Prudential helps people de‑risk their lives and deal with their biggest financial concerns.
profit for the year in note B1.1 of the IFRS financial statements.
2 For insurance operations, underlying free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and excludes non-operating items. For asset management businesses, it equates to post-tax operating profit for the period. Restructuring costs are presented separately from the underlying business unit amount. Further information is set out in note 10 of the EEV basis results.
3 New business profit on business sold in the year, calculated in accordance with EEV principles.
Our�performance�depends�on�the�quality� of�our�products,�which�meet�essential� needs�for�our�customers.�We�are�strongly� aware�of�our�purpose,�which�is�to�help� people�de-risk�their�lives�and�deal�with� their�biggest�financial�concerns.�Our� products�and�services�are�designed�and� delivered�with�that�purpose�clearly�in�mind.� The�quality�of�our�financial�performance� during�2018�is�a�reflection�of�our�success�in� providing�value�to�our�customers.
We�have�been�working�hard�on�the� proposed�demerger�of�M&GPrudential� from�the�Group,�which�we�announced�in� March�2018.�We�remain�confident�that�it� will�result�in�the�creation�of�two�businesses� with�distinct�investment�prospects,�each� offering�compelling�propositions�to� customers�and�shareholders.�The�practical� steps�needed�to�deliver�the�demerger�are� progressing�as�planned.�The�Board�is� focused�on�ensuring�a�smooth�transition� and�that�both�businesses�have�the� necessary�management�and�board� expertise�to�give�them�the�best�possible� start�to�life�after�the�demerger.�This�has� included�the�appointment�of�Mike�Evans� as�Chair�of�M&GPrudential.
We�have�also�looked�at�our�wider�Board� composition�as�we�head�towards�the� demerger�of�M&GPrudential.�As�Chief� Executive�of�M&GPrudential,�John�Foley� will�naturally�stand�down�from�the�Board� as�part�of�the�transition.�Having�taken�into� account�the�changed�shape�of�the� Prudential�Group�post-demerger�and�the� reduced�number�of�business�units,�the� Board�has�decided�that�the�roles�of�Chief� Executive�of�Prudential�Corporation�Asia� and�Chairman�and�Chief�Executive�of� Jackson�Holdings�will�no�longer�be� executive�director�roles�on�the�Board,� although�they�will�remain�on�the�Group� Executive�Committee.�John�Foley,�Nic� Nicandrou�and�Michael�Falcon�will�not�seek� re-election�and�will�step�down�at�the�2019� Annual�General�Meeting�(AGM).�My� thanks�go�to�all�three�of�them�for�their� service�on�the�Board.
Our customers and wider stakeholders Regardless�of�the�nature�of�the�external� environment�and�the�changes�we�are� making�to�the�Group,�we�maintain�our� strong�focus�on�delivering�for�our� customers.�In�Asia,�we�are�developing� innovative�digital�solutions;�in�the�US�we� are�providing�new�retirement�propositions;� and�in�the�UK�we�are�making�our�successful� PruFund�products�increasingly�available�to� people�who�are�looking�for�ways�to�ensure� their�financial�security�in�retirement,� including�through�our�digital�platform.� We�are�also�taking�active�steps�to�ensure� that�we�are�prepared�for�the�impact�of�the� UK’s�exit�from�the�European�Union.�At�the� same�time,�we�are�using�our�customers’� capital�to�invest�in�companies�and� infrastructure�around�the�world,�driving� economic�growth�and�supporting�the� communities�in�which�we�operate.
I am pleased to introduce Prudential’s 2018 Annual Report. The Company has performed well amid uncertain macro-economic conditions, continuing to deliver value for our customers, shareholders and wider stakeholders. We have also made good progress towards our planned demerger of M&GPrudential from Prudential plc.
Our people Prudential�has�always�been�a�business�built� on�our�people.�It�is�the�commitment,�drive� and�creativity�of�our�teams�in�markets� around�the�world�that�has�enabled�us�to� deliver�these�results�while�moving�towards� our�demerger.�The�commitment�of�our� people�to�our�customers�is�inspiring,�and� understanding�their�needs�and�priorities�is� a�focal�point�for�the�Board.�An�environment� where�we�continually�develop�our�talent,� reward�great�performance,�protect�our� people�and�value�our�differences�is�key� to�delivering�results�such�as�these.
