Chairman’s introduction 82 Board of Directors 83 How we operate 88 Further information on Directors 98 Risk management and internal control 99 Committee reports 101 Statutory and regulatory disclosures 120 Additional information 121 Index to principal Directors’ report disclosures 122 04 Directors’ remuneration report
Annual statement from the Chairman of the Remuneration Committee 124 Our Executive Directors’ remuneration at a glance 126 Summary of the current Directors’ remuneration policy 128 Annual report on remuneration 132 Supplementary information 154 05 Financial statements 159 06 European Embedded Value (EEV) basis results 325 07 Additional information
The Directors’ Report of Prudential plc for the year ended 31 December 2017 is set out on pages 2 to 8, 82 to 122 and 362 to 407, and includes the sections of the Annual Report referred to in these pages.
www.prudential.co.uk Annual Report 2017 Prudential plc 01 01 G roup overview 02 Strategic report 03 G
2 The 2016 comparative results have been re‑presented from those previously published following reassessment of the Group’s operating segments as described in note B1.3 of the IFRS financial statements, as a result Prudential Capital is not included in underlying free surplus generated.
3 IFRS profit after tax reflects the combined effects of operating results determined on the basis of longer‑term investment returns, together with negative short‑term investment variances, which in 2017 largely arose within Jackson, profit (loss) on disposal of businesses, amortisation of acquisition accounting adjustments and the total tax charge for the year.
4 The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring‑fenced with‑profits funds and staff pension schemes in surplus. The estimated solvency position includes management’s calculation of UK transitional measures reflecting operating and market conditions at each valuation date. An application to recalculate the transitional measures as at 31 December 2017 has been approved by the Prudential Regulation Authority.
The Board has always considered it important to create optionality within our corporate structure. After a rigorous review, which considered all options including the status quo, we have concluded that it is in the best interest of the business to operate as two separately listed companies, able to focus on their distinct strategic priorities in their chosen geographies. This will unlock the potential for enhanced value creation in both businesses, as each benefits from strategic focus and capital allocation policies aligned to its market opportunity. On completion of the demerger, shareholders will hold interests in both companies.
M&G Prudential is one of the leading retirement and savings businesses in the UK and Europe. As a standalone entity, it will continue to drive its transformation into a more capital‑efficient and customer‑ focused business, targeting growing customer demand for comprehensive financial solutions in these markets. In line with this strategy M&G Prudential agreed in March 2018 to the partial sale of its shareholder annuity portfolio. As with other changes to the business, our priority is to ensure these customers are treated fairly.
Governance All our stakeholders benefit from the Board taking an active role in the development and execution of our strategy, ensuring it is fit for today and for the future. The Board’s decision to separate M&G Prudential was not taken lightly and we took significant time to consider the benefits for shareholders and customers and the impact on our wider stakeholders. We took an important step towards this decision in August 2017 when we announced our intention to merge our UK asset manager, M&G, and our UK and Europe life insurance business to form M&G Prudential. The combined business now manages £351 billion in assets1 for more than seven million customers and is well placed to thrive as an independent business.
A customer-focused Group delivering long-term sustainable returns I am pleased to present Prudential’s 2017 Annual Report. Prudential has produced another well balanced performance while making a number of important changes to our business. Alongside our 2017 results, the Board announced its intention to demerge M&G Prudential, our UK and European business, from the Group.
www.prudential.co.uk Annual Report 2017 Prudential plc 03 01 G roup overview 02 Strategic report 03 G
Policy and regulatory change affects both our short‑term performance and long‑term strategy. Prudential places great importance on having an effective relationship with the regulators and policymakers who supervise us and our markets. We engage regularly and constructively with all our regulators and supervisors, as well as with governments around the world. Throughout the demerger process, the Board will continue to engage with all our stakeholders to ensure that they are kept informed and their input is sought.
Our people The success of Prudential is rooted in the commitment, creativity and drive of our teams in each of our markets and businesses. The structural changes we are proposing will only succeed because of the hard work of our people and we will support them through these changes.
Our community investment work focuses particularly on financial education, disaster preparedness and social inclusion. The Cha‑Ching programme, our financial education platform aimed at primary school‑aged children, is now in its seventh year. It has expanded from its origins in Asia to each of the four continents in which the Group does business, and in all of the markets where it has been launched it has been extremely positively received, with strong feedback from parents, teachers, children and political stakeholders. The Prudence Foundation’s Safe Steps is a first‑of‑its‑kind pan‑Asian public service initiative to enhance disaster preparedness and awareness through the dissemination of educational survival tips for natural disasters, with a potential reach of 200 million people. And in the UK, over the past five years Prudential RideLondon has raised over £50 million for charity and become one of the largest fundraising events in the country. In 2017 alone, more than 800 charities benefited from riders’ fundraising.
The direct contribution made by our people to the communities in which they live and participate makes me particularly proud. In 2017, Prudential colleagues volunteered 96,493 hours of their time. I support this activity personally through our flagship international volunteering programme, the Chairman’s Challenge, and I am delighted by the continuing success of the programme, with the number of volunteers increasing year‑on‑ year. From its launch in 2006, when 2,603 employees signed up, volunteer numbers have more than trebled. Last year 8,500 colleagues around the world – over 30 per cent of our workforce – took part, volunteering more than 35,000 hours to support 30 projects.
Note 1 Represents M&G Prudential asset management external funds under management and internal funds included on the M&G Prudential long‑term insurance business balance sheet.
Our strategy is aligned to structural trends: the savings and protection needs of the fast‑ growing middle class in Asia, the retirement income needs of the approximately 75 million baby boomers in the United States1 and the growing demand for managed savings solutions among the ageing populations of the United Kingdom and Europe. These trends are sustained, and we remain focused on the opportunities they present.
In line with its strategy to transition towards a more capital efficient, de‑risked business model, M&G Prudential agreed in March 2018 to the sale of £12.0 billion20 of its shareholder annuity portfolio to Rothesay Life. Under the terms of the agreement, M&G Prudential has reinsured £12.0 billion20 of liabilities to Rothesay Life, which is expected to be followed by a Part VII transfer of the portfolio by the end of 2019. The capital benefit of this transaction will be retained within the Group to support the UK demerger process.
Our financial performance We have built on our good start to 2017 through disciplined execution of our strategy, again led by our businesses in Asia.
We announce today the achievement of our remaining 2017 objectives, which were set in December 2013. During the first half of 2017, we exceeded the Group objective of underlying free surplus generation of at least £10 billion from the beginning of 2014 to the end of 2017. By the end of 2017 we had generated £12.8 billion over this four year period. Our Asia businesses delivered growth in IFRS operating profit based on longer‑term investment returns2 (‘IFRS operating profit’) at a compound average rate of 16 per cent3 over the period 2012 to 2017, and underlying free surplus generation of £1,078 million3 for the full year 2017. This is testament to the strength, scale and diversity of our Asia platform, validates our focus on recurring premium health and protection business and demonstrates the strength of our operational execution. It also marks the third set of objectives that we have successfully achieved within the last 10 years.
During 2017 we combined our UK and European life and asset management businesses to form M&G Prudential, which delivered record levels of external asset management net inflows of £17.3 billion in 2017. This contributed to combined assets under management4 of £351 billion at 31 December 2017.
Strong performance and continued profitable growth I am pleased to report that over 2017 our clear, consistent strategy, high-quality products and improving capabilities have enabled us to meet the needs of customers around the world better than ever before.
www.prudential.co.uk Annual Report 2017 Prudential plc 05 01 G roup overview 02 Strategic report 03 G
Our financial KPIs continue to reflect the outcome of the Group’s strategy. Our Asia life businesses are driven by growth in our recurring premium base and focus on health and protection business, and elsewhere we are benefiting from our prioritisation of fee‑generating products across our Asia asset management, US variable annuity and UK and European asset management activities.
In Asia, the growth of the middle class is creating significant and long‑term demand for the products we offer. The working‑age population in the region is growing by a million people a month, and by 2030 is expected to reach 2.5 billion13, while 65 per cent of Asian private financial wealth is held in cash14 and at the same time, that wealth is growing by US$4 trillion a year14.
In the UK and Europe there is growing demand among customers for managed solutions, savings products that provide better long‑term returns than cash, while smoothing out the ups and downs of the market. We meet that need through our PruFund propositions and our comprehensive range of actively managed funds. M&G Prudential is well positioned to target this growing customer demand for comprehensive financial solutions and the demerger will enable this business to play an even greater role in these markets.
Doing more for our customers We deliver on our clear strategy and our long‑term opportunities by paying close attention to the needs of our customers, by responding to those needs with products that fit their changing requirements, and by improving our capabilities continually in order to deliver the best products in the most effective way.
The members of the Group Executive Committee and their roles are set out on page 406.
Front, left to right: Nic Nicandrou, John Foley, Mike Wells, Mark FitzPatrick, Barry Stowe.
James Turner was appointed as an Executive Director and as Group Chief Risk Officer in March 2018.
We are also continuing to improve both our agency platform and our bancassurance partnerships in Asia to ensure that we reach as many customers as possible. Nowhere is this clearer than in China, where, through our joint venture CITIC‑ Prudential, we now have a presence in 77 cities, with access to 940 million people, or about 70 per cent of the population of the world’s most populous country. We have over 44,000 agents in China and access to more than 4,000 bank branches. Across the region during 2017 we increased our total agents to over 600,000 and we ended the year with over 15 million life insurance customers. Recent announcements of new agreements in the Philippines, Thailand, Indonesia and Vietnam have also increased the reach of our bancassurance partnerships.
Continuous improvement of our capabilities is also a key part of our approach, and in Asia we introduced a number of digital initiatives that will benefit both our customers and our shareholders, including apps and chatbots, that, among other services, can provide rapid claims payment, constant customer support, answer queries, help schedule appointments and transfer feedback from customers to our businesses. Building on its success in Hong Kong, our myDNA service, which provides diet and exercise advice based on genetic profiles, has been launched in Vietnam, Malaysia and Singapore. In Singapore we also launched PRU Fintegrate, a new initiative enabling us to collaborate with fintech startups to co‑develop digital solutions for customers.
In the UK and Europe, the combination of our life and asset management businesses into M&G Prudential has enabled us to meet the needs of our customers better than ever before. The business manages £351 billion of assets4 for more than seven million customers, both in the UK and internationally, and we are leveraging our scale, financial strength and complementary product and distribution capabilities to enhance the development of capital‑efficient, customer‑focused solutions. Bringing these businesses together has given us the opportunity to deliver better collaboration across business segments and more innovative and differentiated propositions. It also provides better access to customers and channels, merger cost synergies and transformation benefits, including the chance to invest to create a digital, data‑led business with low marginal cost of growth. M&G Prudential is in the top five in UK retail funds19, with an active management offering, and provides a range of consumer‑focused retirement and savings wrappers. The performance of its products continues to make them very popular among customers. The flagship PruFund Growth Life Fund, for example, has grown by 36 per cent since the start of 2013, compared with benchmark growth of 30 per cent, and this performance has driven growth in PruFund assets under management from £7.5 billion in 2012 to £35.9 billion at the end of 2017. To improve the offering to customers, in 2017 the business rolled out myM&G, its direct‑to‑ consumer platform.
We took another step forward in our Africa business in 2017 when we entered Nigeria, Africa’s largest economy and our fifth market in the region. Following the launch of our businesses in Ghana, Kenya, Uganda and Zambia, this further demonstrates our commitment to Africa and our determination to bring the benefits of our products to customers across the region.
Prudential won the insurance category of Management Today’s ‘Britain’s Most Admired Companies’ awards in December 2017.
We were also named Britain’s most admired company overall for quality of management and inspirational leadership and fourth for our ability to attract and retain top talent. The highly regarded awards are based on a review by peers.
A positive outlook With our clear strategy focused on long‑term trends around the world and continued improvements in our execution capabilities, we are delivering value to our customers, our shareholders and the communities in which we operate. This is supported by our ongoing focus on risk management and the strength of our balance sheet. We believe the demerger of M&G Prudential from the international group will leave both businesses better able to focus on meeting our customers’ rapidly evolving needs and to deliver long‑term value to investors as two separate companies. I have no doubt that the strength of our underlying opportunities and our proven ability to innovate and improve the way we do things, will ensure that both businesses are well positioned to continue to serve our customers well and grow profitably into the future.
Notes 1 Source: US Census Bureau, Population Division, 2017 estimate of population.
3 The current year and all comparative amounts for the Asia objectives exclude contributions from the Korea life business which was sold in 2017. The 2017 Asia IFRS operating profit objective was adjusted accordingly. 2012 comparative amounts include the one‑off gain on sale of the stake in China Life of Taiwan of £51 million.
6 Underlying free surplus generated comprises underlying free surplus generated from the Group’s long‑term business (net of investment in new business) and that generated from asset management operations. Further information is set out in note 11 of the EEV basis results.
7 Based on the 2017 operating segments. 8 The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring‑fenced with‑profits funds and staff pension schemes in surplus. The estimated solvency position includes management’s calculation of UK transitional measures reflecting operating and market conditions at each valuation date. An application to recalculate the transitional measures as at 31 December 2017 has been approved by the Prudential Regulation Authority.
9 Estimated before allowing for second interim dividend. 10 Closing EEV shareholders’ funds divided by issued shares, as set out in note II(n) of the Additional unaudited financial information.
15 Source: World health Organisation ‑ Global Health Observatory data repository (2013). Out of pocket as percentage of total health expenditure.
18 Source: Based on formal (Competitors’ results release, local regulators and insurance associations) and informal (industry exchange) market share data. Ranking based on new business (APE or weighted FYP depending on the availability of data).
www.prudential.co.uk Annual Report 2017 Prudential plc 09 01 G roup overview 02 Strategic report 03 G
Chief Financial Officer’s report on the 2017 financial performance 33 Report on the risks facing our business and how these are managed 48 Corporate responsibility review 64
— meeting the savings and retirement needs of an ageing British and continental European population.
Prudential Corporation Asia Prudential Corporation Asia has leading insurance and asset management operations across 14 markets and serves the families of the region’s high potential economies. We have been operating in Asia for over 90 years and have built high‑performing businesses with multichannel distribution, a product portfolio centred on regular savings and protection, award‑winning customer services and a widely recognised brand.
Eastspring Investments is a leading asset manager in Asia and provides investment solutions across a broad range of asset classes.
Leading pan-regional franchise of APE sales are regular premium £139bn Eastspring Investments funds under management £3.1bn Eastspring Investments external net inflows1 1 Excluding money market funds.
Asia Signi�cant protection gap and investment needs of the middle class
We entered Africa in 2014 to offer products to new customers in one of the fastest‑growing regions in the world. We aim to provide products that help our customers to live longer and healthier lives, and save to improve future choices for them and their families.
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1 ©2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar www.AnnuityIntel.com. Total Sales by Company 3Q YTD 2017.
Jackson Jackson provides retirement savings and income strategies aimed at the large number of people approaching retirement in the United States. Jackson’s pursuit of excellence in product innovation and distinctive distribution capabilities has helped us forge a solid reputation for meeting the needs of customers. Jackson’s variable annuities offer a distinct retirement solution designed to provide a variety of investment choices to help customers pursue their financial goals.
Investment for growth We focus on strategic investment in long‑term opportunities and capabilities to drive future growth and value for our stakeholders. We invest to improve relationships with our customers and distributors, to create innovative products, to improve our operating platforms and to capture new opportunities and build new relationships. We invest in digital capabilities to empower our distributors and improve customer service.
Customers Customers are at the heart of our strategy. We proactively listen to both new and existing customers to understand and respond to their changing needs. This allows us to propose financial solutions customised for different groups, whether that is young and middle‑aged people or those in the retirement phase of life. We are expanding our digital infrastructure to enhance our customer experience.
Risk management We generate value by selectively taking exposures to risks that are adequately rewarded and that can be appropriately quantified and managed. Balance sheet strength and proactive risk management enable us to make good our promises to our customers and create long‑term value for our stakeholders.
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Cash £3,640m Free surplus generation ‑1%1 on 2016 £1,788m Remittances +4%2 on 2016
Cover ratio +1pp on 2016 1 Growth rates on constant exchange rate basis. 2 Growth rates on an actual exchange rate basis.
Strength and flexibility of our distribution network gives us a distinctive advantage
Our global distribution strength Our trusted brands and strong distribution channels enable us to understand the diverse needs of our customers, and respond to those needs.
Notes 1 Independent research and Market Metrics, a Strategic Insight Business.
Prudential takes a balanced approach to performance management across IFRS, EEV and cash. We aim to demonstrate how we generate profit under different accounting bases, reflecting the returns we generate on capital invested and the cash generation of our business.
EEV new business profit in 2017 increased by 12 per cent on a constant exchange rate basis (17 per cent on an actual exchange rate basis) compared with 2016, driven by strong performance in each of our businesses with Asia up 12 per cent (17 per cent on an actual exchange rate basis), the US up 9 per cent (15 per cent on an actual exchange rate basis), and the UK up 28 per cent.
CAGR +11% 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 year.
Measuring our performance To create sustainable economic value for our shareholders we focus on delivering growth and cash while maintaining appropriate capital.
Remittances measure the cash transferred from business units to the Group. Cash flows across the Group reflect our aim of achieving a balance between ensuring sufficient net remittances from business units to cover the dividend (after corporate costs) and the use of cash for reinvestment in profitable opportunities available to the Group.
Asia IFRS operating profit, £m Asia life and asset management pre‑tax IFRS operating profit to grow at a compound annual rate of at least 15 per cent over the period 2012 ‑ 2017.
Asia underlying free surplus, £m Asia underlying free surplus generation4 of £0.9 billion to £1.1 billion in 2017.
3 Embedded value reporting provides investors with a measure of the future profit streams of the Group. The EEV basis results have been prepared in accordance with EEV principles discussed in note 1 of the EEV basis results. A reconciliation between IFRS and the EEV shareholder funds is included in note C of the Additional EEV financial information.
7 The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring‑fenced with‑profits funds and staff pension schemes in surplus. The estimated solvency position includes management’s calculation of UK transitional measures reflecting operating and market conditions at each valuation date. An application to recalculate the transitional measures as at 31 December 2017 has been approved by the Prudential Regulation Authority.
10 For the purpose of the Group objective, cumulative underlying free surplus generation includes the free surplus relating to Prudential Capital.
