business. This comprises principally the charge for the adjustments arising on the purchase of REALIC in 2012; — Loss attaching to the held for sale Japan life business. See note D1 for further details; and — The costs associated with the domestication of the Hong Kong branch which became effective on 1 January 2014.
Segment results that are reported to the Group Executive Committee include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis. Unallocated items are mainly in relation to the Group Head Office and the Asia Regional Head Office.
Determination of operating profit based on longer-term investment return for investment and liability movements: a General principles (i) UK style with-profits business The operating profit based on longer-term returns reflects the statutory transfer gross of attributable tax. Value movements in the underlying assets of the with-profits funds do not affect directly the determination of operating profit.
(iii) US variable annuity and fixed index annuity business This business has guarantee liabilities which are measured on a combination of fair value and other, US GAAP derived, principles. These liabilities are subject to an extensive derivative programme to manage equity and, with those of the general account, interest rate exposures. The principles for determination of the operating profit and short-term fluctuations are necessarily bespoke, as discussed in section (c) below.
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At 31 December 2014, the level of unamortised interest-related realised gains and losses related to previously sold bonds for the Group was a net gain of £467 million (2013: £461 million).
Equity type securities For equity-type securities, the longer-term rates of return are estimates of the long-term trend investment returns for income and capital having regard to past performance, current trends and future expectations. Equity-type securities held for shareholder-financed operations other than the UK annuity business, unit-linked and US variable annuity are of significance for the US and Asia insurance operations. Different rates apply to different categories of equity-type securities.
The longer-term investment returns for the Asia insurance joint ventures accounted for using the equity method are determined on a similar basis as the other Asia insurance operations described above.
Credit experience reflects the impact of defaults and other similar experience, such as asset exchanges arising from debt restructuring by issuers that include effectively an element of permanent impairment of the security held. Positive or negative experience compared to assumptions is included within short-term fluctuations in investment returns without further adjustment. The effects of other changes to credit risk provisioning are included in the operating result, as is the net effect of changes to the valuation rate of interest due to portfolio rebalancing to align more closely with management benchmark.
Finance costs: interest on core structural borrowings of shareholder-financed operations – (12) – (17) – – (29) (312) (341)
Total charges, net of reinsurance (13,627) (20,568) (20,821) (937) (794) (249) (56,996) (279) (57,275)
Tax charge attributable to policyholders’ returns (105) – (435) – – – (540) – (540)
Profit (loss) before tax attributable to shareholders 1,220 257 1,321 471 12 90 3,371 (757) 2,614
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Acquisition costs and other operating expenditureB3 (2,015) (1,112) (1,950) (840) (807) (193) (6,917) 56 (6,861)
Tax charge attributable to policyholders’ returns (90) – (357) – – – (447) – (447)
Operating profit (loss) based on longer-term investment returns 1,001 1,243 735 441 59 74 3,553 (599) 2,954
Short-term fluctuations in investment returns on shareholder-backed business (204) (625) (254) 22 – – (1,061) (49) (1,110)
Investment return Realised and unrealised gains and losses on securities at fair value through profit or loss 16,532 12,879 Realised and unrealised losses and gains on derivatives at fair value through profit or loss 142 (1,724) Realised gains on available-for-sale securities, previously recognised in other comprehensive income 84 64 Realised gains (losses) on loans (61) 11 Interestnotes (i),(ii) 6,802 6,771
Fee income from investment contract business and asset managementnotes (iii),(iv) 2,306 2,184
(ii) Interest income includes £3 million (2013: £5 million) accrued in respect of impaired securities. (iii) Fee income includes £23 million (2013: £44 million) relating to financial instruments that are not held at fair value through profit or loss. These fees primarily related to prepayment fees, late fees and syndication fees. (iv) The following table provides additional segmental analysis of revenue from external customers: Asia US UK Intragroup Total Asia US UK Intragroup Total