I�am�also�particularly�pleased�with�the�efforts� so�many�of�our�people�make�in�regard�to� community�involvement.�We�have�an�active� programme�of�community�investment�in�our� businesses�around�the�world,�with�a�total� contribution�of�over�£27�million.�Our�projects� range�from�Cha-Ching,�the�financial� education�platform�aimed�at�primary-school� children,�which�began�in�Asia�and�is�now� present�on�all�four�continents�on�which�we� operate,�to�Prudential�RideLondon,�now�in� its�seventh�year,�which�has�raised�more�than� £66�million�for�charity,�plus�our�many�other� activities�around�social�inclusion,�education� and�life�skills�and�disaster�preparedness.
Looking forward We�have�delivered�solid�results�while� making�good�progress�towards�a�significant� change�that�we�believe�will�secure�the� long-term�future�for�both�Prudential�plc�and� M&GPrudential.�The�Board�is�confident� that�shareholders,�customers�and�all�our� stakeholders�will�benefit�from�the�creation�of� the�two�focused�and�innovative�companies� that�will�result,�and�that�we�will�continue� delivering�value�well�into�the�future.
In�March�2018,�we�announced�our� intention�to�demerge�M&GPrudential�from� the�Group,�in�order�to�create�two�separately� listed�companies�with�distinct�investment� characteristics�and�opportunities.�After�the� demerger,�our�shareholders�will�have� shares�in�Prudential�plc,�which�will�be�even� better�positioned�to�capture�the�structural� opportunities�ahead�of�us,�and� M&GPrudential,�with�greater�freedom�to� deploy�its�capital�where�and�how�it�likes�to� meet�the�changing�needs�of�customers.
Group�adjusted�IFRS�operating�profit� based�on�longer-term�investment�returns4� (‘operating�profit’)�was�6�per�cent3�higher� at�£4,827�million�(up�3�per�cent�on�an�actual� exchange�rate�basis).�Operating�profit� from�our�Asia�life�insurance�and�asset� management�businesses�grew�by� 14�per�cent3,�reflecting�continued�broadbased �business�momentum�across�the�region� and�high-quality�sales,�with�over�85�per�cent� of�operating�income�from�our�preferred� sources�of�insurance�income,�fee�income� and�with-profits.�In�the�US,�Jackson’s�total� operating�profit�was�11�per�cent3�lower,� with�higher�fee�income�outweighed�by� an�increase�in�market-related�deferred� acquisition�costs�(DAC)�amortisation� expense�and�the�anticipated�reduction�in� spread�earnings.�In�the�UK�and�Europe,� M&GPrudential’s�total�operating�profit�was�
I am pleased to report that we have delivered another year of positive financial performance across the Group. Through the combination of our consistent strategy, our diversified portfolio of businesses and our disciplined execution, we have continued to produce high-quality earnings and deliver consistent returns for our investors and good outcomes for all our stakeholders.