Comparative stated at reported currency basis *Expressed at Dec 2013 FX rates 454*
The first is the growing working population which is predicted to increase at over 1 million people per month. This means that between 2015 and 2030 some 178 million people will reach working age, roughly the equivalent to the combined populations of the UK, France and Italy.
While these opportunities are attractive, there are a number of challenges associated with executing them. The industry is highly regulated as governments are rightly very concerned about ensuring individuals do not take undue risks with their savings and receive fair outcomes. The products are intangible, with the benefits potentially not crystallising for many years; customers need to have a high level of confidence in the company that they are entrusting their financial well‑being to. The products can be complex and unfamiliar, so customers typically need advice and guidance on how
— Continued performance in key metrics: new business profit up 12 per cent1, IFRS operating profit up 15 per cent1 and underlying free surplus generation up 19 per cent1
— Operating in 77 cities in China with APE sales up 43 per cent1
— Eastspring named ‘Best Asset Management House’ by Asia Asset Management for 2018 Awards to address their individual needs. Building, training and managing teams of financial advisers that can do this takes considerable time and expertise. Within this context, Prudential is differentiated by its long history in Asia, the breadth and depth of its operations, and its discipline and quality of execution.
Prudential Corporation Asia has all the key attributes for continuing success, starting with a footprint of life insurance and asset management business spanning 14 countries and giving us access to 3.3 billion people. We also have unrivalled expertise in the region, having been in Malaysia since 1924, and entering markets early such as India, China, Vietnam and most recently Cambodia and Laos. We also pioneered industry developments in the region, such as unit‑linked products and bancassurance. Our sheer scale is a key competitive advantage with over 600,000 agents, access to more than 10,000 bank branches, 15 million life customers, 24 million life policies currently in force and £139 billion of assets under management.
alue (EEV ) basis results 07 A dditional inform ation with our fourth generation of an electronic point of sales (‘ePos’) portal that uses the latest developments in biometric authentication and produces a detailed quote within three minutes. In China our mobile policy application process has reduced customer on‑boarding time from five days to 30 minutes, and includes auto underwriting and verification so policies can be issued within seconds. These initiatives not only give our customers a better experience, but also help our agents become more productive; in China the number of active agents increased 24 per cent last year and their average case sizes increased 21 per cent.
Our agency management capabilities in terms of recruiting and training are well proven, but we are continuing to upgrade these. For example in Indonesia, where we recruited an average of over 4,500 agents per month during 2017, our PRUforce agency workbench has enabled us to reduce significantly on‑boarding times. ‘Million Dollar Round Table’ membership is an industry‑recognised indicator of agency quality, and in Hong Kong we lead the market with over 4,000 qualifiers up by 53 per cent9. We are also adapting technology to improve the service we provide to our agents, such as askPRU in Singapore, the industry’s first chatbot policy enquiry system. Since its launch, calls to the service centre have reduced by 30 per cent.
We believe bancassurance is an effective way to increase insurance penetration and Prudential has an excellent track record in growing high quality business through this channel with a number of different partners. For example, we have had an enduring regional relationship with Standard Chartered Bank since 1998 and the ongoing effectiveness of this relationship is evidenced by a 12 per cent growth in APE last year. We have also had great success in securing and then activating newer relationships, for example Thanachart Bank in Thailand grew APE by 17 per cent last year following collaboration on a new regular premium product.
In addition we are actively increasing our engagement with other banks. We have recently announced new agreements with Robinsons Bank in the Philippines, Siam Commercial Bank in Thailand for the provision of unit linked products to their high worth customers and Shinhan Bank in Indonesia and Vietnam.
Adding more to life: Nasrun, Prudential Indonesia ‘As a PRUcustomer Friend20, one of my first direct interactions with a Prudential customer was meeting a gentleman who was thinking of surrendering his policy. I encouraged him to maintain an active policy by citing the benefits, and thankfully he did just that. Not long after our meeting, I received the sad news that he had passed away.
It’s moments like these that I’m grateful for my role at Prudential, which gives me the opportunity to make a difference in people’s lives.’
Hong Kong Life insurance Market ranking12 2nd Population 7m Penetration13 16.2%
We are also successfully evolving our product ranges within markets to cater for a more differentiated range of customer needs. For example, in Indonesia we have introduced Hebat, a lower premium investment linked product, at one end of the spectrum for emerging customers and an ‘as charged’ medical product at the other end for higher net worth customers. In Indonesia and Malaysia we have been successfully developing Takaful products to provide for the specific needs of Muslim customers.
Work is also underway to ensure we have active dialogues with our customers so their products keep up with their changing needs. Technology is also helping here; during 2017 we piloted ‘next best offer’ with our agents in Hong Kong. This is an AI‑driven app that automatically recommends additional coverage to existing customers.
More broadly, we are also engaging with customers in areas that concern them. Our Relationship Index gives insights on one of the most important areas of customers’ lives, their relationships with their loved ones. Customers are also increasingly concerned that companies they are associated with are ‘good’. Our Prudence Foundation has well recognised community initiatives around children’s education, including the Cha‑Ching financial literacy programme and our disaster preparedness initiatives including the Safe Steps campaigns on natural disasters, road safety and first aid. Our YouTube channels that hold videos related to these and other initiatives have had over 100 million views.
Investing for growth Given the compelling opportunities we see in the region we will continue investing for growth. We will continue to enhance our core operations, expanding our traditional distribution reach with more, higher quality agents; we will add new bank distribution partners and explore adding some non‑ traditional ones too. We will accelerate the work in digitising and automating our processes and ensure we have enhanced abilities to connect with the broader cloud‑based ecosystem.
Underpinning our ability to build on our existing strengths and build out our capabilities is our priority to continue investing in our people. It is vital that we further enhance our diverse and highly talented workforce.
Notes 1 Growth rate on a constant exchange rate basis. 2 Growth rate on an actual exchange rate basis. 3 United Nations, Department of Economic and Social
Affairs, Population Division (2015). World Population Prospects: The 2015 Revision, DVD Edition 15.
6 Source: Swiss Re Sigma 2015. Insurance penetration calculated as premiums as percentage of GDP. Asia penetration calculated on a weighted population basis.
8 Source: Swiss Re Mortality Protection Gap Report – Asia Pacific 2015.
9 Annual growth to 1 July 2017. Source: The Premier Association of Financial Professionals.
12 Based on FY17 or the latest information available. Source include formal (eg Competitors results release, local regulators and insurance association) and informal (industry exchange) market share data. Ranking based on new business (APE sales on weighted full year premium depending on availability of data).
Indonesia to provide customer service and support, and enhance customer relationships.
21 2018 Asia Asset Management ‘Best of the Best Regional Awards’ – Best Asset Management House.
Products We listen to our customers to help us understand their changing needs and tailor our design of product solutions and services. For example: PRUhealth cancer multi‑care was launched to address the impact of multiple cancer diagnoses in Hong Kong and the region.
Distribution We are well‑positioned in terms of the scale and diversity of our distribution to reach and serve our customers’ needs. At the core of our distribution model is face‑to‑face customer interaction that delivers high‑quality, needs‑based advice.
The US is the world’s largest retirement savings market with approximately 40 million Americans reaching retirement age over the next decade alone. This transition will trigger the need for an unprecedented shift of trillions of dollars from savings accumulation to retirement income generation.
Customers and products Through its distribution partners, Jackson provides products, including variable, fixed and fixed index annuities, which offer Americans the retirement strategies they need. These products offer a range of features: — Variable annuity A Jackson variable annuity, with investment freedom, represents an attractive option for retirees, providing both access to equity market appreciation and guaranteed lifetime income as an add on benefit.
— Fixed index annuity A Jackson fixed index annuity is a guaranteed product with limited market exposure but no actual equity ownership. It is designed to build wealth through a combination of a base crediting rate that is generally lower than a traditional fixed annuity crediting rate, but with the potential for additional upside based upon the performance of the linked index.
— Fixed annuity A Jackson fixed annuity is a guaranteed product designed to build wealth without market exposure, through a crediting rate that is likely to be superior to interest rates offered from banks or money market funds.
Distribution Jackson distributes products in all 50 states of the US and in the District of Columbia. Operations in the state of New York are conducted through a New York subsidiary. Jackson markets its retail products primarily through advice based distribution channels, including independent agents, independent broker‑dealer firms, regional
United States Providing an ageing American population with financial strategies for stable retirements.
— Total IFRS operating profit of £2.2 billion – up 3 per cent1
— Strong separate account asset growth – up 19 per cent1 at US$176.6 billion (£130.5 billion)
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In August 2017, National Planning Holdings (NPH), an affiliate of Jackson, announced the sale of the business of the four firms in its independent broker‑dealer network to LPL Financial LLC (LPL). With the US financial services industry experiencing a time of significant regulatory change and consolidation in the independent broker‑dealer (IBD) sector, Jackson has determined its overall strategy did not include being a consolidator in the retail IBD space. Rather, our primary strategy is to focus on expanding Jackson’s success as the leading manufacturer of retirement income products in the country.
Regulatory landscape The industry has continued to manage through an ever‑changing regulatory landscape. In April 2016, the US Department of Labor (DoL) released a final version of its Fiduciary Duty Rule (Rules), which seeks to eliminate conflicts of interest in investment advice, in order to protect and encourage savings and investment for working Americans. The DoL implemented a partial applicability date of 9 June 2017 where fiduciary advisers have an obligation to give advice that adheres to ‘impartial conduct standards’. These impartial conduct standards require advisers to adhere to a best interest standard when making investment recommendations, charge no more than reasonable compensation for their services, and refrain from making misleading statements. In late November, the DoL announced an 18‑month extension on the full applicability date from 1 January 2018 to 1 July 2019. The DoL intends to complete its review under the Presidential Memorandum, instructing the DoL to re‑examine its fiduciary rule and decide whether to propose further changes, leaving the final form of the Rules unclear.
He is like a family member and confidant; easy to work with and establish goals.
Regardless of the outcome of the Rules, the regulatory disruption has challenged the industry to review the ways in which investment advice is provided to American investors. Manufacturers will need to have the ability to provide product and system adaptations in order to support the success of various distribution partners in their delivery of invaluable retirement strategies that investors need. Because of its strong distribution, leadership in the annuities market, best‑in‑class service and low‑cost efficient operation, Jackson is extremely well positioned to take advantage of this opportunity.
On 22 December, 2017, President Trump signed into law the Tax Cuts and Jobs Act making significant changes to America’s tax code. In 2017, the lowering of the corporate tax rate resulted in a charge for the reduction of Jackson’s deferred tax assets. In the future, the lower rate and the effect of other changes to the calculation of taxable income are expected to lead to higher after‑tax earnings, return on equity and capital generation, all else being equal.
Jackson has implemented changes necessary to meet the requirements of the sections of the fiduciary rules which are effective. Jackson has made and continues to consider changes to its product offerings, entered into new selling agreements with advisory providers, and is working with its distributors to support implementation of the Best Interest Contract Exemption or product changes to the extent those become necessary before July 2019.
Jackson’s competitive strengths are even more critical during periods of disruption. Our best‑in‑class distribution team, our agility and success in launching well designed products, the continued success through many economic cycles of our risk management and hedging programmes and our effective technology platforms and award‑winning customer service will provide Americans with the retirement strategies they so desperately need, and will enable us to be positioned to capture additional growth during times of transition and into the future.
Product launches + Changing the narrative + New selling agreements + Technology integration
www.prudential.co.uk Annual Report 2017 Prudential plc 27 01 G roup overview 02 Strategic report 03 G
United States 2016’. 5 Social Security Administration, Annual Performance Plan for FY 2012, and Revised Final Performance Plan for FY 2011.
6 ©2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar www.AnnuityIntel.com. Total Sales by Contract 3Q YTD 2017. Jackson’s Perspective II for base states ranks #1 and Elite Access for base states ranks #8 for Total VA Sales out of 991 VA contracts with reported sales to Morningstar’s quarterly sales survey as of 3Q YTD 2017.
8 New advisers defined as producers who have not sold Jackson product since 2014.
Distribution Jackson’s distribution teams set us apart from our competitors. Jackson’s wholesaling force is the largest and most productive in the industry, supporting thousands of advisers across multiple channels and distribution outlets.
Jackson continues to invest in technology and innovative products to efficiently and effectively adapt to what our customers and regulatory environment require. Jackson has recently launched an advisory version of our flagship product Perspective II and our innovative Elite Access product to allow for penetration into untapped distribution channels.
Corporate Insight Annuity Monitor Awards for excellence in the online and offline experience offered to prospects, clients and advisers
Approximately 35% of Jackson’s advisory variable annuity sales from new advisers8
Understanding our markets In August 2017, we combined M&G, our international investment management business, with Prudential’s UK and European life insurance business to form M&G Prudential. We also announced a major investment programme in the new combined business’s infrastructure to improve customer service, accelerate product development and widen customer choice.
M&G Prudential serves two of the world’s largest savings and investments markets with asset pools in the UK and Europe of £7 trillion and ¤14 trillion respectively. Across the region, people increasingly need help to meet their long‑term financing goals as responsibility for retirement savings passes from state and employer to the individual. They want easy access to savings and investment solutions, as well as guidance and advice from trusted providers. In addition, persistently low rates of return on bank cash deposits are fuelling demand for investment solutions, whether people are saving for retirement, building a lump sum or protecting their wealth from inflation.
Managing £351 billion of assets1 for over seven million customers in the UK and internationally, M&G Prudential has investment expertise, scale and financial strength and two well‑respected brands – M&G Investments and Prudential UK. With the substantial investment we will be making over the next five years in transforming the business’s operations, including building our digital distribution capability, M&G Prudential is well placed to meet the growing and evolving saving and investment needs of customers across intermediated, institutional and retail direct channels.
Customers Whether we’re helping an individual saver plan for their future with more confidence, or helping a big pension fund to meet its future commitments to pensioners, serving the long‑term interests of our customers is key to the long‑term performance of our business.
United Kingdom and Europe Creating a simple, modern savings and investments business.
— Start of major investment programme to improve customer service, accelerate product development and widen customer choice
— PruFund range reaches £36 billion in customer assets under management, up 46 per cent
— 45 per cent growth in funds under advice from our in house direct advice service, Prudential Financial Planning, to £5.5 billion
www.prudential.co.uk Annual Report 2017 Prudential plc 29 01 G roup overview 02 Strategic report 03 G
In the UK, we manage the savings of direct and intermediated customers through a range of mutual funds. We are also a leading provider of savings and retirement solutions to direct and advised UK customers with a 19 per cent market share in life and pensions retail investments as at end September 2017, including the popular and successful PruFund proposition in a number of different wrappers. We also have a large book of UK customers who own traditional insurance‑based savings products. In continental Europe, where we have a leading position in cross‑border fund distribution with £44 billion2 in assets under management, customers in 17 countries are able to access our investment strategies. Finally, we manage the pension and other long‑term savings of millions of people through our relationships with 794 institutional clients, including 70 per cent of the UK’s 50 largest pension schemes.
We see significant opportunities for continued revenue growth in four of these customer segments, including from the synergies available from the combination of our investment management and savings and retirement solutions businesses. We also see an opportunity to offer customers in our existing book of traditional savings products a new set of propositions as their needs evolve.
The expertise of the business in delivering investment outcomes for all of our customers is demonstrated by the scale of our operations. In total, M&G Prudential fund managers invest over £187 billion of assets on behalf of Prudential policyholders, in addition to the £164 billion of assets for customers invested in M&G mutual funds and institutional strategies. This combined investment footprint bolsters our investment solution capabilities allowing us to build the business around our customers and use our experience and insights to meet their needs.
Of the total of £351 billion in assets under management1 across our entire product range, approximately 60 per cent is now invested in multi‑asset solutions and strategies, including the market leading £36 billion PruFund range and the strongly performing £12 billion Episode Allocation range. This expertise in asset allocation is a key part of our investment capability and has again driven substantial inflows over the last year, as customers across the UK and Europe have continued to seek the diversification and flexibility of a multi‑asset solution.
‘I was in my early 20s when I started investing with M&G
have given me more options in life. Decades on from the first £10 I put in to one of their funds, I really value still being an investor.’
Other products include a range of unit‑linked and collective investments, and within our corporate pension portfolio we continue to facilitate a range of auto‑enrolment services.
For direct investors in the UK and intermediated customers in the UK and internationally, we offer a range of 75 open‑ ended funds. The range offers a broad choice of asset types, geographies and investment strategies to help achieve a diversified portfolio. Our funds generally aim to deliver a rising income stream, long‑term capital growth or a mixture of both, and the vast majority are available in ISA or JISA wrappers to UK direct customers. Almost all of our funds are managed actively for the long term.
This year we added our first open‑ended infrastructure fund to our range, which aims to provide individual investors with both a growing income stream and long‑term capital appreciation through exposure to the equity of global listed infrastructure companies. We also launched the M&G ESG Global High Yield Fund, a sister fund to our £1 billion Global High Yield Bond Fund. The new fund is aimed at meeting the needs of individual investors seeking higher yield.
During 2017, we also launched a further six M&G funds on our new Luxembourg‑ domiciled SICAV platform. As one of the most popular investment vehicles within Europe, the ability to offer SICAV funds will enable us to expand and deepen our highly successful international business further over the coming years. The new platform will also ensure we can continue to serve our European‑based customers regardless of the outcome of Brexit negotiations between the UK and the EU. To that end, in September we announced our plans to migrate assets in four UK‑domiciled funds held by European customers to the SICAV platform during 2018.
For our own life funds as well as for our third‑party institutional clients, we continue to deliver innovative and competitive investment strategies to meet their specific needs. We are leading investors in ‘alternative’ assets such as commercial real estate debt, infrastructure debt and equity, and direct lending. These private assets are increasingly attractive options for investors looking for a yield to match their long‑term pension liabilities, and of course also provide a valuable source of competitively‑priced funding for new housing and infrastructure projects.
Reflecting growing demand from institutional clients for investments which make a positive societal and environmental impact, in 2017 we seeded our first Impact Financing Fund with investment from the Prudential life business and two third‑party investors. Through private and illiquid debt transactions, the fund is already financing projects including a regeneration scheme, green energy and social housing construction.
Mutual fund investment performance, net of fees, weighted by: assets under management4 %
www.prudential.co.uk Annual Report 2017 Prudential plc 31 01 G roup overview 02 Strategic report 03 G
Products Market leading propositions, including PruFund and the M&G Optimal Income Fund, available in a number of saving and investment wrappers; and a range of strategies to help institutional customers meet their long‑term commitments.