Revenue from external customers comprises: Earned premiums, net of reinsurance 32,033 29,844 Fee income from investment contract business and asset management (presented as ‘Other income’) 2,306 2,184
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The asset management operations, M&G, Eastspring Investments and US asset management provides services to the Group insurance operations for which fees are charged at appropriate arm’s length prices. Intra-group fees included within asset management revenue were earned by the following asset management segment: Intra-group revenue generated by: US broker-dealer and asset management (including Curian) 84 98 Eastspring Investments 146 86
The profit included in the income statement in respect of asset management operations for the year is as follows: M&G US note (iv)
Share of profit from joint ventures and associates, net of related tax 13 – 29 42 35
Comprising: Operating profit based on longer-term investment returnsnote (ii) 488 12 90 590 574 Short-term fluctuations in investment returnsnote (iii) (17) – – (17) 22
(ii) M&G operating profit based on longer-term investment returns: Asset management fee income 953 859 Other income 1 4 Staff costs (351) (339) Other costs (203) (166)
Total M&G operating profit based on longer-term investment returns 488 441
Acquisition costs incurred for insurance policies (2,668) (2,553) Acquisition costs deferred less amortisation of acquisition costs 916 566 Administration costs and other expenditure (4,486) (4,303) Movements in amounts attributable to external unit holders of consolidated investment funds (514) (571)
(g) There were no fee expenses relating to financial liabilities held at amortised cost included in acquisition costs in 2014 and 2013.
The costs of employment were: Business operations: Wages and salaries 1,323 1,272 Social security costs 100 94
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B3.2 Share-based payment a Description of the plans The Group operates a number of share award and share option plans that provides Prudential plc shares to participants upon vesting. The plans which are in operation include Prudential Long-Term Incentive Plan (PLTIP), Group Performance Share Plan (GPSP), Business Unit Performance Plan (BUPP), Jackson Long-Term Incentive Plan (Jackson LTIP), Annual Incentive Plan (AIP), savings-related share option schemes, share purchase plans and deferred bonus plans. Some of these plans are participated in by executive directors, the details of which are described in the directors’ remuneration report. In addition, the following information is provided.
Share purchase plans Eligible employees outside the UK are invited to participate in arrangements similar to the Company’s HMRC approved UK SIP, which allows the purchase of Prudential plc shares. Staff based in Ireland and Asia are eligible for the Share Participation Plan.
b Outstanding options and awards The following table shows movement in outstanding options and awards under the Group’s share-based compensation plans at 31 December 2014 and 2013: Options outstanding under SAYE schemes
Between £6 and £7 2.1 2.3 1.6 2.6 6.29 6.29 – – – – Between £9 and £10 2.3 2.4 2.9 3.9 9.01 9.01 – – – – Between £11 and £12 2.6 – 4.2 – 11.55 – – – – –
c Fair value of options and awards The fair value amounts estimated on the date of grant relating to all options (including conditional nil cost options) and awards, were determined using the Black-Scholes and the Monte Carlo option-pricing models using the following assumptions: Prudential LTIP (TSR)
Dividend yield (%) – 2.40 – – 2.73 – Expected volatility (%) 21.91 20.77 – 23.64 24.27 – Risk-free interest rate (%) 1.25 1.51 – 0.73 1.06 – Expected option life (years) – 3.77 – – 3.46 – Weighted average exercise price (£) – 11.55 – – 9.01 – Weighted average share price (£) 13.18 14.02 – 11.80 11.85 – Weighted average fair value (£) 6.07 3.00 12.84 7.38 2.57 11.06
B3.3 Key management remuneration Key management constitutes the directors of Prudential plc as they have authority and responsibility for planning, directing and controlling the activities of the Group. Total key management remuneration is analysed in the following table: Salaries and short-term benefits 15.9 16.5 Post-employment benefits 1.0 1.0 Share-based payments 16.2 14.3
The share-based payments charge comprises £11.0 million (2013: £9.3 million), which is determined in accordance with IFRS 2 ‘Share-based Payment’ (see note B3.2) and £5.2 million (2013: £5.0 million) of deferred share awards.