The�Group’s�capital�generation�is� underpinned�by�our�large�and�growing� in-force�business�portfolio,�and�focus�on� profitable�business�with�fast�payback�of� capital�invested.�Overall,�underlying� free�surplus�generation6�increased�by� 14�per�cent3�to�£4,047�million�and�cash� remittances�to�the�Group�from�business� units�were�£1,732�million�(2017:� £1,788�million).�The�Group’s�overall� performance�supported�a�5�per�cent� increase�in�the�2018�full�year�ordinary� dividend�to�49.35�pence�per�share.�
Group Chief Executive’s report – Mike Wells continued growth,�with�average�annual�GDP�growth� in�our�Asia�life�markets�of�10.4�per�cent�in� the�decade�to�201711,�compared�with�just� 1.9�per�cent�for�the�rest�of�the�world11.� Furthermore,�despite�potential�headwinds,� between�2017�and�2023�Asia�is�expected� to�deliver�39�per�cent�of�the�world’s�GDP� growth11.�This�is�creating�a�rapidly�growing� middle�class�in�the�Asia�region,�which�is� expected�to�double�by�2030�to�reach� 3.5�billion�people12.�At�the�same�time,� insurance�penetration�in�Asia�is�just� 2.7�per�cent�of�GDP13,�compared�with� 7.2�per�cent�in�the�UK13,�leaving�the�region� vastly�under-insured�with�an�estimated� mortality�protection�gap�of�US$40�trillion14� and�a�health�and�protection�gap�of� US$1.8�trillion15.�Similarly,�mutual�fund� penetration�in�Asia�is�only�12�per�cent16,� compared�with�96�per�cent�in�the�US16,� whilst�65�per�cent�of�wealth�in�Asia�is�held� in�cash17.�With�private�financial�wealth�in� the�region�growing�by�US$5�trillion�per� year17,�there�is�considerable�latent�demand� for�our�savings�solutions.�These�structural� drivers�of�growth�are�expected�to�persist� for�many�years�to�come�and�create�a� historic�opportunity�for�us.�
We�have�a�strong�and�growing�opportunity� in�the�US.�About�40�million�Americans�are� expected�to�reach�retirement�age�over�the� next�decade�alone.�At�the�same�time,� 72�per�cent�of�American�workers�do�not� have�access�to�a�defined�benefit�retirement� plan18.�A�study�conducted�by�the�Insured� Retirement�Institute�and�Jackson�showed� that�80�per�cent�of�Americans�think�that� social�security�will�not�provide�enough� income�for�retirement19,�and�the�same� percentage�are�willing�to�pay�more�for� guaranteed�lifetime�income19.�This�aligns� with�our�retirement�income�products,�which� are�designed�to�help�customers�avoid� running�out�of�money�and�provide�them�with� a�reliable�cushion�against�volatile�markets.
powerful�opportunity�for�M&GPrudential.� Those�approaching�retirement�have�been� looking�for�new�ways�to�ensure�a� comfortable�future,�and�since�pensions� freedoms�were�introduced�in�the�UK�in� 2015�that�demand�has�been�increasing.�At� the�same�time,�the�total�value�of�household� cash�deposits�in�the�EU�is�estimated�at� ¤10�trillion20,�indicating�the�scale�of�the� opportunity�for�asset�management�in�the� region.�Private�assets�under�management� are�expected�nearly�to�double�between� 2017�and�202321.�M&GPrudential,�which� already�has�established�international� distribution,�a�clear�focus�on�customer� solutions�and�a�broad-ranging�investment� capability,�is�transforming�itself�to�meet� this�opportunity.
New and better ways to serve customers We�are�continuing�to�improve�the�way�we� serve�our�customers�in�every�part�of�the� world�in�which�we�operate.�We�constantly� update�our�products�and�our�capabilities� to�ensure�that�we�are�fulfilling�our�purpose� and�maximising�the�effect�of�our�strategy.
In�the�US,�we�have�a�long�and�durable�track� record�of�delivering�financial�success�for�our� consumers.�We�are�offering�new�products� for�fee-based�advisers�and�have�launched� new�versions�of�our�fee-based�variable� annuities.�We�are�changing�the�narrative� around�retirement�and�lifetime�income,� demonstrating�the�value�proposition�of� our�products�to�regulators,�investors,� policyholders�and�influential�industry� figures.�In�September,�we�announced�our� collaboration�with�the�Envestnet�Insurance� Exchange,�to�offer�our�products�on�its� platform.�In�October,�we�announced�a�key� distribution�partnership�with�State�Farm,� further�strengthening�our�market-leading� distribution�footprint.�Early�in�2019,�we� partnered�with�DPL�Financial�Partners�to� provide�our�protected�lifetime�solutions�to� independent�registered�investment�advisers� (RIA),�providing�access�to�new�opportunities� in�the�independent�RIA�channel.