Investing circa £250 million of shareholders’ funds into our infrastructure to improve customer service and business efficiency and drive long‑term growth.
+7.2 million customers £351 billion total assets under management1 across a broad range of strategies and asset classes £36 billion PruFund assets under management
In the UK, where both M&G and Prudential products are distributed, we will be building on the great success of the PruFund range by broadening the existing proposition, making full use of M&G and Prudential’s combined distribution network and making our customers’ experiences – whether direct or advised – as good as possible throughout the lifetime of their products. Our digital transformation programme is essential to this, providing the infrastructure necessary to offer good value, state of the art solutions.
With over 15 years of experience in international distribution, offices in 18 countries and a new Luxembourg investment platform, we are well placed to continue to take advantage of the attractive growth opportunities in Europe and beyond. This includes retail distribution in Europe, and in international institutional markets, where our strong track record in private asset origination is a real competitive advantage.
Notes 1 Represents M&G Prudential asset management external funds under management and internal funds included on the M&G Prudential long‑term insurance business balance sheet.
(performance is net of charge). PruFund returns are also net of charge (0.65 per cent).
www.prudential.co.uk Annual Report 2017 Prudential plc 33 01 G roup overview 02 Strategic report 03 G
Sterling continued to strengthen against most of the currencies in our major international markets over 2017. However, on an average basis, sterling exchange rates remain lower than 2016, contributing to a positive effect on the translation of results from our non‑sterling operations in 2017. If sterling exchange rates remain at or above end 2017 levels over the remainder of 2018, this will act to depress our results on translation of our non‑sterling operations in 2018 compared with 2017. To aid comparison of underlying progress, we continue to express and comment on the performance trends in our Asia and US operations on a constant currency basis.
The key financial highlights in 2017 were as follows: — New business profit was 12 per cent higher at £3,616 million (17 per cent on an actual exchange rate basis), underpinned by higher volumes with APE sales up 6 per cent (10 per cent on an actual exchange rate basis). In Asia, new business profit increased 12 per cent primarily as a result of prioritisation of health and protection products and positive pricing actions. Jackson’s new business profit increased by 9 per cent, including the benefit of US tax reform. UK life new business profit grew by 28 per cent, driven by a 29 per cent increase in APE sales, supported by consumer demand for products offering access to our PruFund investment option.
— Asset management net inflows reached record levels, with M&G Prudential asset management reporting external net inflows of £17.3 billion (2016: net outflows of £8.1 billion) reflecting growth across its wholesale/direct and institutional businesses, and Eastspring delivering external net inflows of £3.1 billion (excluding money market funds) (2016: £1.8 billion on an actual exchange rate basis).
— IFRS operating profit based on longer-term investment returns was 6 per cent higher at £4,699 million (10 per cent higher on an actual exchange rate basis). IFRS operating profit from our Asia business grew by 15 per cent to £1,975 million, reflecting continued business momentum. In the US, IFRS operating profit increased by 3 per cent, reflecting mainly growth in fee income on higher asset balances, which outweighed the anticipated reduction in spread earnings. In the UK, M&G Prudential’s total IFRS operating profit was 10 per cent higher than the prior year reflecting 6 per cent growth in the insurance business, with core5 life operating profit stable at £597 million, and record asset management profit of £500 million resulting from the positive impact on earnings of net fund inflows, supportive markets and higher performance fees.
— Total IFRS post tax profit was up 21 per cent at £2,390 million (24 per cent on an actual exchange rate basis) and total EEV after‑tax profit was 87 per cent higher at £8,751 million (94 per cent on an actual exchange rate basis). Total profit includes the impact of short‑term fluctuations in financial assets held to back the commitments that we have made to our customers, and the related liabilities, and are reported outside the operating result which is based on longer‑term investment return assumptions. In 2017 these principally arose within Jackson as discussed later in my report. Total profit after‑tax includes the impact of the US tax reform, which generated an IFRS charge of £445 million from the re‑measurement of US net deferred tax balances following the reduction in the corporate income tax rate and an EEV gain of £390 million which additionally includes the benefit of future profits being taxed at a lower rate. Reflecting this post tax profit, Group IFRS shareholders’ equity was 10 per cent higher at £16.1 billion. Similarly, EEV basis shareholders’ equity was up 15 per cent at £44.7 billion.
Broad-based performance and strong growth in high quality business I am pleased to report that Prudential’s financial performance in 2017 has resulted in all of our 2017 financial objectives being met. Our progress across our KPIs reflects the benefits of our focus on driving growth in high-quality, recurring health and protection and fee business across our geographies, products and distribution channels.
Chief Financial Officer’s report on the 2017 financial performance – Mark FitzPatrick
— Full year ordinary dividend increased by 8 per cent to 47 pence per share, reflecting our 2017 performance and our confidence in the future prospects of our Group.
Amortisation of acquisition accounting adjustments (63) (76) 17 (79) 20 Profit (loss) attaching to disposal of businesses 223 (227) n/a (244) n/a
IFRS operating profit based on longer-term investment returns 2017 total IFRS operating profit increased by 6 per cent (10 per cent on an actual exchange rate basis) to £4,699 million, with increased contributions from all of our core business units.
Asia total operating profit of £1,975 million was 15 per cent higher than the previous year (20 per cent on an actual exchange rate basis). IFRS operating profit from life insurance operations increased 15 per cent to £1,799 million (20 per cent on an actual exchange rate basis), reflecting the continued growth of our in‑force book of recurring premium business, with renewal insurance premiums9 reaching £11.6 billion (2016: £9.5 billion on a constant exchange rate basis). Insurance margin was up 21 per cent, reflecting our continued focus on health and protection business. At a country level, we have seen improvement in all of our markets, with double‑digit growth in IFRS operating profit in eight out of 12, led by Hong Kong and China (both increasing 38 per cent). Including money market funds and the assets managed for internal life operations, Eastspring’s total assets under management increased to £138.9 billion (2016: £117.9 billion on an actual exchange rate basis), while the cost‑income ratio was stable at 56 per cent (2016: 56 per cent), driving an 18 per cent increase in IFRS operating profit to £176 million (2016: £149 million).
We took a number of actions during the year to optimise our asset portfolios and capital position, which generated profit of £276 million (2016: £332 million). Of this amount £31 million related to profit from longevity risk transactions (2016: £197 million) and £245 million from the effect of repositioning the fixed income asset portfolio (2016: £135 million). Favourable longevity assumption changes, reflecting updated actuarial mortality tables, contributed a further £204 million. This was offset partly by an increase of £225 million (2016: £175 million) in the provision related to the potential costs and related potential redress of reviewing internally vesting annuities sold without advice after 1 July 2008. The provision does not include potential insurance recoveries of up to £175 million.
Focusing on business supported by shareholder capital, which generates the majority of the life profit, in 2017 net flows into our businesses were overall positive at £2.7 billion driven by our US and Asian operations, as we continue to focus on both retaining our existing customers and attracting new business to drive long‑term value creation. In the UK our shareholder liabilities includes the run‑off of the in‑force annuity portfolio following our effective withdrawal from selling new annuity business. This has been more than offset by inflows into the with‑profits funds of £3.5 billion. Positive investment markets, offset partly by currency effects as sterling has strengthened over the period, increased liabilities by £5.1 billion. In total, business flows and market movements have increased shareholder‑backed policyholder liabilities from £266.6 billion to £274.5 billion.
Asia £1,975m, +15% (+20% AER) US £2,224m, +3% (+9% AER) UK and Europe £1,378m, +10% Others8 £(878)m, ‑26%
Policyholder liabilities in our with‑profits business have increased by 13 per cent to £161.1 billion reflecting the growing popularity of our participating funds in Asia and PruFund in the UK, as consumers seek protection from some of the short‑term ups and downs of direct stock market investments by using an established smoothing process. Across our Asia and UK operations, net liability flows increased to £8.0 billion. As returns from these funds are smoothed and shared with customers, the emergence of shareholder profit is more gradual. This business, nevertheless, remains an important source of future shareholder value.
Asia life US life UK and Europe life Market and other movements
www.prudential.co.uk Annual Report 2017 Prudential plc 37 01 G roup overview 02 Strategic report 03 G
In 2017, average assets under management in our asset management businesses in the UK and Asia benefited from positive net inflows of assets and favourable markets, driving higher fee revenues. Reflecting this, IFRS operating profit derived from asset management activities in M&G Prudential increased by 18 per cent to £500 million and in Eastspring by 18 per cent (up 25 per cent on an actual exchange rate basis) to £176 million.
Eastspring also attracted good levels of external net inflows during the year across its equity, fixed income and balanced fund range, totalling £3.1 billion, excluding money market funds (2016: £1.8 billion on an actual exchange rate basis). Overall external assets under management increased by 22 per cent to £46.6 billion, combined with higher internal assets under management and money market funds lifted Eastspring’s total assets under management to £138.9 billion.
Short‑term fluctuations in investment returns on shareholder‑backed business represent the most significant component of non‑operating items and are discussed further below.
In the US, Jackson provides certain guarantees on its annuity products, the value of which would rise typically when equity markets fall and long‑term interest rates decline. Jackson includes the expected cost of hedging when pricing its products and charges fees for these guarantees which are used, as necessary, to purchase downside protection in the form of options and futures to mitigate the effect of equity market falls, and swaps and swaptions to cushion the impact of declines in long‑term interest rates. Under IFRS, accounting for the movement in the valuation of these derivatives, which are all fair valued, is asymmetrical to the movement in guarantee liabilities, which are not fair valued in all cases. Jackson designs its hedge programme to protect the capital and economics of the business from large movements in investment markets and accepts the variability in accounting results. The negative short‑term fluctuations in investment returns on shareholder‑backed business of £1,568 million in the year are attributable mainly to the net value movement in the period of the hedge instruments held to manage market exposures and reflect the positive equity market performance in the US during the period.
www.prudential.co.uk Annual Report 2017 Prudential plc 39 01 G roup overview 02 Strategic report 03 G
Asia £3,805m, +1% (+6% AER) US £1,662m, +1% (+6% AER) UK and Europe £1,491m, +29%
In Asia, new business profit was 12 per cent higher at £2,368 million (17 per cent on an actual exchange rate basis), primarily reflecting the beneficial impact of our strategic emphasis on increasing sales from health and protection business and pricing actions.
In Hong Kong new business profit has increased by 8 per cent as we continue to focus on driving growth in health and protection business. This targeted shift to higher margin, but lower case size protection business, aligned with the de‑emphasis of broker sales and the expected moderation in the level of sales from Mainland China has, as we reported previously, resulted in a 14 per cent reduction in Hong Kong APE sales.
Outside Hong Kong, new business profit increased by 20 per cent, in line with APE sales which were up 17 per cent. Our performance remains broad‑based, with double digit growth in new business profit across both agency and bancassurance channels. In China, new business profit more than doubled, driven by higher sales and a significant uplift in regular premium health and protection business from our increased scale and productivity in the agency channel, together with a positive contribution from our bancassurance partners. In Singapore, new business profit increased by 22 per cent supported by APE sales growth of 21 per cent, reflecting growth across both agency and bancassurance channels. Indonesia’s APE sales grew 2 per cent while new business profit declined 5 per cent due to product mix.
Underlying free surplus generated from in‑force life business and asset management 4,553 4,469 2 4,633 (2)
Market related movements, timing differences and other non‑operating movements (1,012) (432)
Free surplus generation is the financial metric we use to measure the internal cash generation of our business operations and is based on the capital regimes which apply locally in the various jurisdictions in which our life businesses operate. 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 operating profit for the period.
We drive free surplus generation by targeting markets and products that have low capital strain, high‑return and fast payback profiles and by delivering both good service and value to improve customer retention. Our ability to generate both growth and cash is a distinctive feature of Prudential.
Although new business profit increased by 12 per cent, the amount of free surplus invested in writing new life business in the period was lower at £913 million (2016: £942 million) reflecting a greater proportion of sales in Asia and the UK where strain is lower, and a higher proportion of variable annuity premium being allocated to the separate account in the US.
After funding cash remittances from the business units to the Group, recognition of the profit attaching to the disposal of businesses, and other movements, which includes adverse currency effects and the impact of US tax reform, the closing value of free surplus in our life and asset management operations was £7.6 billion at 31 December 2017.
We continue to manage cash flows across the Group with a view to achieving a balance between ensuring sufficient remittances are made to service central requirements (including paying the external dividend) and maximising value to shareholders through retention and reinvestment of capital in business opportunities.
Net cash remitted by business units: UK and Europe 643 590 Other UK (including Prudential Capital) 25 192
Cash remitted to the Group in 2017 was used to meet central costs of £470 million (2016: £416 million) and pay the 2016 second interim and 2017 first interim dividends respectively. These movements and other corporate cash flows, including a net reduction in core structural borrowings and the impact of currency movements, led to holding company cash decreasing from £2,626 million to £2,264 million over 2017.
Non‑operating items: Short‑term fluctuations on investment returns 2,111 (507) 516 (567) 472 Effect of changes in economic assumptions (102) (60) (70) (54) (89) Mark to market value movements on core structural borrowings (326) (4) (8,050) (4) (8,050) Impact of US tax reform 390 – n/a – n/a Profit (loss) attaching to disposal of businesses 80 (410) n/a (445) n/a
Basic earnings per share based on post‑tax operating profit 257.0 214.7 20 224.3 15 Basic earnings per share based on post‑tax total profit 340.9 176.4 93 182.5 87
EEV operating profit On an EEV basis, Group post‑tax operating profit based on longer‑term investment return increased by 15 per cent (up 20 per cent on an actual exchange rate basis) to £6,598 million in 2017.
In Asia, EEV life operating profit was up 15 per cent to £3,705 million, reflecting growth in new business profit of 12 per cent at £2,368 million. In‑force profit was 22 per cent higher at £1,337 million reflecting the increased value of in‑force business and positive assumption changes and experience as the business continues to grow with discipline.
Capital position, financing and liquidity Capital position Analysis of movement in Group shareholder Solvency II surplus20 2017 £bn 2016 £bn
Solvency II surplus at 1 January 12.5 9.7 Operating experience 3.6 2.7 Non‑operating experience (including market movements)* (0.6) (1.1) Other capital movements
Subordinated debt (redemption)/issuance (0.2) 1.2 Foreign currency translation impacts (0.7) 1.6 Dividends paid (1.2) (1.3)
Estimated Solvency II surplus at 31 December 13.3 12.5 * 2017 includes a £(0.6) billion reduction in deferred tax assets following US tax reform.
Financing and liquidity The Group had central cash resources of £2.3 billion at 31 December 2017 (31 December 2016: £2.6 billion). Total core structural borrowings reduced by £0.5 billion, from £6.8 billion to £6.3 billion, with the issue of US$750 million (£547 million at 31 December 2017) 4.875 per cent tier 2 perpetual subordinated debt in October 2017 being more than offset by the redemption of US$1 billion (£741 million at 31 December 2017) 6.5 per cent tier 2 perpetual subordinated debt in December 2017.
In addition to its net core structural borrowings of shareholder‑financed operations set out above, the Group also has access to funding via the money markets and has in place an unlimited global commercial paper programme. As at 31 December 2017, we had issued commercial paper under this programme totalling US$650 million, to finance non‑core borrowings.
Prudential’s holding company currently has access to £2.6 billion of syndicated and bilateral committed revolving credit facilities provided by 19 major international banks, expiring in 2022. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 31 December 2017. The medium‑term note programme, the US shelf programme (platform for issuance of SEC registered public bonds in the US market), 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 flexible funding capacity.
Market to market value movements on Jackson assets backing surplus and required capital – – 40 (11)
IFRS basis of value of net core structural borrowings Mark to market value Gearing ratio*
* Net core structural borrowings as proportion of IFRS shareholders’ funds plus net debt, as set out in note II(d) of the Additional unaudited financial information.
www.prudential.co.uk Annual Report 2017 Prudential plc 45 01 G roup overview 02 Strategic report 03 G
In preparation for the UK demerger process, and to align the ownership of the Group’s businesses with their operating structures, Prudential plc intends to transfer the legal ownership of its Hong Kong insurance subsidiaries from The Prudential Assurance Company Limited (M&G Prudential’s UK regulated insurance entity) to Prudential Corporation Asia Limited, which is expected to complete by the end of 2019.
Based on asset and liability values as at 31 December 2017, the transaction is estimated to give rise to a pre‑tax IFRS loss of around £500 million in the first half of 2018, alongside the de‑risking being achieved.
The estimated pro forma impact on the Group shareholder Solvency II capital position, assuming that these actions had both been completed as at 31 December 2017, is an increase in surplus of £0.3 billion and an increase in the shareholder solvency ratio of 6 percentage points.
* The pro forma estimate assumes that the partial sale of the UK annuity portfolio and the transfer of Prudential plc’s Hong Kong subsidiaries to Asia had both been completed as at 31 December 2017.
On the same basis, the estimated pro forma impact on the shareholder Solvency II capital position of the UK regulated insurance entity, The Prudential Assurance Company Limited, is provided in the table below. This pro forma solvency position reflects the reduced risk exposures in the UK insurance entity after the partial annuity sale and Hong Kong transfer.
Pro forma estimated The Prudential Assurance Company Limited shareholder Solvency II capital position
Entrance into Nigeria In July 2017 the Group acquired a majority stake in Zenith Life of Nigeria and formed exclusive bancassurance partnerships with Zenith Bank in Nigeria and Ghana. The acquisition and bancassurance partnerships will see Prudential enter the market in Nigeria, Africa’s largest economy, with a population of over 180 million. This expands Prudential’s regional platform in Africa following the launch of businesses in Ghana and Kenya in 2014, in Uganda in 2015 and Zambia in 2016.
The Group’s dividend policy remains unchanged. The Board will maintain focus on delivering a growing ordinary dividend. In line with this policy, Prudential aims to grow the ordinary dividend by 5 per cent per annum. The potential for additional distributions will continue to be determined after taking into account the Group’s financial flexibility across a broad range of financial metrics and an assessment of opportunities to generate attractive returns by investing in specific areas of the business28.
5 Core refers to the underlying profit of the UK and Europe insurance business excluding the effect of, for example, management actions to improve solvency and material assumption changes. Details of these are set out in note I(d) of the Additional unaudited financial information.
10 Includes Group’s proportionate share of the liabilities and associated flows of the insurance joint ventures and associates in Asia.