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 2.0 2.0 Fees payable to the Company’s auditor and its associates for other services: Audit of subsidiaries pursuant to legislation 6.6 6.8 Audit-related assurance services 2.9 2.8 Tax compliance services 0.7 0.8 Other assurance services 1.9 1.1 Services relating to corporate finance transactions 0.1 0.5 All other services 2.4 1.2
In addition, there were fees incurred of £0.1 million (2013: £0.1 million) for the audit of pension schemes.
b US insurance operations Amortisation of deferred acquisition costs Jackson applies a mean reversion technique for amortisation of deferred acquisition costs on variable annuity business which dampens the effects of short-term market movements on expected gross profits against which deferred acquisition costs are amortised. To the extent that the mean reversion methodology does not fully dampen the effects of market returns, there is a charge or credit for accelerated or decelerated amortisation. For 2014, there was a charge for accelerated amortisation of £13 million (2013: a credit for decelerated amortisation of £82 million) to the operating profit based on longer-term investment returns. See note C5.1(b) for further details.
Other In 2013, Jackson revised its projected long-term separate account return from 8.4 per cent to 7.4 per cent net of external fund management fees. The effect of this change together with other assumption changes and recalibration of modelling of accounting values of guarantees gave rise to a net benefit of £6 million to profit before tax in 2013.
Bond spread over swap ratesnote (i) 143 – 143 133 – 133 Credit risk allowance: Long-term expected defaultsnote (ii) 14 – 14 15 – 15
Notes (i) Bond spread over swap rates reflect market observed data.
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Movement in the credit risk allowance for PRIL The movement during 2014 of the average basis points allowance for PRIL on Pillar 1 regulatory and IFRS bases are as follows: Pillar 1 regulatory
Total allowance for credit risk at 31 December 2013 62 43 Credit rating changes 1 1 Asset trading (1) (1) Other effects (including for new business) (4) 3
Total allowance for credit risk at 31 December 2014 58 46
Overall the movement has led to the credit allowance for Pillar 1 purposes to be 41 per cent (2013: 47 per cent) of the bond spread over swap rates. For IFRS purposes it represents 32 per cent (2013: 32 per cent) of the bond spread over swap rates.
The total tax charge comprises: Current tax expense: Corporation tax (1,102) (414) Adjustments in respect of prior years (6) 15
Tax charge to policyholders' returns (449) (91) (540) (447) Tax charge attributable to shareholders (659) 261 (398) (289)
The total deferred tax credit (charge) arises as follows: Unrealised gains and losses on investments (127) 69 Balances relating to investment and insurance contracts (43) (44) Short-term temporary differences 309 (314) Capital allowances (4) (7) Unused tax losses 35 (41)
In 2014, a deferred tax charge of £295 million (2013: credit of £580 million) has been taken through other comprehensive income.
Operating profit (loss) based on longer-term investment returns 1,050 1,431 776 (71) 3,186
Effect of results of joint ventures and associates (40) – (8) (10) (58) Irrecoverable withholding taxes – – – 27 27
† The expected and actual tax rates as shown includes the impact of the held for sale Japan life business. For 2014, the tax rates for Asia insurance and Group, excluding the impact of the held for sale Japan life business are the same. For 2013, the tax rates for Asia insurance and Group, excluding the impact of the held for sale Japan life business, are as follows: Asia insurance Total Group
Expected tax rate on total profit 23% 27% Actual tax rate: Operating profit based on longer-term investment returns 17% 22%
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Based on operating profit based on longer-term investment returns 2,954 (638) 2,316 90.9p 90.7p
Based on profit for the year 1,635 (289) 1,346 52.8p 52.7p
The weighted average number of shares for calculating earnings per share: millions
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 final dividend for the year ended 31 December 2013 of 23.84 pence per ordinary share was paid to eligible shareholders on 22 May 2014 and the 2014 interim dividend of 11.19 pence per ordinary share was paid to eligible shareholders on 25 September 2014.