Our leadership In�July�2018,�we�announced�that�Anne� Richards�was�resigning�as�Chief�Executive�of� M&G�and�from�the�Group’s�Board.�I�would� like�to�thank�Anne�for�her�contribution�to� the�Group’s�continued�success.�In�October� 2018,�we�announced�that�Barry�Stowe�had� decided�to�retire�as�Chairman�and�Chief� Executive�Officer�of�Jackson�and�as�an� Executive�Director�of�the�Group.�Barry� made�an�exceptional�contribution�over�his� 12�years�at�the�Group,�first�at�our�Asia� business,�which�under�his�leadership�grew� to�become�the�market-leading�operation�it� is�today,�and�in�the�US�since�2015.�Barry� has�been�succeeded�at�Jackson�by�Michael� Falcon.�Formerly�CEO�of�Asia�Pacific�for�JP� Morgan�Asset�Management,�Michael�has� deep�expertise�and�an�impressive�track� record�in�the�industry�and�is�well�placed�to� lead�the�next�phase�of�our�development�in� North�America.�We�continue�to�invest�in�the� right�people�at�all�levels�across�the�Group.
Delivering value into the future Our�clear�strategy,�discipline�and�improving� capabilities�have�enabled�us�to�deliver� a�broad-based�financial�performance�in�2018,� based�on�a�close�focus�on�our�core�purpose�of� helping�people�to�de-risk�their�lives�and�deal� with�their�biggest�financial�concerns.�In�Asia� we�continue�to�see�a�strong�runway�for�the�
Our strategy Our strategy is to capture the long-term structural opportunities within our markets, operating with discipline and enhancing capabilities through innovation to deliver high-quality resilient outcomes for our customers.
We aim to do this by: — Serving the protection and investment needs of the growing middle class in Asia; — Providing asset accumulation and retirement income products to US retirees; — Offering products to new customers in Africa, one of the fastest-growing regions in the world; and
We aim to generate attractive returns enabling us to provide financial security to our customers and deliver sustainable growth for our shareholders. Following rigorous review, we believe that this long-term strategy is best served through the intended demerger of M&GPrudential.
In 2018 the Group announced its intention to demerge its UK and Europe business, M&GPrudential, from Prudential plc, which will result in two separately listed companies, with different investment characteristics and opportunities. We have always been clear about the importance of creating optionality in our corporate structure, and decided to exercise one of those options in the interests of both the business and all of our stakeholders.
M&GPrudential With over 6 million clients across 29 markets and £321 billion1 in assets under management, M&GPrudential’s vision is a business built for the customer which is simple, efficient, digitally enabled, capital-light, fast-growing and, above all, focused on delivery.
The combined business benefits from two strong complementary brands, a world-class investment capability, international distribution and a robust capital position.
£657 billion total funds under management 26 million customers worldwide 1 Represents M&GPrudential asset management external funds under management and internal funds included on the M&GPrudential long-term insurance balance sheet.
Leading pan-regional franchise £151bn assets under management 94% of APE sales are regular premium £1.2bn underlying free surplus generation
Asia Prudential Corporation Asia has leading insurance and asset management operations across 14 markets which serve 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 service and a widely recognised brand.
The formation of M&GPrudential, the joining of two well recognised brands with a strong track record, has created a leading savings and investment business, ideally positioned to target growing customer demand for financial solutions in the UK and Europe.
Structural growth over the last two decades has allowed our non-European business to reach the scale where it has the ability to self-fund its own long-term goals through disciplined capital allocation. Prudential plc has a diversified, but highly complementary, portfolio of businesses with access to the world’s largest and fastest-growing markets.
Africa 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.
M&GPrudential — Ageing population — Large and growing retirement asset pools — Growing demand for saving and income
Customer service 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.
Solutions We offer solutions for customers as they face the biggest financial challenges of their lives. We consistently develop our product portfolio, designing it around our customers’ needs and providing them with peace of mind, whether that be in relation to saving for retirement or insuring against risks of illness, death or critical life events.
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.
Growth £4,827m Operating profit1 +6%2 on 2017 £3,877m New business profit +11%2 on 2017 £7,563m EEV operating profit +19%2 on 2017
Cash £4,047m Free surplus generation +14%2 on 2017 £1,732m Remittances -3%3 on 2017
Providing an environment with equal opportunities, career potential and rewards, enabling us to attract and retain high-quality individuals to deliver our strategy.
Supporting communities where we operate, through investment in business and infrastructure, tax revenues and community support activities.
Notes 1 Adjusted IFRS operating profit based on longer-term investment returns. 2 Growth rates on a constant exchange rate basis. 3 Growth rates on an actual exchange rate basis.