11 Defined as movements in shareholder‑backed policyholder liabilities arising from premiums (net of charges), surrenders/withdrawals, maturities and deaths.
14 For our asset management business the level of funds managed on behalf of third parties, which are not therefore recorded on the balance sheet, is a driver of profitability. We therefore analyse the movement in the funds under management each period, focusing between those which are external to the Group and those held by the insurance business and included on the Group balance sheet. This is analysed in note II(b) of the Additional unaudited financial information.
Company Limited are Prudential General Insurance Hong Kong Limited, Prudential Hong Kong Limited, Prudential International Assurance plc and Prudential Pensions Limited.
25 Net of related charges to deferred acquisition costs and tax.
26 Closing IFRS shareholders’ funds divided by issued shares, as set out in note II(e) of the Additional unaudited financial information. Closing EEV shareholders’ funds divided by issued shares, as set out in note II(n) of the Additional unaudited financial information.
28 Refer to note 11 on the parent company financial statements for further detail on the distributable profits of Prudential plc.
30 Relates to £12.0 billion of IFRS shareholder annuity liabilities, valued as at 31 December 2017.
As in previous years, we continue to maintain a sustained focus on managing prevailing market conditions and macroeconomic uncertainty arising from the global environment. Looking internally, in August 2017 we announced our intention to combine M&G and our UK life business to form M&G Prudential, allowing us better to leverage our scale and capabilities. Change inherently carries risk, but we will manage and minimise this appropriately in order to provide better outcomes for our customers.
In addition to our risk committees, there are various executive risk forums to ensure risk issues are shared and considered across the Group. These are led by the Group Executive Risk Committee, an advisory committee to the Group Chief Risk Officer which is supported by a number of sub‑committees, including security and information security where specialist skills and knowledge are required.
www.prudential.co.uk Annual Report 2017 Prudential plc 49 01 G roup overview 02 Strategic report 03 G
The Framework requires all our businesses and functions to establish processes for identifying, evaluating, managing and reporting of the key risks faced by the Group – the ‘Risk Management Cycle’ (see below) is based on the concept of the ‘three lines of defence’, comprising risk taking and management, risk control and oversight, and independent assurance.
During 2017 we made a number of enhancements to our policies and processes. These included changes to our processes around new product approvals, management of our critical outsourcing arrangements and increased oversight of model risk across the Group. A new framework was developed to support the monitoring and reporting of risks associated with material transformation programmes, and work continued over the year on the Group’s risk culture.
Group risk appetite is set with reference to economic and regulatory capital, liquidity and earnings volatility, as well as for our major risks, and is aimed at ensuring that we take an appropriate level of aggregate risk. It covers risks to shareholders, including those from participating and third‑party business.
There are core risk policies for credit, market, insurance, liquidity and operational risks and a number of internal control policies covering internal model risk, underwriting, dealing controls and tax risk management. They form part of the Group Governance Manual, which was developed to make a key contribution to the sound system of internal control that we maintain in line with the UK Corporate Governance Code and the Hong Kong Code on Corporate Governance Practices. Group Head Office and business units must confirm on an annual basis that they have implemented the necessary controls to evidence compliance with the Group Governance Manual.
Risk standards The Group‑wide Operating Standards provide supporting detail to the higher level risk policies. In many cases they define the minimum requirements for compliance with Solvency II regulations which in some areas are highly prescriptive. The standards are more detailed than policies.
Our risk culture Culture is a strategic priority of the Board who recognise the importance of good culture in the way that we do business. Risk culture is a subset of broader organisational culture, which shapes the organisation‑wide values that we use to prioritise risk management behaviours and practices.
During 2017 a risk culture assessment was performed across the Group. The assessment allowed us to compare the Group’s risk culture against best practice behaviours, identify any areas which need improvement and provide high‑level industry benchmarking and peer comparison. The Group Risk Committee also has a key role in providing advice to the Remuneration Committee on risk management considerations to be applied in respect of executive remuneration.
Our Code of Conduct and our Group Governance Manual include a series of guiding principles that govern the day‑to‑day conduct of all our people and any organisations acting on our behalf. This is supported by specific risk policies which require that we act in a responsible manner. This includes, but is not limited to, policies on anti‑money laundering, financial crime and anti‑bribery and corruption. Our Group outsourcing and third‑party supply policy ensures that human rights and modern slavery considerations are embedded within all of our supplier and supply chain arrangements. We also have embedded procedures to allow individuals to speak out safely and anonymously against unethical behaviour and conduct.
In accordance with provision C.2.1 of the UK Code, the Directors perform a robust assessment of the principal risks facing the Company through the Group‑wide risk identification process, Group ORSA report, and the risk assessments done as part of the business planning review, including how they are managed and mitigated.
Reverse stress testing, which requires us to ascertain the point of business model failure, is another tool that helps us to identify the key risks and scenarios that may have a material impact on the Group.
Our emerging risk management process identifies potentially material risks which have a high degree of uncertainty around timing, magnitude and propensity to evolve. In 2017 we enhanced our Emerging Risk Framework to bring it closer to the Group’s risk management activity. This included a redefinition of the relationship between emerging and emerged risks, enabling a consistent framework for evaluating and escalating sufficiently developed emerging risks for risk management activity. The Group holds emerging risk sessions over the year to identify emerging risks which includes input from local subject matter and industry experts. We maintain contacts with thought leaders and peers to benchmark and refine our process.
Risk measurement and assessment All identified risks are assessed based on an appropriate methodology for that risk. All quantifiable risks which are material and mitigated by holding capital are modelled in the Group’s internal model, which is used to determine capital requirements under Solvency II and our own economic capital basis. Governance arrangements are in place to support the internal model, including independent validation and process and controls around model changes and limitations.
These risk policies define: — The Group’s risk appetite in respect of material risks, and the framework under which the Group’s exposure to those risks is limited; — The processes to enable Group senior management to effect the measurement and management of the Group material risk profile in a consistent and coherent way; and
Risk identification covers Group‑wide: — Top down risk identification — Bottom up risk identification — Emerging risk identification
Material risks which are modelled are included in capital models, including ECap.
Risk processes that support the management and controlling of risk exposures include: — Risk appetite and limits — Financial incidents procedures — Large risk approval process — Global counterparty limit framework — Own risk and solvency assessment — Reverse stress testing
Credit risk Is the potential for reduced value of our investments due to the uncertainty around investment returns arising from the potential for defaults of our investment counterparties. Invested credit risk arises from our asset portfolio. We increase sector focus where necessary.
In the UK, exposure arises from the valuation of the proportion of the with‑profits fund’s future profits which is transferred to the shareholders (future transfers), which is dependent on equity, property and bond values.
The processes that determine the price of our products and reporting the results of our long‑term business operations require us to make a number of assumptions. Where experience deviates from these assumptions our profitability may be impacted.
For M&G Prudential the most material insurance risk is longevity risk driven by legacy annuity business.
At Jackson, the most material insurance risk is policyholder behaviour risk, including persistency. This impacts the profitability of the variable annuity business and influenced by market performance and the value of policy guarantees.
The number of regulatory changes underway across Asia, in particular those focusing on consumer protection means that regulatory change in the region is considered a key risk.
The insurance risks that we are exposed to by virtue of our products include longevity risk (policyholders living longer than expected); mortality risk (policyholders with life protection dying); morbidity risk (policyholders with health protection becoming ill) and persistency risk (customers lapsing their policies, and a type of policyholder behaviour risk).
Across our business units, some insurance risks are more material than others.
We also face operational risks through business transformation; introducing new products; new technologies; engaging in third party relationships; and entering into new markets and geographies. Implementing our business strategy requires interconnected change initiatives across the Group. The pace of change further adds to the complexity of our operational risk profile.
Information security risk is a significant consideration within operational risk, including both the continuously evolving risk of malicious attack on our systems as well as risks relating to data security and integrity and network disruption. The size of Prudential’s IT infrastructure and network, our move toward digitalisation and the increasing number of high profile cyber security incidents across industries means that this risk will continue to be an area of high focus and is one considered to be material to the Group.
With respect to investment risk, equity and property risk arises from our holdings of equity and property investments, the prices of which can change depending on market conditions.
The valuation of our assets (particularly the bonds that we invest in) and liabilities are also dependent on market interest rates and exposes us to the risk of those moving in a way that is detrimental for us.
Our main investment risk exposure arises from the portion of the profits from the M&G Prudential with‑profits fund to which we are entitled to receive; the value of the future fees from our fee‑earning products in our Asia business; and from the asset returns backing Jackson’s variable annuities business.
Our interest rate risk is driven in the UK business by our need to match the duration of our assets and liabilities; from the guarantees of some non unit‑linked investment products in Asia; and the cost of guarantees in Jackson’s fixed, fixed index and variable annuity business.
In Asia, our shareholder exposure to equity price movements results from unit‑linked products, where our fee income is linked to the market value of the funds under management. Further exposure arises from with‑profits businesses where bonuses declared are based broadly on historical and current rates of return from our investment portfolios which include equities.
Interest rate risk arises in M&G Prudential’s insurance business from the need to match cash payments to meet annuity obligations with the cash we receive from our investments. To minimise the impact on our profit, we aim to match the duration (a measure of interest rate sensitivity) of assets and liabilities as closely as possible and the position is monitored regularly. Under the Solvency II regulatory regime, additional interest rate risk results from the way the balance sheet is constructed, such as the requirement for us to include a risk
alue (EEV ) basis results 07 A dditional inform ation margin. The UK business assesses on a continual basis the need for any derivatives in managing its interest rate sensitivity. The with‑profits business is exposed to interest rate risk because of underlying guarantees in some of its products. Such risk is borne largely by the with‑profits fund itself but shareholder support may be required in extreme circumstances where the fund has insufficient resources to support the risk.
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. We accept the foreign exchange risk this can produce when reporting our Group balance sheet and income statement. In cases where a surplus arises in an overseas operation which is to be used to support Group capital, or where a significant cash payment is due from an overseas subsidiary to the Group, this foreign exchange exposure is hedged where we believe it is favourable economically to do so. Generally, we do not have appetite for significant direct shareholder exposure to foreign exchange risks in currencies outside of the countries in which we operate, but we do have some appetite for this on fee income and on non‑sterling investments within the with‑profits fund. Where foreign exchange risk arises outside our appetite, currency borrowings, swaps and other derivatives are used to manage our exposure.
Credit risk We invest in bonds that provide a regular, fixed amount of interest income (fixed income assets) in order to match the payments we need to make to policyholders. We also enter into reinsurance and derivative contracts with third parties to mitigate various types of risk, as well as holding cash deposits at certain banks. As a result, we are exposed to credit risk and counterparty risk across our business.
Credit risk also arises in the general account of the Jackson business, where £35.4 billion of fixed income assets are held to support shareholder liabilities including those from our fixed annuities, fixed index annuities and life insurance products.
Bank debt exposure and counterparty credit risk (Audited) Our exposure to banks is a key part of our core investment business, as well as being important for the hedging and other activities we undertake to manage our various financial risks. Given the importance of our relationship with our banks, exposure to the sector is considered a material risk for the Group with an appropriate level of management information provided to the Group’s risk committees and the Board.
Our exposure to derivative counterparty and reinsurance counterparty credit risk is managed using an array of risk management tools, including a comprehensive system of limits.
At 31 December 2017, shareholder exposures by rating1 and sector are shown below: — 95 per cent of the shareholder portfolio is investment grade rated. In particular, 69 per cent of the portfolio is rated A and above; and
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Liquidity risk Our liquidity risk arises from the need to have sufficient liquid assets to meet policyholder and third‑party payments as they fall due. This incorporates the risk arising from funds composed of illiquid assets and results from a mismatch between the liquidity profile of assets and liabilities. Liquidity risk may impact on market conditions and valuation of assets in a more uncertain way than for other risks like interest rate or credit risk. It may arise, for example, where external capital is unavailable at sustainable cost, increased liquid assets are required to be held as collateral under derivative transactions or redemption requests are made against Prudential external funds.
We have significant internal sources of liquidity, which are sufficient to meet all of our expected cash requirements for at least 12 months from the date the financial statements are approved, without having to resort to external sources of funding. In total, the Group has £2.6 billion of undrawn committed facilities that we can make use of, expiring in 2022. We have access to further liquidity by way of the debt capital markets, and also have in place an extensive commercial paper programme and have maintained a consistent presence as an issuer in this market for the last decade.
Liquidity uses and sources are assessed at a Group and business unit level under both base case and stressed assumptions. We calculate a Liquidity Coverage Ratio (LCR) under stress scenarios as one measure of our liquidity risk, and this ratio and the liquidity resources available to us are monitored regularly and are assessed to be sufficient.
Our risk management and mitigation of liquidity risk include: — Our liquidity risk policy; — The risk appetite statements, limits and triggers that we have in place; — The monitoring of liquidity risk we perform through regular management information to committees and the Board; — Our Liquidity Risk Management Plan, which includes details of the Group Liquidity Risk Framework as well as gap analysis of our liquidity risks and the adequacy of our available liquidity resources under normal and stressed conditions; — Regular stress testing; — Our established contingency plans and identified sources of liquidity; — Our ability to access the money and debt capital markets; — Regular deep dive assessments; and
The principal drivers of the Group’s insurance risks are persistency and morbidity risk in the Asia business; longevity risk in the UK legacy business of M&G Prudential; and policyholder behaviour risks in Jackson.
We manage and mitigate our insurance risk using the following: — Our insurance and underwriting risk policies; — The risk appetite statements, limits and triggers we have in place; — Using longevity, morbidity and persistency assumptions that reflect recent experience and expectation of future trends, and industry data and expert judgement where appropriate; — Using reinsurance to mitigate longevity and morbidity risks; — Ensuring appropriate medical underwriting when policies are issued and appropriate claims management practices when claims are received in order to mitigate morbidity risk; — Maintaining the quality of our sales processes and using initiatives to increase customer retention in order to mitigate persistency risk; — Using product re‑pricing and other claims management initiatives in order to mitigate medical expense inflation risk; and
We continue to conduct research into longevity risk using both experience from our annuity portfolio and industry data. Although the general consensus in recent years is that people are living longer, there is considerable volatility in year‑on‑year longevity experience, which is why we need expert judgement in setting our longevity basis.
Our morbidity risk is mitigated by appropriate underwriting when policies are issued and claims are received. Our morbidity assumptions reflect our recent experience and expectation of future trends for each relevant line of business.
In Asia, we write significant volumes of health protection business, and so a key assumption for us is the rate of medical inflation, which is often in excess of general price inflation. There is a risk that the expenses of medical treatment increase more than we expect, so the medical claim cost passed on to us is higher than anticipated. Medical expense inflation risk is best mitigated by retaining the right to re‑price our products each year and by having suitable overall claim limits within our policies, either limits per type of claim or in total across a policy.
Our persistency assumptions reflect similarly a combination of recent past experience for each relevant line of business and expert judgement, especially where a lack of relevant and credible experience data exists. Any expected change in future persistency is also reflected in the assumption. Persistency risk is mitigated by appropriate training and sales processes and managed locally post‑sale through regular experience monitoring and the identification of common characteristics of business with high lapse rates. Where appropriate, we make allowance for the relationship (either assumed or observed historically) between persistency and investment returns and account for the resulting additional risk. Modelling this dynamic policyholder behaviour is particularly important when assessing the likely take‑up rate of options embedded within certain products. The effect of persistency on our financial results can vary but depends mostly on the value of the product features and market conditions.
The performance of our core business activities places reliance on the IT infrastructure that supports day‑to‑day transaction processing. Our IT environment must also be secure and we address an increasing cyber risk threat as our digital footprint increases – see separate Cyber risk section below. The risk that our IT infrastructure does not meet these requirements is a key area of focus for us, particularly the risk that legacy infrastructure supporting core activities/ processes affects business continuity or impacts on business growth.
Operational challenges also exist in keeping pace with regulatory changes. This requires implementing processes to ensure we are, and remain, compliant on an ongoing basis, including regular monitoring and reporting. The high rate of global regulatory change, in an already complex regulatory landscape, increases the risk of non‑compliance due to a failure to identify, interpret correctly, implement and/or monitor regulatory compliance. See Global regulatory and political risk section below. Legislative developments over recent years, together with enhanced regulatory oversight and increased capability to issue sanctions, have resulted in a complex regulatory environment that may lead to breaches of varying magnitude if the Group’s business‑as‑usual operations are not compliant. As well as prudential regulation, we focus on conduct regulation, including those related to sales practice and anti‑money laundering, bribery and corruption. We have a particular focus on regulations related to the latter in newer/ emerging markets.
The business environment we operate in has become increasingly complex over the years. The political, environmental, societal, legal and economic landscape is highly dynamic and uncertain. Changes and developments on the horizon may result in emerging risks to us which are monitored under our Emerging Risk Framework.
These include: — Investment risk in the form of ‘transition risk’. This is the risk that an abrupt, unexpected tightening of carbon emission policies lead to a disorderly re‑pricing of carbon‑intensive assets; — Liability risk, if the Group is unable to demonstrate sufficiently that we have acted to mitigate our exposure to climate change risk; and
The Group has established a Group‑wide Responsible Investment Advisory Committee with designated responsibility to oversee Prudential’s responsible investment activities as both asset owners and asset managers.
Physical impacts of climate change could also arise, driven by specific climate‑related events such as natural disasters. These impacts are mitigated through our crisis management and disaster recovery plans.
Further information on the climate risks facing our business and how we are managing and responding to these can be found in the Corporate responsibility review on page 77.
Strategic risk requires a forward‑looking approach to risk management. A key part of our approach are the risk assessments performed as part of the Group’s annual strategic planning process, which supports the identification of potential future threats and the initiatives needed to address them, as well as competitive opportunities. We also assess the impact on the Group’s businesses and our risk profile to ensure that strategic initiatives are within the Group’s overall risk appetite.
Outputs from these processes and activities performed by individual business units are monitored by the Group Risk function, who provide an aggregated view of risk profile across the business to the Group Risk Committee and Board.
These core framework components are embedded across the Group via the Group Operational Risk Policy and Standards documents, which sets out the key principles and minimum standards for the management of operational risk across the Group.