Strength and flexibility of our distribution network gives us a distinctive advantage Largest and most productive VA wholesale distribution force in the US1
+700 broker-dealers’ selling agreements covering +230,000 (74%) of total US advisers2
Establishing network with market-leading initiatives +4,000 agents 6 exclusive bank partners
Diversified distribution model underpinned by two complementary brands £321 billion total assets under management4
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 & by Contract 3Q YTD 2018. Jackson ranks #1 out of 725 VA contracts with reported sales in the Independent Channel in 3Q YTD 2018.
4 Represents M&GPrudential asset management external funds under management and internal funds included on the M&GPrudential long-term insurance business balance sheet.
Chief Executive Officer: Mike Wells Headquarters: London Premium listing: London Stock Exchange Other listings: Hong Kong (Primary), Singapore, New York
What is the rationale for the demerger? Following separation, M&GPrudential will have more control over its business strategy and capital allocation. This will enable it to play a greater role in developing the savings and retirement markets in the UK and Europe through two of the financial sector’s most trusted brands, M&G and Prudential, while Prudential plc will be able to focus on the attractive returns and growth potential of its market-leading businesses in Asia and the US.
Will the businesses stay in the UK? Both businesses will be headquartered in the UK, and premium-listed on the London Stock Exchange. We expect both businesses will meet the criteria for inclusion in the FTSE 100 index.
How are we progressing? In preparation for the demerger, we have already completed a number of key steps, including: — We announced that the Hong Kong Insurance Authority would be the Group-wide supervisor after the demerger of M&GPrudential; — We raised £1.6 billion of debt in September 2018. This debt issuance contained a substitution clause, allowing us to substitute M&GPrudential for Prudential plc as the issuer; — We established a new holding company for M&GPrudential and completed the transfer of the legal ownership of The Prudential Assurance Company Limited and M&G Group Limited to this company; — We announced the independent Chair of M&GPrudential in October 2018; and
When will it happen? We are making good progress on the workstreams to enable the legal, operational and financial separation of the businesses and we are committed to delivery with best execution. We will provide more details on timing when it is appropriate to do so.
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.
CAGR +16% EEV operating profit is provided as an additional measure of profitability. This measure includes EEV new business profit, the change in the value of the Group’s long-term in-force business, and profit from our asset management and other businesses. As with IFRS, EEV operating profit reflects the underlying results based on longer-term investment returns.
Group EEV operating profit in 2018 increased by 19 per cent on a constant exchange rate basis (15 per cent on an actual exchange rate basis), compared with 2017, driven by higher new business profit and higher contributions from the in-force business.
CAGR +12% 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 operating profit for the year.
Prudential is subject to the risk-sensitive solvency framework required under European Solvency II Directives (Solvency II) as implemented by the Prudential Regulation Authority in the UK. The Solvency II surplus represents the aggregated capital (own funds) held by the Group, less solvency capital requirements.
3 The EEV basis results have been prepared in accordance with EEV principles discussed in note 1 of the EEV basis results. See note III of Additional unaudited financial information for definition and reconciliation to IFRS balances.
4 For insurance operations, underlying free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and excludes non-operating items. For asset management businesses, it equates to post-tax operating profit for the period. Restructuring costs are presented separately from the underlying business unit amount. Further information is set out in note 10 of the EEV basis results.
5 Cash remitted to the Group forms part of the net cash flows of the holding company. A full holding company cash flow is set out in note II (a) of the Additional unaudited IFRS financial information. This differs from the IFRS Consolidated Statement of Cash Flows which includes all cash flows relating to both policyholders’ and shareholders’ funds. The holding company cash flow is therefore a more meaningful indicator of the Group’s central liquidity.
6 The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring fenced with-profit funds and staff pension schemes in surplus. The estimated solvency positions include management’s calculation of UK transitional measures reflecting operating and market conditions at each valuation date, which for both 2018 and 2017 reflects the approved regulatory position.
— Continued performance in key metrics: new business profit up 14 per cent1, operating profit up 14 per cent1 and underlying free surplus generation up 14 per cent1
— Developed over 160 products in 2018 and added 1.4 million new life customers2
— Signed an exclusive partnership with Babylon Health to provide AI-powered digital health services in up to 12 markets across Asia
— Established Eastspring’s wholly foreign-owned enterprise in Shanghai and extended our asset management presence to Thailand, following the acquisition of TMB Asset Management
Management Awards — In early 2019, we renewed and expanded our successful regional strategic bancassurance alliance with UOB
We believe our commitment to customers on ‘listening, understanding, delivering’ is a key differentiator. To fulfil this, we adopt a multi-channel strategy with over 600,000 agents, over 300 distribution partners and an increasing online offering, enabling us to serve our customers’ needs in their preferred manner. We have a proven ability to attract, develop and retain a talented and diverse workforce, employing over 13,000 people with more than 40 separate nationalities and wide-ranging industry backgrounds. This enables us to remain at the forefront of product development, create innovative services for our customers and embed digital technology to drive efficiency.
Today, consumers in Asia are both under-insured and under-saved during their working lives, which leaves them inadequately prepared for retirement.
Asia’s economies are also benefiting from a demographic dividend with moderating fertility rates and improving life expectancy. In youthful markets, such as Indonesia, this is creating a surge in the working age population and with that a continued source of demand for our
Continued progress against our strategic priorities, which align with the evolving and expanding sources of demand in Asia, leaves the business well positioned for sustained future growth.
Asia continuedAsia continued products. Across Asia the working age population is forecast to grow by almost one million people per month between now and 2030 to 2.5 billion people11. Meanwhile, the number of those aged over 65 is projected to almost treble by 2050 to 700 million11. This is expected to create demand for new solutions in markets with ageing populations, such as Hong Kong and China, as individuals look to maintain their standard of living during retirement.
Whilst these trends provide an attractive backdrop, we need to remain diligent and focused in our execution as a wide range of external developments can affect our business. The escalating trade-related tensions between the US and China contributed to increased equity market volatility in the second half of 2018. The landmark election result in Malaysia heralded the first change in governing party since independence in 1957 and we have been actively discussing how we support the new leadership in their desire to provide greater insurance access to the Malaysian population. In China, there was a step forwards in easing foreign investment in the insurance sector, with caps on foreign ownership expected to be lifted by 2021. Alongside these developments, regulators across the region are seeking to reward disciplined riskmanagement practices by strengthening consumer protection and migrating to risk-based solvency frameworks.
Strategic priorities Our business achieves high risk-adjusted returns by maintaining a disciplined focus on value. Two key distinguishing features of our sales mix are the contribution from health and protection products, which collectively accounted for 70 per cent of our new business profit in 2018, and the high proportion of regular premiums, which comprised 94 per cent of APE sales. We favour this mix because it provides our shareholders with a higher and more stable return across market cycles. Our success in health and protection is underpinned by our comprehensive underwriting processes, extensive experience and technical capabilities of our in-house professionals. Meanwhile, the high proportion of regular premiums ensures we collect a steady stream of revenues across market cycles.
We also use digital technology in servicing policies, both to improve the efficiency of our business and to enhance customer satisfaction. In Hong Kong we developed the ‘Hospital to Prudential’ portal to redefine the way our customers and medical professionals manage hospital claims, reducing the time required to submit a claim to just three minutes. Meanwhile, in China we have extended
Middle class in Asia as a proportion of world middle class10
Prudential Corporation Asia is well positioned to benefit from long-term structural opportunities
Agency Bank partners Unit linked Return of premium Multi-care multi-stage medical cover Critical illness
A dditional inform ation our award-winning WeChat self-service platform to include 90 per cent of all policy administration actions. Similarly, in Thailand we created a new customer services touchpoint through PruConnect, which enables customers to quickly access key information such as policy information, premium certificates and nearby network hospitals.
Finally, we intend to expand our presence in China across both the insurance and asset management sectors. We recently established a new branch in Hunan and received regulatory approval to undertake preparatory work to establish a new branch in Shaanxi, our nineteenth and twentieth provinces, respectively, offering access to over 100 million new people. This geographic expansion is supported by the diligent growth in our agency force, which grew by 7 per cent in 2018 to 48,000 agents. We also formed a two-year research partnership with the Development Research Centre of the State Council focused on the development of a sustainable pension system, which is testament to our aspirations in this market and our differentiated capabilities. Another major milestone in China was the opening of Eastspring’s wholly foreign-owned enterprise in Shanghai. This enables us to manage onshore investments for high-networth individuals and institutional investors in China, complementing our existing asset management joint venture with CITIC. Our first private fund has a Chinese equities mandate and is
PRUconnect also includes a chatbot feature, which uses artificial intelligence to simulate natural conversations. Customers can submit simple enquiries to the PRUchat bot via the LINE app, and stay connected to the company for assistance anytime and anywhere.