These policies and standards include subject matter expert‑led processes that are designed to identify, assess, manage and control operational risks, including the application of: — A transformation risk framework that assesses, manages and reports on the end‑to‑end transformation lifecycle, project prioritisation and the risks, interdependencies and possible conflicts arising from a large portfolio of transformation activities; — Internal and external review of cyber security capability; — Regular updating and testing of elements of disaster‑recovery plans and the Critical Incident Procedure process; — Group and business unit‑level compliance oversight and testing in respect of adherence with in‑force regulations; — Regulatory change teams in place assist the business in proactively adapting and complying with regulatory developments; — A framework in place for emerging risk identification and analysis in order to capture, monitor and allow us to prepare for operational risks that may crystallise beyond the short‑term horizon; — Corporate insurance programmes to limit the financial impact of operational risks; and
On 29 March 2017 the UK submitted formal notification of its intention to withdraw from the EU. In December 2017, agreement was reached between the UK and EU to progress negotiations onto transitional arrangements and the future trading relationship. The outcome of negotiations remains highly uncertain. If no formal withdrawal agreement is reached then it is expected the UK’s membership of the EU will terminate automatically two years after the submission of the notification.
The ongoing uncertainty during the remainder of the negotiation period and the potential for a disorderly exit from the EU by the UK without a negotiated agreement may increase volatility in the markets where we operate, creating the potential for a general downturn in economic activity and for falls in interest rates in some jurisdictions due to easing of monetary policy and investor sentiment.
As a Group, our diversification by geography, currency, product and distribution should reduce some of the potential impact. We have UK‑domiciled operations including M&G Prudential, and due to the geographical location of both its businesses and its customers, its insurance and the fund management operations have most potential to be affected by the UK’s exit. The extent of the impact will depend in part on the nature of the arrangements that are put in place between the UK and the EU. Contingency plans were developed ahead of the referendum by business units and operations that may be impacted immediately by a vote to withdraw the UK from the EU, and these plans have been enacted since the referendum result. We have since also undertaken significant work to ensure that our business, and in particular our customer base, is not unduly affected by the decision of the UK to exit from the EU.
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National and regional efforts to curb systemic risk and promote financial stability are also underway in certain jurisdictions in which Prudential operates, including the Dodd‑Frank Wall Street Reform and Consumer Protection Act in the US, the work of the Financial Stability Board (FSB) on Global Systemically Important Insurers (G‑SIIs) and the Insurance Capital Standard being developed by the International Association of Insurance Supervisors (IAIS). There are also a number of ongoing policy initiatives and regulatory developments that are having, and will continue to have, an impact on the way Prudential is supervised. These include addressing Financial Conduct Authority (FCA) reviews, ongoing engagement with the Prudential Regulation Authority (PRA), and the work of the Financial Stability Board (FSB) and standard‑setting institutions such as the IAIS. Decisions taken by regulators, including those related to solvency requirements, corporate or governance structures, capital allocation and risk management may have an impact on our business.
We continue to engage with the IAIS on developments in capital requirements for groups with G‑SII designation. The regime introduces capital requirements in the form of a Higher Loss Absorption (HLA) requirement. This requirement was initially intended to come into force in 2019 but has been postponed until 2022. The HLA is also now intended to be based on the Insurance Capital Standard, which is being developed by the IAIS as the capital requirements under its Common Framework (ComFrame). This framework is focused on the supervision of Internationally Active Insurance Groups (IAIGs) and will establish a set of common principles and standards designed to assist regulators in addressing risks that arise from insurance groups with operations in multiple jurisdictions. As part of this, work is underway to develop a global Insurance Capital Standard (ICS) that is intended to apply to Internationally Active Insurance Groups.
The IAIS has announced that the implementation of ICS will be conducted in two phases – a five‑year monitoring phase followed by an implementation phase. During the monitoring phase, IAIGs will be required to report on ICS to the group‑ wide supervisor on a confidential basis, although these results will not be used as a basis to trigger supervisory action.
The IAIS’s Insurance Core Principles, which provide a globally‑accepted framework for the supervision of the insurance sector and ComFrame evolution, are expected to create continued development in both prudential and conduct regulations over the next two to three years.
A degree of uncertainty as to the timing, status and final scope of these key US reforms exists. Our preparations to manage the impact of these reforms will continue while we await further clarification.
In May 2017, the International Accounting Standards Board (IASB) published IFRS 17 which will introduce fundamental changes to the statutory reporting of insurance entities that prepare accounts according to IFRS from 2021. The Group is reviewing the complex requirements of the standard and is considering its potential impact. This is expected to, among other things, include altering the timing of IFRS profit recognition, and the implementation of the standard is likely to require changes to the Group’s IT, actuarial and finance systems.
Cyber risk Cyber risk remains an area of heightened focus after a number of recent high profile attacks and data losses. The growing maturity and industrialisation of cyber‑ criminal capability, together with an increasing level of understanding of complex financial transactions by criminal groups, are two reasons why risks to the financial services industry are increasing. Disruption to the availability, confidentiality and integrity of our IT systems could make it difficult to recover critical services, result in damage to assets and compromise the integrity and security of data. This could result in significant impacts to business continuity, our customer relationship and our brand reputation. Developments in data protection worldwide (such as the EU General Data Protection Regulation that comes into force in May 2018) may increase the financial and reputational implications for Prudential of a breach of its (or third‑party suppliers’) IT systems.
Given this, cyber security is seen as a key risk for the Group and is an area of increased scrutiny by global regulators. The threat landscape is continuously evolving, and our assessment is that the systemic risk from untargeted but sophisticated and automated attacks has increased. Cyber risks are also increasingly stemming from geopolitical tensions.
The Directors regularly consider strategic matters that may affect the longer‑term prospects of the Group. In performing this viability assessment, the Directors considered the potential impact on the viability of the Company and the Group of the announced intention to demerge the Group’s UK operations. Further, the Group as a whole and each of its life assurance operations are subject to extensive regulation and supervision, which are designed primarily to reinforce the Company’s management of its long‑term solvency, liquidity and viability to ensure that it can continue to meet obligations to policyholders. Further details on the current capital strength of the Group are provided on pages 48 to 63.
Period of viability assessment The Directors have assessed the viability of the Company and the Group for a period longer than the 12 months required by the going concern statement.
The Directors performed the assessment by reference to the three‑year period to December 2020. Three years is considered an appropriate period as it represents the period covered by the detailed business plan that is prepared annually on a rolling three‑year basis. In approving the business plan the Directors review the Group’s projected performance with regards to profitability, cash generation and capital position, together with the parent company’s liquidity over this three‑year period. This projection involves setting a number of economic and other assumptions that are inherently volatile over a much longer reporting period. Such assumptions include foreign exchange rates, interest rates, economic growth rates and the impact on the business environment for events such as the exit of the United Kingdom from the European Union or changes in regulation.
The scenarios tested showed that the Group would be able to maintain viability, over the three‑year period under assessment, after taking account of the actions available to management to mitigate the impacts on capital and liquidity in such scenarios.
The impact on the business of known areas of regulatory change whose financial implications can be reasonably quantified is also considered as part of the plan. As well as known areas of regulatory change the Group is exposed to the risk of sudden and unexpected changes in regulatory requirements at the Group and local level. While unexpected changes cannot be fully anticipated and hence modelled, the risk of regulatory change is mitigated by capital held by the Group and its subsidiaries in excess of Group and local regulatory requirements, the Group’s ability to generate significant capital annually through its operational delivery and the availability of compensating actions designed to restore key capital and solvency metrics.
The Directors also considered the risks that would arise from the proposed intention to demerge M&G Prudential that could impact their assessment of the Group’s viability over the three years ended December 2020. The assessment did not change the Board’s conclusion.
Conclusion on viability Based on this assessment, the Directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet their liabilities as they fall due over the three‑ year plan period to December 2020.
Note 1 Based on hierarchy of Standard & Poor’s, Moody’s and Fitch, where available and if unavailable, internal ratings have been used.
This corporate responsibility review provides an overview of our community investment, environmental, diversity and inclusion, talent development and performance management activities and progress in 2017, which have helped to improve the lives of customers and strengthened communities throughout the markets in which we operate. More detailed information is available online at www. prudential.co.uk/corporate‑responsibility and in our 2017 Environmental, social and governance report.
We have chosen to include a summary of our material ESG issues and how we manage these for the first time here in our Annual Report and commit to continuing to develop these disclosures for our investors in future Annual Reports. This reflects our belief in the importance of ESG considerations to our long‑term success.
Building stronger communities We build stronger communities by delivering products that enable our customers to move ahead in their lives with confidence, and by investing in the real economy to drive the cycle of growth.
— £500,000 raised through Prudential RideLondon from charity partners and employees
Customers Serving our customers well is core to our strategy and to creating long‑term sustainable value. We provide fair and transparent products that meet our customers’ needs, often providing solutions to the biggest financial challenges of their lives. Prudential serves a global customer base with a broad range of needs. The financial challenges facing our customers continue to change and we want to serve our customers for the long term, which involves proactively listening to their needs and developing our products and solutions to improve financial access and deliver consistent, long‑term sustained performance.
Responsible investment Responsible investment for us is the integration of ESG considerations into our investment processes and our stewardship activities. Our general approach is one of ‘inclusion’ through engagement with investee companies and active ownership practices rather than ‘exclusion’
Technology Emerging technologies enable us to provide financial protection to previously unreachable communities and deliver better, more efficient outcomes for our customers. They also bring new concerns, in particular cyber risks, which pose threats to our business operations and the customer data that we hold and protect. Cyber risk remains a prominent concern and focus area for regulators and corporates globally, and could have a significant impact on business continuity, our customer relationships and our brand reputation. We closely monitor and respond to developments in this area, to ensure that we can maximise the benefits of new emerging technology while minimising the risks.
Communities We recognise that we have a role to play in the broader sustainable development agenda, for example in building financial literacy and improving financial inclusion. Our community investment strategy is closely aligned with our business objectives and with our stakeholders’ concerns and interests, and is aimed at protecting and encouraging more sustainable and resilient communities. To achieve this, our programme is focused around four principal areas: social inclusion, financial education and life skills, disaster preparedness, and employee engagement.
Further information on our material ESG issues, including 2017 progress and performance can be found in our forthcoming 2017 ESG Report. For more information on the principal risks facing our business and general risk governance and risk management policies and procedures and how these are managed, refer to the report on the Risks facing our business and how these are managed on pages 48 to 63.
ESG policy framework – Group Governance Manual Group‑wide ESG standards are established through the Group Governance Manual. The Manual sets out the policies and procedures by which the Group operates within our framework of internal governance, taking into account relevant statutory and regulatory matters. Group‑wide policies relating to the Group’s material ESG issues include: Material ESG issues Our Group-wide policies*
— Code of Business Conduct Policy, setting out the standards that are required across the Group, by all employees and any individuals and organisations acting on our behalf. This includes our core values – prudence, security, integrity and initiative – and that we pursue opportunities to grow our business in line with these values, and our commitments to our customers, investors and economies, our people and communities.
— Anti Money Laundering and Counter Terrorist Financing Policy, setting out our prohibition of money laundering and terrorist financing, and how we combat and limit our exposure to this.
— Tax Risk Policy, covering our processes to identify, measure, control and report on tax‑related risks, including technical judgement, operational, regulatory and reputational tax risk.
— Owing to the distinct investment risks faced by our asset management and ownership businesses, with each investing in different markets and asset classes, each business manages ESG‑related matters through the pursuit of business‑specific responsible investment policies. This is overlain by our Group‑wide Responsible Investment Framework, aligned to our Group‑wide Code of Conduct and underpinned by our Group Responsible Investment Standards. Further information on our Group Responsible Investment Framework will be found in our 2017 ESG Report.
Technology — Risk Security Policy – we are in the process of updating our data protection policies to prepare for the implementation of the General Data Protection Regulation (GDPR). This policy ensures the protection of information, information systems and technical infrastructure from unauthorised access, use, disclosure, disruption, modification, or destruction, in order to provide confidentiality, integrity, and availability of information.
— Employee Relations Policy, outlining the way we engage our employees and motivate them to achieve success for the Group: promoting positive relationships with employees, representative organisations and trade unions, and maintaining a positive reputation for the treatment of employees.
— Performance and Learning Policy, setting out the importance of our people and framing how we invest in their development to deliver against our strategy and the future success of the organisation. This includes our Performance Management Framework.
— Remuneration Policy, outlining our effective approach to appropriately rewarding our employees in a way which: aligns incentives to business objectives and enables the recruitment, retention and incentivisation of high‑calibre employees in line with our risk appetite and Group Reward Principles.
— Talent Policy, demonstrating how we attract and select the best people for roles that will ensure high performance in the short term and improve the longer‑term succession and talent pipeline. It sets out our fair and effective approach to pursuing this.
— Health and Safety Policy, covering our employees, business partners, customers and others that may be affected by our operations. This details our health and safety core principles, our commitments and the measuring and reporting on our health and safety performance.
Communities — Community Investment Policy, outlining our commitment and approach to being an active and supporting member of the community. The policy includes the development of our community investment strategy and sets out investments that are not permitted, relevant records and reporting.
* In addition to our Group‑wide policies, our business units have underlying business‑specific policy frameworks, reflective of their individual risks and operating environments. For the purposes of this report, we focus primarily on the Group policy framework.
The Group Governance Manual is used as a platform for mandating specific ways of working across the Group. Each Business Unit chief executive attests annually to compliance with applicable requirements set out in the Group‑wide ESG policies, including matters that must be reported to the Group. Specific procedures are followed for the reporting of non‑compliance. Business units present such instances in their annual certification, which in turn is reported to the Group Audit Committee.
The Group Audit Committee reviewed the results of the year‑end certificate of compliance with Group Governance Manual requirements. While a number of improvements to ensure the policies are fully embedded were discussed, no significant areas of non‑compliance in relation to the policies relevant to ESG issues were noted.
For further information on our Group business standards and policies pursued in relation to our material ESG issues, refer to the ‘Business standards’ pages of our website at: www.prudential.co.uk/ responsibility/standards
Serving our customers Improving the lives of customers is at the heart of what we do. Across our markets in Asia, the US, the UK and Europe and Africa, the needs of customers are often very different and this is reflected in the products we offer, but wherever we operate we aim to remove uncertainty from life’s big events and help customers build their lives with confidence. Whether that means starting a family, saving for a child’s education or planning for old age, our products are shaped around that core purpose.
Last year, Prudential Hong Kong also introduced ‘myDNA Pro’, which offers users a simple DNA test and lifestyle assessment to evaluate the overall risk of developing three common and potentially life‑threatening conditions – type 2 diabetes, hypertension and high cholesterol. It includes a dedicated mobile app which offers guidance from a personal health coach, plus a 16‑week programme to help customers establish good diet, nutrition and exercise regimes, and reduce their risks of developing these three debilitating conditions.
Prudential Vietnam has also launched ‘Matchbook’, a mobile app allowing customers to choose their financial consultants based on several criteria, including preferred personality traits and type of consultation services they require, and to make appointments.
Prudential Malaysia has launched ‘PRUDream Planner’, a first‑of‑its kind needs‑based mobile app that allows its financial consultants to provide tailored solutions to customers, enabling them to collect pertinent information on customers’ financial profiles, assess their needs and financial priorities in relation to their life goals, and navigate our wide selection of insurance solutions to provide tailored recommendations.
Prudential Singapore’s ground‑breaking ‘PRU Fintegrate Partnership’ identifies fintech startups from around the world to co‑develop digital solutions for customers. The scope of these solutions covers the entire value chain – from helping customers understand how to bridge their protection gaps and to plan for their financial future, to simplifying purchase and claims processes and improving service levels.
Another example of how we develop our products in response to the needs of customers in different markets is Prudential Indonesia’s launch last year of ‘PRUprime healthcare’, a hospitalisation product that is comprehensive, offers growing benefits and is available to customers in both conventional and sharia versions. The plan provides an additional 10 per cent of the annual benefit limit if no claims are made within a year, up to a maximum of 50 per cent of the initial annual limit. It also offers cashless admission, where a letter of guarantee is issued by Prudential Indonesia to the hospital so the customer does not have to pay upfront, at a wide network of partner hospitals in Indonesia, Singapore and Malaysia.
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As with previous fee‑based launches, PAII and PWS are intended to meet increased market demand for products compatible with fee‑based accounts and platforms as a result of the US Department of Labor (DOL) fiduciary rules, released in April 2016. We believe commissions and fees can co‑exist in the annuity space, and our growing suite of products is a step towards making this a reality for our distribution partners.
PWS will be sold through companies in the trust space, following a distribution process that differs from Jackson’s other products. The company has developed a Trust Team to form relationships with professionals in the private wealth and trust industry who are interested in using annuities in trusts to manage taxes and control income for multiple generations.
In 2017, we also introduced ‘Retire on Purpose’, a new platform with a focus on thoughtful life planning as a crucial first step towards creating a comprehensive financial plan. The presentation and its accompanying materials are designed to help advisers build richer relationships with their clients and integrate a more holistic approach to financial and life planning in their practices.
Jackson has been simplifying the language used around financial products to make them clearer and more transparent for consumers, and change the conversation to focus on planning for the lifetime income consumers need to live well throughout their lives. To promote this simple language approach, Jackson has launched a new website, The Financial Freedom Studio (www.jackson.com/financialfreedomstudio/), which now serves as the company’s central content ‘hub.’ The site is an evolution and expansion of the financial education resource for consumers, the Center for Financial Insight.
With core strengths in with‑profits and retirement solutions, M&G Prudential is well positioned to continue to meet the growing needs of customers taking on the responsibility for managing their own savings, following reform of the UK’s pension and retirement income system in 2015. The Prudential Retirement Account, which allows customers to save flexibly for their retirement and access their retirement income, has proven extremely popular since launching at the end of 2016, accumulating assets under management of £7.2 billion in its first year.
A further customer milestone was reached in 2017 when our digital customer engagement strategy reached one million customer log‑ins through the MyPru service, a customer portal giving access to update contact details, view annual statements and check valuations and payment information online.
External recognition at the 2017 Financial Adviser Service Awards saw us retain the coveted Five Star ratings in the Life and Pensions and Investments categories for the seventh consecutive year. We once again achieved success at one of the most sought‑after awards in our industry, receiving top awards at the Investment Life & Pensions MoneyFacts Awards in 2017 for Best Investment Bond Provider and Best Income Drawdown Provider.
Investing for positive change As an asset manager and asset owner, we have the ability to affect positive change, indirectly through the direction of our capital and our customers’ capital. We allocate our customers’ capital into projects that fuel economic growth and improve the quality of people’s lives, including through investments in affordable homes, transport programmes that cut commuting times, broadband networks that connect people and power stations using clean energy. These investments translate into strong, reliable returns for our customers and tangible benefits for the communities we serve. The long‑term nature of the promises we make to our customers and clients makes long‑term investments in infrastructure an ideal way of ensuring we can afford to meet those promises in full.