22 Prudential plc Annual Report 2018 www.prudential.co.uk expected to launch in April 2019, with further investment strategies planned to follow in due course.
Customers Our strong reputation and success to date have been built on a foundation of excellent customer service. During 2018, we added a further 1.4 million new life customers2, bringing the total to over 15 million life customers. Our strong retention ratio, which remained in excess of 90 per cent, and the consistently high proportion of repeat sales, which last year contributed over 40 per cent of APE sales, demonstrate the regard and trust our customers have in our business. These dynamics mean that we have 24 million in-force policies in total, with each of our policyholders holding 1.6 policies on average. In addition, our focus on health and protection business is reflected in a 7 per cent increase in sum-at-risk per policy, which is a leading measure of insurance coverage. Funds managed by Eastspring grew by 6 per cent to £151 billion at the end of 2018, with 10 per cent growth amongst third-party retail clients.
Life insurance Market ranking3 1st Population 267m Penetration16 1.9% Average health protection gap per household9 US$1,230
Laos Life insurance Market ranking3 Top 3 Population 7m Penetration16 0.0%
Life insurance Market ranking3 1st Population 32m Penetration16 3.3% Average health protection gap per household9 US$6,864
Philippines Life insurance Market ranking3 3rd Population 107m Penetration16 1.2% Average health protection gap per household9 US$1,406
Vietnam Life insurance Market ranking3 4th Population 97m Penetration16 1.3% Average health protection gap per household9 US$1,251
We pioneered the strategy of partnering with banks in Asia over 20 years ago and now have one of the largest and most successful bancassurance franchise in the region. Our strategic bank partnerships include multi-national banks, regional banks and prominent domestic banks in many key markets including China, India and Taiwan. In total we have access to over 14,000 bank outlets. Collectively, these partnerships contributed over 30 per cent of our APE sales in 2018 and associated new business profit grew by 19 per cent.
We have also started collaborating with non-traditional partners, including DirectAsia, Hiscox’s online property and casualty business in Singapore, and Eureka, a data management and analytics platform based in Indonesia. These mutually beneficial partnerships will enable us to reach new customers and create unique opportunities for our existing ones.
Business outlook We continue to see a strong runway for the insurance and asset management industries in Asia. We recently conducted a strategic assessment, which re-affirmed the strengths of our business, established the potential future size of our markets and has informed our future investment pathway.
Our market-leading position in retail fund management reflects our region-wide presence and strong operating credentials. This positions us well for the future growth in the market that is expected from new wealth creation and the shift we envisage from deposits to riskier investments. We believe these factors make double-digit growth viable in India, where we are market leaders, alongside other key markets such as China and Thailand, where we have taken action to strengthen our position.
Notes 1 Growth rate on a constant exchange rate basis. 2 Excluding India. 3 Based on full year 2018 or the latest information available.
4 IFRS gross premiums earned for Asia segment. 5 Includes renewal premiums from joint ventures.
October 2018. Average gap per household is calculated as ‘total health protection gap divided by the estimated number of households hospitalised under the mentioned gap range’. Report excludes Cambodia and Laos.
10 Brookings Institution. Global Economy & Development Working Paper 100. February 2017. ‘Asia’ represents Asia Pacific.
11 United Nations, Department of Economics and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision.
12 Working age population: 15 to 64 years. 13 ©Copyright 2018 Strategic Insight, an Asset International
17 Total joint venture / foreign players only. 18 FUM reported based on the country where the funds are managed.
21 Includes Takaful sales and excludes Group business. 22 Includes onshore only, excluding Eldershield and DPS. 23 Based on 100 per cent conversion of qualifiers into members. 24 Proprietary research/Bain Analysis (2018) covering the following markets: Hong Kong; Singapore; Indonesia; Malaysia; China; and India, using sales data provided by insurance regulators, insurance associations and industry expert surveys in these markets.