Our investment teams in Asia, Europe and the US are all working hard to invest with a positive purpose. Developed economies may not face the same basic threats to survival that are found in emerging markets, but traffic congestion, electricity ‘brown‑outs’ and rural broadband black spots can constrain economic growth and make daily life frustrating. M&G Prudential is innovating in this important field. Our new Greenfield Fund will enable our clients to participate in infrastructure projects at an earlier stage than was previously possible, which will translate into stronger returns and more essential projects receiving the funding they need. The UK government in 2017 recognised our skills in this area by appointing M&G Prudential to manage a portion of its £400 million Digital Infrastructure Investment Fund, aimed at kick‑starting better broadband connections across the country.
In the US too we are investing in important infrastructure. PPMA, our American asset manager, is helping states such as
California and Texas meet their ambitious green energy targets and reduce the risk of future power shortfalls, with investments in wind and solar generation. We have also made a recent investment in new storage batteries, which enable consistent power delivery from renewable sources.
The value we provide through investments in the real economy and through our products is complemented by investments in communities in each of the markets in which we operate. We provide support to charitable organisations through both funding and the experience and expertise of our employees.
Supporting local communities Our investments in communities are designed to support the communities in which we operate and deepen engagement with colleagues. As such, our community investment programme is linked to our strategy and is focused around four principal areas: — Social inclusion; — Education and life skills; — Disaster preparedness; and — Employee engagement.
In Asia, the programme reaches over 34 million households a day through a multi‑distribution platform including Cartoon Network, and through a school contact programme that has reached more than 300,000 children since inception. The standardised Cha‑Ching curriculum developed in partnership with Junior Achievement has been well received and
alue (EEV ) basis results 07 A dditional inform ation rolled out to more than 90,000 students in Indonesia, the Philippines and Malaysia. In addition, Cha‑Ching increased its presence during the year on digital platforms, including a new smartphone app called the ‘Cha‑Ching Challenge’, which helps further engagement with children.
In other markets, the online educational resource has also been utilised to support the roll‑out of the Cha‑Ching programme across our African markets as part of a financial literacy campaign delivered jointly by Junior Achievement Africa and Prudential Africa employees. Cha‑Ching was launched in Poland in 2015 and the first 10 films were translated into Polish and aired on several children’s television channels. A website with materials for children and teachers was created to share in local schools.
Since First Read’s inception, over 270,000 children and adults have benefited directly and over 540,000 community members indirectly. In 2018, the partnership will continue, with Save the Children focusing on quality implementation and building a strong evidence base to demonstrate First Read’s impact.
Fostering careers in IT and coding Through four programmes, Jackson’s IT employees are devoting considerable personal time and skills toward increasing IT exposure to diverse youth in Middle Tennessee. In 2014, Nashville IT associates adopted a small coding club at Woodland Middle School in Williamson County. The programme has gained momentum through Jackson and other local businesses’ volunteers. So much so, that after seeing the impact of volunteer efforts alone, the school system invested in paid training for teachers to further support and professionalise the efforts.
Through three secondary school partnerships in Paddington, Reading and Stirling, Prudential UK has also been directly involved in building the knowledge and skills of young people. These partnerships have supported over 3,700 young people since 2013, with 360 employees giving their time and sharing their knowledge and skills. The M&G business is a supporter of The Lord Mayor of London’s Appeal Charity, which aims to work towards a City that is healthy, skilled, inclusive and fair.
Prudential’s partnership with MyBnk, which delivers financial literacy programmes in secondary schools in London, helped develop money skills for 5,000 young people in secondary schools in deprived areas of the capital.
Secondary school scholarships across Africa 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. Prudential has worked with a number of charities operating in Ghana, Kenya, Uganda and Zambia by funding educational programmes and projects since 2014. Education and gender equality are key priorities and we have already provided scholarships to 700 young people on the continent and expect to reach over 1,000 more in the near future. These programmes have focused on allowing vulnerable children in these countries to access quality education through the provision of scholarship awards, as well as ensuring that those marginalised by society receive education, skills and support.
Disaster readiness and relief Helping to make Asia more prepared and safer As a life insurance and asset management company, our core business is to help protect and reduce the vulnerability of individuals and their families in the face of unfortunate events. Asia Pacific is the world’s most disaster‑prone region so Prudence Foundation is working with humanitarian and private sector organisations and governments to help communities better prepare for disasters and also, when required, provide immediate emergency response and longer‑term recovery support.
Aligned with aiming to protect communities and make them less vulnerable in emergency situations, Prudence Foundation launched its third Safe Steps programme in September 2017. Safe Steps First Aid is in partnership with the International Federation of Red Cross and Red Crescent Societies (IFRC) and National Geographic. It builds on the success of its previous two Safe Steps programmes, which focus on natural disasters and road safety. Safe Steps First Aid provides essential, easy‑to‑understand first aid information to millions of people throughout Asia.
Safe Steps is a first‑of‑its‑kind, in terms of reach and breadth of partnerships, pan‑Asian public service initiative to enhance awareness through the dissemination of educational survival tips for natural disasters, road safety and first aid. It is a multi‑platform programme including on‑air video messages and informative website and educational collateral that can be shared among communities. Core to the programme is a series of 60‑second educational videos that advise individuals and households on what to do should a natural disaster strike, how to be safe on the roads and what to do if they encounter a first aid emergency.
Volunteering to build disaster-resilient homes Prudence Foundation continues to provide support to major emergency relief efforts across Asia. During 2017, Prudence Foundation completed its long‑term commitment to support the Typhoon Haiyan/Yolanda disaster recovery efforts in the Philippines. In March, around 70 volunteers spent one week helping to complete the building of 126 homes with partner Habitat for Humanity and the local government. In total, almost 400 regional volunteers have donated their time and skills to help Bantayan Island since 2014.
This included help for casualties of heavy monsoon rains in India, Bangladesh and Nepal, a mudslide in Sierra Leone, an earthquake in Mexico and hurricanes in the US.
Social inclusion Commitment to social inclusion in the UK through Prudential RideLondon In the past five years Prudential RideLondon has raised over £50 million for charity and become one of the UK’s largest fundraising events. In 2017, more than 846
Following the success of the 2016 ‘Fixing Dad’ documentary, in 2017 Prudential supported the ‘Fixing Challenge’. The new challenge followed four people hoping to improve their type‑2 diabetes, weight issues or weight‑related health concerns. As with Fixing Dad, the culmination of the Fixing Challenge shows the four individuals taking on the challenge of Prudential RideLondon‑Surrey 100 and having their journey filmed as part of a new documentary.
Employee fundraising Jackson employees are actively engaged in our commitment to communities by taking part in programmes such as the Jackson National Community Fund Advisory Committee and the employee‑nominated matching programme. The Jackson National Community Fund supports charities that help strengthen families and increase economic opportunities through bi‑annual grants in communities where Jackson’s 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 that Jackson’s support is received by responsible organisations where funding will create a significant impact.
Over the past five years Prudential UK has recruited over 200 young people to our apprenticeship programme. Based at our London, Reading or Stirling offices, apprentices gain important paid work and life skills as well as achieving recognised vocational and professional qualifications. In 2017, 40 apprentices completed a 13‑month apprenticeship. 93 per cent secured ongoing employment with Prudential, while others choose to work elsewhere or move on to higher education. In 2017, the UK business was recognised as a ‘Top 100 Employer for 2017‑2018’ by RateMyApprenticeship.
Around 260 students completed the PruGoals programme in 2017 as part of Prudential’s partnership with Teach First and Greenhouse Sports, and 82 per cent said that taking part in PruGoals had changed their mindset in a positive way. Jessica, aged 16, said: ‘I have developed motivation skills and learnt that I can complete anything if I put my mind to it’, and Fatima added: ‘I’ve realised as part of this programme that a strong mindset is important. If I want to accomplish something, I can.’
Charitable donations We calculate our community investment spend using the internationally recognised London Benchmarking Group (LBG) standard. This includes cash donations to registered charitable organisations, as well as a cash equivalent for in‑kind contributions.
Political donations It is the Group’s policy neither to make donations to political parties nor to incur political expenditure, within the meaning of those expressions as defined in the UK Political Parties, Elections and
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We aim to foster a working environment where individuals are empowered and differences recognised. We aspire that over time our senior management, including our Board, better represents the experiences and backgrounds of our customers and stakeholders. We recognise that diversity contributes to effectiveness and is essential for successfully delivering the strategy of an international Group. We are committed to recruiting and developing the best available talent and appointing the most appropriate candidate for each role while at the same time ensuring appropriate diversity of experience, skillsets and professional background. Further information on the diversity of our Board, our policy in respect of this, how this is implemented and the associated results in 2017 can be found in our Governance statement on page 101.
We have a strategic, long‑term approach to D&I and the Board monitors progress regularly. We invest in targeted activity across 10 priority areas, ranging from unconscious bias training to mentoring and support for various affinity groups. In addition our commitment to D&I is supported, across our businesses, by initiatives such as reviews of pay, performance management consistency, providing training to staff, engaging with recruitment firms and awareness campaigns to diversify the pool of potential candidates.
Tony Jones, Chair of Trustees at SEED Madagascar, said: ‘We have been fortunate recently in appointing two enthusiastic trustees with very relevant skills for us. Coming from major institutions which encourage staff to get involved in the third sector, we have enhanced our capacity to manage change more effectively and also to ensure our own staff and volunteers are properly motivated and rewarded.’
Group Executive Committee (GEC) Includes Executive Directors 11 = 10 1
Within our businesses there are many examples of our continuing commitment to talent development. In 2015 we launched a Group‑wide Long‑Term Workforce Planning Initiative, which has progressed in 2016 and 2017. For example, in 2017 Prudential Corporation Asia deployed strategic workforce planning to predict the capabilities required to ensure our continued success utilising a succession‑ driven talent strategy to build the next generation of leaders with the capabilities we require. In the US, Jackson offers customised on‑premises programmes, as well as access to an online university, to meet the personal and professional development needs of employees with all levels of experience. M&G Prudential supports talent development through a range of development programmes to increase personal and organisational capability alongside bespoke development support for key individuals. GHO provides innovative programmes designed in partnership with top academic institutions and industry experts ‑ focused on early career development, leadership development, and opportunities to develop a strategic and innovation mindset through varied career experiences and projects.
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We encourage volunteering through which our employees can support our communities and acquire new skills. See page 74 for further detail.
Performance and reward Our reward arrangements are designed to attract, motivate and retain high‑calibre people. Each individual contributes to the success of the Group and is rewarded accordingly.
Remuneration is linked to the delivery of business goals and expected behaviours and we ensure that rewards for our people are consistent with our values and do not incentivise inappropriate risk‑taking. To enable this, employees are not only regularly assessed on ‘what’ they have achieved, but also on ‘how’ they have done so.
There are recognition initiatives running across our businesses, such as the Jackson High Five Recognition Program, which allows individuals to recognise when their colleagues go above and beyond, and for Prudential Stars awards at GHO, in which individuals can nominate their colleagues to recognise examples of exceptional contributions, specifically in the areas of delivering synergy, adding value, fostering innovation, demonstrating stakeholder focus and maintaining risk awareness. We also believe in the importance of giving employees the opportunity to benefit from the Group’s success through share ownership, and operate share plans for employees in the UK and Asia. This includes PruSharePlus, which enables employees in Asia to share in the longer‑
Protecting the environment and managing the risks from climate change We take a long‑term and holistic approach to managing the risks and opportunities posed by climate change and our impact on the environment and strive to play our part in reducing both our direct and indirect impacts where possible. Our long‑term approach includes investing in the low‑carbon economy, measuring and improving the environmental performance of our global operations and reducing the impact of our investments on the environment.
Managing our climate-related risks and opportunities As a life insurer, asset owner and manager, we are long‑term stewards of our customers’ assets and we recognise the challenge that climate change presents. We also recognise our responsibility to customers, society and the environment to effectively integrate associated considerations into investment decisions and fiduciary and stewardship duties and help finance the transition to a more sustainable economy. Active consideration of ESG factors is integral to our stewardship responsibilities. For example, in 2017 M&G Prudential joined Climate Action 100+, an initiative bringing together more than 250 global institutional investors to engage with the world’s largest corporate greenhouse gas emitters to improve climate‑related financial disclosure and curb emissions, and in October M&G Prudential launched the ESG Global High Yield Bond Fund, which fully integrates ESG factors into its investment process. In February 2018 Eastspring became the third Prudential signatory to the United Nations Principles for Responsible Investment, joining PPMSA and M&G. Further information on the indirect environmental impact of our asset management activities is available in our forthcoming ESG Report.
We improved our CDP Climate Change disclosure and were awarded a ‘Leadership’ ranking of A‑ (2016: B) and in ClimateWise, the insurance sector climate initiative managed by the Cambridge Institute for Sustainability Leadership, we improved our score, achieving 71 per cent (2016: 60 per cent). Our performance in ClimateWise against six core principles is independently audited by PwC.
We continue to develop our energy and environmental management strategies, 14 per cent of our global electricity consumption is now renewably sourced. In the UK, we successfully transitioned our environmental management system to ISO 14001:2015 and renewed our focus on waste and recycling by collecting our waste coffee grounds for energy recovery by conversion into biofuel. We are also rolling out advanced energy analytics software across our largest UK properties following a successful trial. In the US, we continue to demonstrate superior energy efficiency with an Energy Star score of 93 for our new corporate office in Lansing, placing it in the top 10 per cent of all similar facilities nationwide. In Asia we have developed an environmental management framework to review current site performance and identify opportunities for energy and water efficiency improvements for our most significant buildings.
M&G Real Estate, part of M&G Prudential, has an approach to responsible property investment that enables it to manage and respond to the growing range of environmental and social issues that can impact property values. It continues to decarbonise its property estate through continued LED lighting rollout and its first UK solar photovoltaic installation, covering an area of 3,800 m2, equivalent to 15 tennis courts. It is anticipated the system will generate enough electricity annually to power the equivalent of 68 average UK households and save 165 tonnes of carbon dioxide. M&G Real Estate’s progress can be found in its annual Responsible Property Investment report at www.mandg.co.uk/ institutions/realestate/responsible‑ investing/
Further detail on our environmental performance throughout 2017 is available online and will be published in our 2017 ESG Report later in 2018, including performance against our global environmental targets framework.
Greater Lansing area, Jackson’s commitment to energy efficiency and environmental conservation sets a positive example for other local companies and organisations and helps bring awareness to this important topic.
Carbon intensity* 2017 2016 % Change kg CO2e per m2 – Scope 1 and 2 only Group 31 34 -9%
Prudential owns assets, which are held on its balance sheet in the financial statements, over which it does not have operational control. These are excluded from the data below. Assets not included on the balance sheet but held under an operating lease and where we have operational control are included.
Scope 2 calculations use the IEA GHG 2017 Conversion Factors for location‑ based reporting. Market‑based reporting uses supplier emission factors for our UK REGO‑backed supply (Investment) and RE‑DISS factors where available.
Notes 1 2016 figure restated as accurate data became available from suppliers. 2 This figure has not been assured as not reported in 2016.
Supply chain management It is our policy to work in partnership with third parties whose values and standards are aligned with our Group Code of Business Conduct, aligned with the methods and practices of the Chartered Institute of Purchasing and Supply, an industry‑recognised body.
Strategic report approval by the Board of Directors The strategic report set out on pages 9 to 80 is approved by the Board of Directors.
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Effective leadership As Chairman, one of my priorities is how we as a Board can improve and work together even more effectively. The Board undertakes an annual review of its performance, both collectively and as individuals and uses the outcomes of these reviews to drive improvements over the coming year. The actions taken by the Board in 2017 to address the recommendations of the 2016 review are set out on pages 93 and 94. An external independent evaluation was conducted at the end of 2017 in order to provide shareholders with further comfort that the Board continues to operate effectively. Details of the 2017 review can be found on page 94 and I was pleased that the review concluded that the Board’s strengths included “strong leadership in a collegiate and constructive environment”, “effective use of time and materials”, and “strong risk and control oversight”.
Risk and internal controls Fundamental to demonstrating good governance and stewardship is having in place processes to allow the Board to make a robust assessment of the risks facing our business and those internal controls used to mitigate them. Details of our approach to internal controls and risk management are set out on pages 99 to 100. The Audit Committee report on pages 105 to 114 describes how the Committee monitors the effectiveness of the internal control and risk management systems and the Risk Committee report on pages 115 to 119 sets out how that Committee has considered the Group’s risk appetite.
Culture I continue to believe that tone is set from the top and the Board and senior management must therefore exhibit the behaviours expected throughout the Group. Individual businesses are also shaping culture locally, contributing to our shared values. Under my stewardship, our international volunteering programme, Chairman’s Challenge, has grown significantly and over 8,000 colleagues offered their time and skills to supporting the community in 2017.
In December, the Board approved an updated Group Code of Conduct which introduced standards of business conduct. This clarifies expectations over employee behaviour and seeks to ensure employees understand the individual obligations that the Group imposes on them through our policies, including financial crime prevention, conflicts of interest, information security and securities dealing, public communications and social media, people related policies and confidential reporting.
During the year we also announced the sale of our broker‑dealer network in the US, which was owned by our subsidiary National Planning Holdings Inc. and consisted of INVEST Financial Corporation, Investment Centres of America, Inc, National Planning Corporation and SII Investments, Inc., to LPL Financial LLC. This allows us to focus on our primary strategy in North America of being the leading manufacturer of retirement products.
Relevant skills and experience Paul has held a number of senior leadership roles. Notable appointments include serving as chairman of the Association of Investment Companies (1991 to 1993), acting as founding CEO of Threadneedle Asset Management Limited (1994 to 1999), directorships of Eagle Star and Allied Dunbar, holding the offices of European CEO of Deutsche Asset Management (2002 to 2005), global CEO of Rothschild Asset Management (1999 to 2002), chairman of Bridgewell Group plc and a director of Henderson Smaller Companies Investment Trust plc.
Other appointments — Securities Institute — RateSetter (Retail Money Market Limited)
Relevant skills and experience Mike has more than three decades’ experience in insurance and retirement services, having started his career at the US brokerage house Dean Witter, before going on to become a managing director at Smith Barney Shearson.
Mike joined the Prudential Group in 1995 and became Chief Operating Officer and Vice‑Chairman of Jackson in 2003. In 2011, he was appointed President and Chief Executive Officer of Jackson, and joined the Board of Prudential.
During his leadership of Jackson, Mike was responsible for the development of Jackson’s market‑leading range of retirement solutions. He was also part of the Jackson teams that purchased and successfully integrated a savings institute and two life companies.
Mike joined the Board in 2011 and was appointed Group Chief Executive in June 2015.
In August 2017, the Company announced its intention to merge its asset manager, M&G, and Prudential UK & Europe to form
M&G Prudential. John Foley became Chief Executive of M&G Prudential and Anne Richards became Deputy Chief Executive of M&G Prudential (retaining her role as Chief Executive of M&G).
In 2017, John’s role was expanded from Chief Executive of Prudential UK & Europe to Chief Executive of M&G Prudential, the Group’s combined UK asset management and savings and retirement solutions business.
In July 2017, Nic became Chief Executive of Prudential Corporation Asia having originally joined the Board in October 2009 as an Executive Director and Chief Financial Officer.
Relevant skills and experience James led internal audit teams in UBS in both the UK and Switzerland. Prior to joining Prudential, James was the deputy head of compliance for Barclays plc. He also held a number of senior internal audit roles across the Barclays group, leading teams that covered the UK, the US, Western Europe, Africa and Asia retail and commercial banking activities.
Barry Stowe Chairman and Chief Executive Officer of the North American Business Unit
Relevant skills and experience Anne became an analyst for Alliance Capital in 1992 and then moved into portfolio management roles at JP Morgan Investment Management and Mercury Asset Management. She joined the board of Edinburgh Fund Managers plc as chief investment officer and joint managing director in 2002 and continued in this role following Aberdeen Asset Management PLC’s acquisition of Edinburgh Fund Managers in 2003. Anne was chief investment officer and head of the EMEA region for Aberdeen Asset Management PLC, positions she held until February 2016.
Other appointments — Financial Services advisory board — CFA UK Advisory — Financial Conduct Authority practitioner panel (chair) — Standing Council on Europe — IBDE advisory board
Barry joined the Board in 2006 as an Executive Director and the Chief Executive of Prudential Corporation Asia, leading Prudential’s Asian business through a period of major growth and development.
Relevant skills and experience Sir Howard has a wealth of experience in the financial services industry, across the Civil Service, consultancy, asset management, regulatory and academia. Sir Howard was previously chairman of the Phoenix Group and an independent director of Morgan Stanley Inc.
David joined the Board in September 2015 as a Non‑executive Director and member of the Audit Committee. David was appointed Chair of the Audit Committee and a member of the Risk Committee and of the Nomination & Governance Committee in May 2017.
Other appointments — L&F Holdings Limited (CEO) and its subsidiaries (the professional indemnity captive insurance group that serves the PwC network and its member firms)
Relevant skills and experience Kai spent 19 years at Bank of America and was based in Hong Kong in roles as group executive vice president and head of the Asia Wholesale Banking Group during 1990 to 1995. He spent 10 years working for Standard Chartered PLC in Singapore as group executive director responsible for Asia Governance and Risk during 1998 to 2007. Kai was chief executive officer of the Asia Pacific Region of Credit Suisse AG during 2008 to 2010 and now serves as director and chairman of their remuneration committee.
Kai joined the Board in January 2012 as a Non‑executive Director and member of the Remuneration and Risk Committees.
Other appointments — Clifford Capital Pte. Ltd (chair) — Credit Suisse Group AG — Duke‑NUS Medical School (chairman) — Prudential Corporation Asia Limited
Philip joined the Board in January 2013 as a Non‑executive Director, as Senior Independent Director and as a member of each of the Audit Committee, the Remuneration Committee and the Nomination & Governance Committee.
Other appointments — City of London Investment Trust (chairman) — M&G Group Limited (Prudential plc subsidiary) (chairman) — Severn Trent plc — Takeover Panel — UK Financial Investments Limited
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Ri Au Relevant skills and experience Alice began her career as a qualified accountant at Ernst & Young. She joined the Financial Accounting Standards Board as a manager in 1991, overseeing the issuance of several significant insurance accounting standards.
Alice joined the Board in June 2013 as a Non‑executive Director and member of the Audit Committee. She became a member of the Risk Committee in March 2018.
Relevant skills and experience Anthony spent his career in Asia, where he joined the Jardine Matheson Group in 1969, holding a number of senior positions before joining the board of Jardine Matheson Holdings in 1994. He was managing director of the Jardine Matheson Group from 2006 to 2012.
Tom joined the Board in July 2017 as a Non‑executive Director and member of the Remuneration Committee.
He served as director‑general of the Confederation of British Industry, vice‑chairman of Merrill Lynch Europe, chairman of the Pensions Commission and as a non‑executive director of Standard Chartered Bank.
Lord Turner was chairman of the UK’s Financial Services Authority, a member of the international Financial Stability Board and a non‑executive director of the Bank of England.
Other appointments — Chubb Europe (chairman) — Energy Transition Commission (chairman) — House of Lords crossbench member
A narrative description of how the Company has complied is set out in the following pages and in the Directors’ remuneration report.
The Board is collectively responsible to shareholders for the success of the business through: — The delivery of sustainable value to shareholders; — Setting the Group’s strategy and overall risk appetite; — Providing leadership within a framework of effective controls; and
Specific matters are reserved for decision by the Board, including: — Determination of dividends; — Approval of strategic projects; — Approval of the three‑year business and financial plan; — Approval of key financial reporting including the Group’s full and half yearly Report and Accounts; and
The governance framework outlines the key mechanisms through which the Group sets strategy, plans its objectives, monitors performance, considers risk management, holds business units to account for delivering on business plans and arranges governance. The Group Governance Manual (the Manual) sets out the policies and procedures by which the Group operates within this framework, taking into account relevant statutory, regulatory and governance matters.
Business units manage and report compliance with Group‑wide mandatory requirements set out in the Manual through their Governance, Risk Management and Internal Control – Annual Statement of Compliance attestations. This includes compliance with our risk management framework, details of which are set out on pages 99 and 100 of this report.
Prudential has appointed independent non‑executive directors to the boards of its four Material Subsidiary entities within the Group. Each Material Subsidiary has a board of directors led by an independent chair and an audit committee and risk committee, composed entirely of independent non‑executives.
Dialogue between the Group Chair, Group Risk Committee Chair and Group Audit Committee Chair and their counterparts in the Material Subsidiaries provides an effective information flow.
The Nomination & Governance Committee is responsible for oversight of governance arrangements for the Material Subsidiaries. The activities of the Nomination & Governance Committee during 2017 is set out on pages 101 to 104.
The Chairman is responsible for the leadership and governance of the Board, ensuring its smooth and effective running in discharging its responsibilities to the Group’s stakeholders and managing Board business.
— Working with the Group General Counsel and Company Secretary to ensure continued good governance
This initiative has added a layer of independent scrutiny and helped to ensure that those boards are close to the community and charitable activities of their business units.
The Group Chief Executive leads the Executive Directors and senior executives and is responsible for the operational management of the Group on behalf of the Board on a day‑to‑day basis: — Responsible for the implementation of Board decisions
— Sets policies, provides day‑to‑day leadership and makes decisions on matters affecting the operation, performance and strategy of the Group, seeking Board approval for matters reserved to the Board
— The Chairs of the Audit and Risk Committees act as key contact points for the independent chairs of the audit and risk committees of the Material Subsidiaries
The Senior Independent Director acts as an alternative conduit to the Board for shareholder concerns and leads the evaluation of the Chairman: — Keeps in close contact with the Chairman and acts as sounding board for him
— Leads the Non‑executive Directors in conducting the Chairman’s annual evaluation
— Holds meetings with Non‑executive Directors without management being present, typically at least once a year to evaluate the performance of the Chairman
— Engaging with Executive Directors and management at Board and Committee meetings as well as at site visits, training sessions and on an informal basis
The Board has established four principal Committees whose functions are summarised below.
— Responsible for reviewing, maintaining and enhancing the balance of skills and experience on the Board in support of the Group’s strategic objectives
— Recommends appointments to the Board and its principal Committees and appointments of non‑executive chairs to the boards of the Material Subsidiaries
See Nomination & Governance Committee report on pages 101 to 104
— Approves the internal audit plan and recommends the appointment of the external auditor
— Leads on and oversees the Group’s overall risk appetite, risk tolerance and strategy
— Provides advice to the Remuneration Committee on risk management considerations to inform remuneration decisions
— Approves individual remuneration packages of the Chairman, the Executive Directors, other senior executives and the non‑executive directors of Material Subsidiaries
— Reviews the design and development of share plans and approves and assesses performance targets where applicable
Terms of reference for the principal Committees can be accessed at www.prudential.co.uk/investors/governance‑and‑policies/board‑committees‑terms‑of‑reference
Board and Committee meeting attendance throughout 2017 Individual Directors’ attendance at meetings throughout the year is set out in the table below.
Executive Directors Mike Wells 10 – – – – – 1 Mark FitzPatrick1 5/5 – – – – – – John Foley 10 – – – – – 1 Nic Nicandrou 10 – – – – – 1 Anne Richards 10 – – – – – 1 Barry Stowe 10 – – – – – 1 Executive Directors who stepped down during the year Tony Wilkey2 4/5 – – – – – 1 Penny James3 8/8 – – – – – 1
Tom Watjen4 5/5 – – 2/2 – – – Non-executive Director who stepped down during the year Ann Godbehere5 4/ 4 4/ 4 2/ 2 – 3/3 1 1
Notes 1 Mark FitzPatrick joined the Board with effect from 17 July 2017. 2 Tony Wilkey stepped down from the Board with effect from 17 July 2017. 3 Penny James stepped down from the Board with effect from 30 September 2017. 4 Tom Watjen joined the Board with effect from 11 July 2017. 5 Ann Godbehere retired from the Board with effect from 18 May 2017.
Full details of changes to the Board during the year can be found on page 83.
Board effectiveness Actions during 2017 During the year, the action points that had been identified in the 2016 evaluation were addressed and the Board received an update on progress against those actions in September 2017 and February 2018.
— Group Secretariat continued to monitor and support the regular interactions between the Chairman, Audit Committee Chair and Risk Committee Chair with their Material Subsidiary counterparts; — Reports of all material issues at subsidiary level were given to the Board and to the Audit and Risk Committees as regular agenda items; — Subsidiary independent non‑executive directors and chairs, along with all Prudential Non‑executive Directors, were invited to a meeting at which the Executive team gave presentations on each business unit with a question and answer session. The sessions also provided the opportunity for the Prudential Board and subsidiary boards to spend time together in an informal setting; and
Board agenda – the 2016 review noted that time spent at meetings should flex to reflect strategic priorities, with an increased focus on products and customers.
— Agendas continued to be reviewed by the Chairman, Group Chief Executive and the Group General Counsel and Company Secretary, as well as other senior executives where appropriate; — The Board specifically debated at its July 2017 meeting, as part of a wider discussion on good governance, whether sufficient time was allowed for discussion and debate and concluded positively; and
— The aspiration to create an information pack on products and markets for Board background information was developed into an app, which was trialled to the GEC in the first quarter of 2018.
— The Board met all members of the Prudential Corporation Asia executive committee as well as a number of senior Prudential Corporation Asia executives at its Jakarta sessions in April 2017. All members of the Prudential Indonesia executive committee also presented to the Board on this occasion; — The Board held a two‑day session in Craigforth in September 2017 at which the M&G Prudential executive committee and senior executives gave business and strategy updates, including on the merger of the M&G and Prudential UK & Europe businesses; — The Board received reports from all business units at its meetings on key joiners and leavers; and
— A number of senior executives below GEC level presented to each of the Audit Committee and Risk Committee on a regular basis during the year.
— A specific and detailed induction was arranged for Mr Watjen on his appointment, given his role as a member of the Remuneration Committee.
2017 review and actions for 2018 The Board undertook an external evaluation of its performance and that of its Committees in 2017. The review was facilitated by Boardroom Review Limited, a consultancy which undertakes no other business for the Company. The external nature of the review met the provision of the UK Corporate Governance Code which requires external evaluations on no less than three‑yearly intervals.
Spend additional time on site visits. Continue to hold Non‑executive Director only sessions on an as‑required basis
Provide further reports to the Board on culture in 2018 and mature the Group’s strategic objective to ‘develop a framework for a measurable, definable culture’
The outcome of these evaluations is reported to the Nomination & Governance Committee in February each year in order to inform the Committee’s recommendation that each Board member be put forward for re‑election by shareholders.
www.prudential.co.uk Annual Report 2017 Prudential plc 95 01 G roup overview 02 Strategic report 03 G
A summary of the general topics covered, as well as the role specific topics on which they each received comprehensive briefings, are set out in the table below.
— Tailored briefings with each business unit to gain a comprehensive understanding of each of their business models, product suites, pricing arrangements and governance structures
— Human Resources‑specific induction provided by the Director of Human Resources, including an overview of Group Reward, current UK remuneration hot topics, and the role of the Remuneration Committee and business unit remuneration committees
— Meeting with the Chair of the Remuneration Committee to discuss the annual cycle of Committee work, its current focus and focus for 2018 and beyond
Mr Law had been a member of the Audit Committee for almost two years at the time of his appointment as Chair, which provided him with detailed knowledge of its operations and he worked closely with the outgoing Chair to ensure a smooth transition. In addition Mr Law met with the Chief Financial Officer and other members of Group Finance, the Group‑wide Internal Audit Director, the Group Regulatory and Government Relations Director and the Director of Group Compliance in preparation for his role as Chair. Mr Law attended one of each of the Material Subsidiary audit committee meetings to gain a better understanding of their operations. He also met with the Group Chief Risk Officer and other members of Group Risk to prepare him for his role as a member of the Risk Committee.
Lord Turner received a detailed briefing from the Director of Group Finance on appointment to the Audit Committee.
— The Remuneration Committee receives updates on regulatory and governance developments affecting the Group’s remuneration arrangements. In 2017, these included the PRA’s guidance on Solvency II remuneration requirements, the Investment Association Principles of Remuneration, BEIS Corporate Governance reform concerning remuneration and gender pay gap reporting.
Board site visits Jakarta, Indonesia All Board members made a site visit to the Group’s operations in Jakarta, Indonesia in March 2017. The visit included presentations from the Prudential Corporation Asia executive team on regional financial performance and an overview of the asset management and life businesses across Asia.
Craigforth, Scotland in September 2017. The visit included presentations from the M&G Prudential executive team, which gave opportunity to demonstrate to the Board the activity that had taken place in merging the M&G and
As well as formal presentations, the Board visited different parts of the Craigforth site for demonstrations from employees on typical processing systems and technology innovation.
Diversity Given the global reach of the Group’s operations, and our business strategy and long‑term focus, the Board makes every effort to ensure it is able to recruit Directors from different backgrounds, with diverse experience, perspective and skills. This diversity not only contributes towards Board effectiveness but is essential for successfully delivering the strategy of an international Group.
The Board is committed to recruiting the best available talent and appointing the most appropriate candidate for each role while at the same time aiming for an appropriate diversity on the Board. The Nomination & Governance Committee takes into account the Group Diversity and Inclusion Policy when considering succession planning. Prudential has a preference for using suppliers recognised for their commitment to diversity. The Board considers that its diversity of experience, skill set and professional background has been increased as a result of Board level succession in 2017.
The Board continues to commit to developing a robust and diverse talent pipeline and to increasing representation of women in senior positions in the Group and on the Board. As part of this commitment the Board may endorse relevant measurable objectives for increasing diversity. For example, in 2016 the Board decided to sign the HM Treasury Women in Finance Charter with an aim to achieve at least 30 per cent of women in senior management by the end of 2021 and in 2017, all Executive Directors volunteered to mentor members from our senior management team of various ages, gender, educational and professional backgrounds. The Group also engaged in a number of targeted activities in support of our Diversity and Inclusion Policy, including awareness training of unconscious bias.
Shareholder engagement As a major institutional investor, the Board recognises the importance of maintaining an appropriate level of two‑way communication with shareholders.
A full programme of engagement with shareholders, potential investors and analysts, in the UK and overseas, is conducted each year by the Group Chief Executive and the Chief Financial Officer, led by the Investor Relations team. A conference for investors and analysts is held on a regular basis, including in‑depth business presentations and opportunities for attendees to meet with members of the Board and senior executives and an opportunity for the executive team to communicate progress and strategy outside of the financial reporting cycle. The most recent event was held in November 2017 and feedback was provided to the Board in December 2017.
The Company holds an ongoing programme of regular contact with major shareholders, conducted by the Chairman, to discuss their views on the Company’s governance. The Senior Independent Director offers meetings to major shareholders as needed. Engagement with institutional investors on the Directors’ remuneration policy and implementation is led by the Remuneration Committee Chair. Other Non‑executive Directors are available to meet with major shareholders on request.
The Annual General Meeting is an opportunity for further shareholder engagement, for the Chairman to explain the Company’s progress and, along with other members of the Board, to answer any questions. All Directors then in office attended the 2017 Annual General Meeting.
Details of the 2018 Annual General Meeting are available on www.prudential.co.uk/investors
Information on a number of regulations and processes relevant to Directors, and how these are addressed by Prudential, is given below.
— Subject to review by the Nomination & Governance Committee and re‑election by shareholders, it would be expected that Non‑executive Directors serve a second term of three years.
— At present, the average time commitment expected of a Non‑executive Director is 32.5 days per annum. In addition, all Non‑executive Directors currently serve on at least one of the Board’s principal Committees, which requires an additional commitment of time dependent on the Committee and role.
— On appointment, all Non‑executive Directors confirm they are able to devote sufficient time to the Group’s affairs to meet the demands of the role.
— Qualifying pension scheme indemnity provisions are also in place for the benefit of certain pension trustee directors within the Group.
— These indemnities were in force during 2017 and remain so.
www.prudential.co.uk Annual Report 2017 Prudential plc 99 01 G roup overview 02 Strategic report 03 G
The Group’s risk governance arrangements, which support the Board, the Risk Committee and the Audit Committee, are based on the principles of the ‘three lines of defence’ model: risk taking and management, risk control and oversight, and independent assurance.
— Assists the Board to formulate and then implement the approved risk appetite and limit framework, risk management plans, risk policies, risk reporting and risk identification processes; and
— Reviews and assesses the risk‑taking activities of the first line of defence, where appropriate challenging the actions being taken to manage and control risks and approving any significant changes to the controls in place.
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The smooth transition of David Law as our new Audit Committee Chair, who also joined this Committee in May, and the appointment and induction of Tom Watjen has helped to refresh the Non‑executive roles on the Board.
The move by Nic Nicandrou to become Chief Executive of Prudential Corporation Asia and the appointment of Mark FitzPatrick as Chief Financial Officer demonstrates both the effectiveness of our succession planning preparations and the ability of the Committee to recruit high calibre candidates with the appropriate skills and knowledge for our business.
Careful ongoing review and planning ensures that our Board continues to attract the high calibre individuals it requires and that there are no gaps in leadership. In 2017, the Committee formalised its approach in this area by creating a skills map to support succession planning, which identifies sector‑specific and general operational competencies as well as geographic and business experience.
Part of my role as Chair is to oversee the governance arrangements for this Committee. The Committee considered its terms of reference in November 2017, and in the preparation of this report I have considered the time commitment, number of meetings and skills and experiences required for Committee members.
Committee members — Paul Manduca (Chair) — Howard Davies — David Law (from May 2017) — Anthony Nightingale — Philip Remnant — Ann Godbehere (until May 2017)
The Committee takes account of the size, structure and composition of the Board and its Committees, including existing knowledge, experience and diversity. In doing so, the Committee considers the Group’s strategic needs and anticipates future needs, skills and experience. The Committee is responsible for developing and periodically reviewing objectives established for the implementation of diversity on the Board and monitoring progress toward the achievements of those objectives. A description of the Group Diversity and Inclusion Policy is included on page 97. Following the departure of Ann Godbehere and Penny James in 2017, the Committee is focusing on gender diversity, alongside diversity of skills, in its succession planning in 2018.
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Non‑executive Directors During the year, the Committee finalised the terms of appointment of Mr Watjen as a Non‑executive Director. The work of the Committee was supported by Russell Reynolds as search consultant. See page 104.
During 2017: — Mr FitzPatrick was appointed as Chief Financial Officer in July 2017, following completion of a comprehensive search; — Following the departure of Penny James in September 2017, Prudential appointed Pat Casey as Interim Group Chief Risk Officer while the search for a permanent successor continued. Following a recommendation from the Committee, the Board appointed James Turner as an Executive Director and as Group Chief Risk Officer with effect from 1 March 2018; and
Use of search consultancies Neither Russell Reynolds nor The Miles Partnership have any additional connection with Prudential. In addition to acting as search consultant for certain executive hires, Egon Zehnder also provides support for senior development assessments. Talent Intelligence also provides additional succession planning support to the Group below GEC level.
The Committee regularly reviews the membership of all principal Committees and makes recommendations to the Board as appropriate.
In February 2017, the Committee made recommendations to the Board to appoint Lord Turner to the Audit Committee and to appoint Mr Law to the Risk Committee and as Audit Committee Chair, which changes became effective in May 2017. The Committee recommended the appointment of Mr Watjen to the Remuneration Committee on his appointment as a Non‑executive Director in July 2017.
Full details of changes to the membership of the principal Committees are set out on page 83.
Particular attention has been paid to the recommendation to re‑elect Mr Nargolwala and Sir Howard Davies at the Annual General Meeting to be held in 2018 due to their length of service.
Having reviewed the performance of the Non‑executive Directors in office at the time, and having received feedback from the Group Chief Executive on the performance of the Executive Directors, the Committee concluded that each Director continued to perform effectively and was able to devote sufficient time to fulfil their duties, taking account of the number and nature of their external appointments. The Committee recommended to the Board that all Directors should stand for election at the Company’s Annual General Meeting.
Prior to proposing Directors for re‑election, the Committee considered the external appointments of all Directors and reviewed existing conflict authorisations, reaffirming or updating any terms or conditions attached to authorisations where required. In addition, the Committee considered the external positions of those Directors appointed during the year, noted changes in the external positions of existing Directors and considered whether these gave rise to any conflicts.
The Board considers that the procedures set out above for dealing with conflicts of interest, operate effectively.
Governance Group subsidiaries During the year under review, the Committee carried out various duties related to the Material
Appointment of Tom Watjen The Committee undertook a thorough and international search for potential candidates, supported by Russell Reynolds who were engaged for this purpose. The objective of the search was to enhance the Board’s US expertise and insurance executive experience. Mr Watjen was identified as a preferred candidate following interviews with the Chairman, the Senior Independent Director and Group Chief Executive. The Committee reviewed Mr Watjen’s skills and experiences against the needs of the business, noting in particular his knowledge of the insurance sector, his many years in senior executive roles and his understanding of US regulatory matters. His appointment was then recommended to the Board for consideration and subsequently approved in July 2017.
www.prudential.co.uk Annual Report 2017 Prudential plc 105 01 G roup overview 02 Strategic report 03 G
Dear Shareholder It has been a great pleasure to take over responsibility as Chair of the Committee from Ann Godbehere who retired from the Board in May 2017. I would like to thank her for the significant contribution she made to the Committee during her nine years of service.
A key part of the Committee’s role is to provide the Board with assurance as to the integrity of the business through our activities in monitoring financial reporting and the second and third lines of defence as part of our internal control environment.
During the year the Committee continued to receive regular briefings from the Group‑wide Internal Audit (GwIA) function. Delivery of the internal audit plan represents a key component of the Committee’s oversight of the Group’s internal controls procedures. GwIA undertook a programme of risk‑based audits covering matters across the business units in addition to assurance work on significant change programmes such as preparations for the implementation of the General Data Protection Regulations (GDPR) and MiFID II. We also approved the 2018 audit plan which focuses on matters such as financial, business change, regulatory and operational risks as well as consideration of controls to deliver appropriate customer outcomes. The plan was mapped to the key risks identified by the Group Risk Committee and is kept under review throughout the year as necessary to ensure the programme remains in line with business needs.
During the year I was involved in recruiting a successor to the role of Director of GwIA. After an extensive internal and external search, we appointed an individual with extensive knowledge of the Group, having previously been the Chief Operating Officer of Group Risk, and before that the Group Compliance Director.
The Committee received updates against the annual Compliance Plan (the Plan). In 2017 the Plan focused on a number of areas to help strengthen the compliance framework, which is intended to aid the Group in meeting regulatory obligations. The Plan also included the management and review of Group Compliance top risks, including anti‑money laundering and anti‑bribery and corruption.
We also refreshed the Group’s whistleblowing protocols and spent time with the Group Resilience Director to gain comfort that he was appropriately supported. The Committee sponsored a special review to ensure there was no evidence of abuse of power in the workplace.
During 2017 the Committee reviewed our first published tax strategy and environmental, social and governance (ESG) report, both released in May. Another key piece of work was our review of the disclosures about the merger of M&G and Prudential UK & Europe into one business and an additional meeting was held to discuss these. Members of the Committee also received additional updates on the impact of MiFID II, and reviewed the financial disclosures relating to the partial sale of the UK annuity portfolio.
www.prudential.co.uk Annual Report 2017 Prudential plc 107 01 G roup overview 02 Strategic report 03 G
Business unit audit committee effectiveness, status updates and terms of reference
Financial reporting and tax Overview One of the Committee’s key responsibilities is to monitor the integrity of the financial statements.
The Committee assessed whether appropriate accounting policies had been adopted throughout the accounting period and whether management had made appropriate estimates and judgements over the recognition, measurement and presentation of the financial results. There were no new or altered accounting standards in 2017 that had a material effect on the Group’s financial statements.
The Committee considered compliance with accounting standards and obligations under applicable laws, regulations and governance codes. Particular areas on which the Committee focused during the year included the fair, balanced and understandable requirement under the UK Corporate Governance Code, providing advice to the Board in respect of this requirement and reviewing the up‑date of these disclosures for revised reporting requirements.
Key assumptions and judgements The Committee reviewed the key assumptions and judgements made in valuing the Group’s investments, insurance liabilities and deferred acquisition costs under IFRS, together with reports on the operation of internal controls to derive these amounts. It also reviewed the assumptions underpinning the Group’s European Embedded Value (EEV) metrics. The Committee considered information, including peer comparisons if relevant and available, on the following key assumptions: — Persistency, mortality, morbidity and expense assumptions within the Asia life businesses; — Economic and policyholder behaviour assumptions (including mortality) affecting the measurement of Jackson guaranteed liabilities and amortisation of deferred acquisition costs; and
The Committee was satisfied that the assumptions adopted by management were appropriate.
The Committee regularly reviews the Group’s provisions, including the level of provisioning for regulatory and litigation matters and provisions for certain open tax items including tax matters in litigation. The Committee was satisfied that the level of provisioning adopted by management was appropriate.
The Committee considered various analyses from management regarding Group and subsidiary capital and liquidity prior to recommending to the Board that it could conclude that the financial statements should continue to be prepared on the going‑concern basis and the disclosures on the Group’s longer‑term viability were both reasonable and appropriate.
This assessment included a review to ensure that the allocation of items between operating and non‑operating profit was in accordance with the Group’s accounting policy. The Committee considered the impact of equity and interest rate movements on the IFRS results of the Group’s US business and after discussion, the Committee was satisfied that the presentation and disclosure of such impacts was appropriate and consistent with prior periods. Following the announcement of the merger of M&G and the UK life business, the Committee re‑evaluated the Group’s segmental disclosure, resulting in a revision to reflect the revised business unit structure. Prior to the announcement of the merger, the Committee also reviewed the basis of preparation of the costs and synergies disclosed. This work was supported by external independent review of management’s proposed disclosures.
External audit Review of effectiveness, non-audit services and auditor reappointment External audit effectiveness The Group’s external auditor is KPMG LLP (KPMG) and oversight of the relationship with them is one of the Committee’s key responsibilities. This included challenging and querying KPMG’s approach to risk and other issues regularly throughout the year.
The Committee approved KPMG’s terms of engagement for the statutory audit, and approved fees for both audit and non‑audit services in accordance with the Group’s policy. To assess the effectiveness of the auditor, the Committee reviewed the audit approach and strategy, and received an internal report on their performance.
The feedback provided was reviewed and compiled into a report for the Committee which covered areas such as the knowledge and expertise of the partners and team members, their understanding of the Group, the resourcing applied to the audit and continuity of the team, liaison with Group‑wide Internal Audit and approach to resolution of issues, as well as factors such as their coordination across the Group’s multiple jurisdictions and quality of their written and oral communication. The degree of challenge and robustness of approach to the audit were key components of the evaluation.
The Committee Chairman invited other Group stakeholders to provide their views on the performance of the auditor, and KPMG were given the opportunity to respond to the findings in the report.
www.prudential.co.uk Annual Report 2017 Prudential plc 111 01 G roup overview 02 Strategic report 03 G
Reappointment Based on the outcome of the effectiveness evaluation and all other considerations, the Committee concluded that there was nothing in the performance of the auditor which would require a change. The Committee therefore recommended that KPMG be reappointed as the auditor. A resolution to this effect will be proposed to shareholders at the 2018 Annual General Meeting.
Audit tender The Committee acknowledges the provisions contained in the UK Code in respect of audit tendering, along with European rules on mandatory audit rotation and audit tendering. In conformance with these requirements, the Company will be required to change audit firm no later than for the 2023 financial year end.
The external audit was last put out to competitive retender in 1999 when the present auditor, KPMG, was appointed. Since 2005, the Committee has annually considered the need to retender the external audit service. The Committee recognises that the industry is in a period of unprecedented change with the IASB issuing its new insurance accounting standard in 2017, for implementation in 2021. The Committee currently believes any change of auditor should be scheduled to limit operational disruption during such a period of change and, as a consequence, is not currently planning to change auditors before the adoption of IFRS 17. This remains subject to the Committee’s normal annual review of auditor performance and recommendation to shareholders as described above. The Committee considered its strategy on audit tendering in November 2017, concluding that the existing timeline for appointing a new auditor by the 2022 year end, did not need to be amended. In conducting this review, the Committee concluded that it would be appropriate to commence a competitive tender for the 2022 audit in 2019.
At the half year, the Committee considered recommendations to refresh the Internal Audit Plan in response to changes in the business unit operating environments and an update to the Group’s top risks. The 2018 Internal Audit Plan was formulated based on a bottom‑up risk assessment of audit needs mapped against various metrics combined with top‑down challenge. The plan was then mapped against a series of risk and control parameters, including the top risks identified by the Risk Committee, to verify that it is appropriately balanced between financial, business change, regulatory and operational risk drivers and provides appropriate coverage of key risk areas and audit themes within a risk‑based cycle of coverage. Key areas of focus for 2018 include strategic change initiatives, customer outcomes, cyber security and digitalisation.
Internal audit effectiveness The Committee is responsible for approval of the GwIA charter, audit plan, resources, and for monitoring the effectiveness of the function. The Committee assesses the effectiveness of GwIA through a combination of EQA reviews, required every five years, and an annual internal effectiveness review, performed by the GwIA Quality Assurance Director.
www.prudential.co.uk Annual Report 2017 Prudential plc 113 01 G roup overview 02 Strategic report 03 G
An assessment of the business unit audit committees was completed and the outcomes reported to the Committee and to the business unit audit committees in February 2018. The assessment was supported by local teams from GwIA and considered whether each of the committees fulfilled the responsibilities documented in their terms of reference. The evaluation also considered attendance rates by audit committee members and evidence of the audit committees’ coverage of key business unit issues, as well as the appropriate escalation of concerns to the Committee. The evaluation concluded that the audit committees operated in accordance with their terms of reference.
The Committee also reviewed the membership of the Material Subsidiary audit committees.
Second line oversight Compliance, financial crime prevention, whistleblowing Regular reporting from the Compliance function
Regular updates were provided to the Committee by the Group Regulatory and Government Affairs Director and the Group Compliance Director. The reports kept the Committee apprised of key compliance activities, issues and controls, including progress against the 2017 Compliance Plan, the outcome of compliance monitoring activities across the Group and the effectiveness of business units’ compliance activities.
The Committee considered and approved the 2018 Group Compliance Plan. The strategic focus of the Plan in 2018 will be on enhancing the assurance framework, building on work undertaken in 2017. Group Compliance will also continue to drive forward capabilities within the team and wider compliance community, carrying out activities to maintain oversight of the top risks identified.
As part of its responsibility for the oversight of financial crime prevention, the Committee received updates on Anti‑bribery and Corruption and Anti‑money Laundering, Sanctions and Fraud procedures. The Risk Committee was updated on risk assessments of anti‑bribery and corruption and fraud prevention, during the year, which informed the update provided to the Committee in early 2018.
The Committee is responsible for reporting and making recommendations to the Board on the effectiveness of Group‑wide internal control and risk management systems.
The Committee considered the outcome of the annual review of the systems of internal control and risk management. The report considered all material controls, including financial, operational and compliance controls, risk management systems and the adequacy of the resources, qualifications and experience of staff of the Group’s accounting, internal audit and financial reporting functions. The review identified a number of areas for improvement and the necessary actions have been or are being taken.
Having considered the review, the Committee made recommendations to the Board regarding the ongoing process for identifying, evaluating and managing the significant risks faced by the Group, noting that it had been in place throughout the period and confirming that the systems remain effective.
The Board’s statement regarding effectiveness of these systems can be found on page 100.
The Committee reviewed the results of the Group Governance Manual annual content review and the results of the year end certification of compliance with Group Governance Manual requirements for the year ended 31 December 2017.
www.prudential.co.uk Annual Report 2017 Prudential plc 115 01 G roup overview 02 Strategic report 03 G
The Committee assists the Board in providing leadership, direction and oversight of the Group’s overall risk appetite and limits, risk strategy, and risk culture. We also oversee and advise the Board on current and future risk exposures of the Group, including those which have the potential to impact on the delivery of the Group’s Business Plan. The Committee reviews the Group Risk Framework and recommends changes to it for approval by the Board, to ensure that it remains effective in identifying and managing the risks faced by the Group.
We work closely with the Audit Committee to ensure both Committees are updated and aligned on matters of common interest. Where responsibilities are perceived to overlap between the two Committees, I work with Mr Law to agree the most appropriate Committee to consider the matter. During the year we transferred responsibility for the review of Solvency II disclosures to the Audit Committee.
The Committee reviewed in depth the risks arising from our business. This included a further review into the Jackson hedging programme and providing oversight of implementation of recommended actions. Reviews were also performed on asset liability management for our UK with‑profit business, our China joint ventures and other aspects relating to our Asia business.
The Committee reviewed the methodology and annual calibration of the Solvency II internal model, and we also oversaw the successful submission of the Group’s Major Model Change application in November 2017 in respect of the model.
Cyber security remains an area of focus which saw attention from the Committee in 2017. During the year we reviewed progress achieved on the implementation of our Cyber Defence Plan. The Committee considered the Group‑wide approach, and changes in governance and processes required, for compliance with the EU’s General Data Protection Regulations which are due to come into force in May 2018. The Group also prepared its first environmental, social and governance report in 2017 with the Committee reviewing the risk elements included in that report.
Committee members — Howard Davies (Chair) — Ann Godbehere (until May 2017) — David Law (from May 2017) — Kai Nargolwala — Alice Schroeder (from March 2018) — Lord Turner
Regular attendees — Chairman of the Board — Group Chief Executive — Group Chief Risk Officer — Chief Financial Officer — Group Regulatory and Government Relations Director
In August we announced the merger of two of our business units to form M&G Prudential. The Committee considered the approach for managing risks associated with the merger, and will monitor and assess these risks through 2018.
Part of my role as Chair is to consider the governance arrangements for the Committee. The Committee considers its terms of reference at least annually and in October 2017 considered proposed changes to its terms of reference. We formalised the Committee’s role in considering how changes in the financial environment impact the Group’s risk profile. We also refreshed our terms of reference to reflect the Committee’s role in providing advice to the Remuneration Committee on risk management considerations to be applied in respect of executive remuneration.
www.prudential.co.uk Annual Report 2017 Prudential plc 117 01 G roup overview 02 Strategic report 03 G
How the Committee spent its time during 2017 Feb1 May Jul Oct Dec
Business Plan As part of the Committee’s role in overseeing and advising the Board on future risk exposures and strategic risks, the Committee reviewed Group Risk’s assessment of the Group’s Business Plan, which covered a range of both financial and non‑financial considerations.
As part of the Group Risk’s review of the annual Group Business Plan, Group Approved Limits were reviewed, updated and approved by the Committee.