Customers In Asia, we focus our efforts on helping new and existing customers build better futures for themselves and their families, by helping to fill the savings and protection gap that exists in many markets in the region.
94% of APE sales in regular premium 70% of all new business submitted through e-point-of-sale technology
The US is the world’s largest retirement savings market with approximately 40 million Americans reaching retirement age over the next decade. This transition will trigger the need for an unprecedented shift of trillions of dollars from savings accumulation to retirement income generation.
To overcome these challenges, Americans need and demand retirement strategies that offer them the opportunity to grow and protect the value of their existing assets, as well as the ability to provide guaranteed income that will last throughout their extended lifetimes.
Fixed index annuity A Jackson fixed index annuity is a guaranteed product with limited market exposure but no direct 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.
Also, in 2018, Jackson took a lead role in bringing together 24 of America’s financial services organisations to launch the Alliance for Lifetime Income (Alliance). The Alliance was launched to educate Americans on the risk of outliving their income, so they can enjoy their years in retirement. The Alliance’s nationwide, multi-year, integrated educational campaign is designed to raise awareness and motivate consumers and financial advisers to discuss the need for protected lifetime income in retirement, which can be achieved with the use of annuity products such as those provided by Jackson.
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 broker-dealers, wirehouses and banks. For variable annuity sales, Jackson is the leader in the independent broker-dealer, bank and wirehouse channels2 and fourth in regional firms2.
Providing an ageing American population with financial strategies for stable retirements.
In October 2018, Jackson announced a new distribution relationship with State Farm®. In the second half of 2019, authorised State Farm agents will begin offering a select group of Jackson’s variable annuity and fixed index annuity products. While Jackson currently maintains one of the largest sales teams in the industry, this distribution relationship will add significant distribution access through State Farm’s growing network of qualified producers.
In February 2019, Jackson partnered with DPL Financial Partners (DPL) to provide our protected lifetime income solutions to independent registered investment advisors (RIAs). The collaboration expands Jackson’s distribution footprint and provides Jackson with access to new opportunities in the independent RIA channel.
As a result of an improved regulatory outlook, rising interest rates and more aggressive product feature changes (ie withdrawal percentages) implemented by competitors, the annuity industry saw increased sales in 2018 (albeit still well below levels prior to the DoL Rules proposal). Sales in the variable annuity industry as of the third quarter of 2018 at US$75.4 billion4 were up 4 per cent compared with the same period last year.
Investment for growth With trillions of dollars of adviserdistributed assets across distribution platforms that have not historically been a focus, such as the dually-registered investment adviser channel, we believe that a significant opportunity exists to reach even more American retirees and serve their needs with annuity products going forward. The industry will need to remain flexible and cost-effective in making changes to product systems and processes. We continue to seek to understand and make the necessary adjustments to support the needs and demands of American retirees into the future.
As Alliance co-chair, Jackson leads the charge to bring together 23 peer companies, non-profit groups and leading financial experts to create awareness about the role annuities can play in truly comprehensive financial plans.
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 of our risk management and hedge programmes through many economic cycles, and our effective technology platforms and award-winning customer service will provide Americans with the retirement strategies they so desperately need. Jackson’s discipline will enable us to be positioned to capture additional growth during times of transition into the future.
3 Independent research and Market Metrics, a Strategic Insight Business. US Advisor Metrics 2018, as of 30 September 2018.
8 New advisers defined as producers who have not sold Jackson product since 2013.
Customers Many retirees or soon-to-be retirees face a reality of under-saving, having no guaranteed income source and the prospect of living longer than any prior generation. Jackson’s focus is to provide solutions to help address these concerns for the millions of Americans currently transitioning to and through retirement.
Products Jackson’s products provide needed access to equity market growth, protection of principal, and a way of converting retirees’ savings into retirement income with a degree of certainty. With a long history of disciplined product design and prudent risk management, Jackson has earned and continues to earn trust from its key stakeholders.
Largest and most productive VA wholesale distribution force in the US3
New marketing alliance with State Farm adding significant distribution access through its growing network of qualified producers
Approximately 32% of Jackson’s 2018 advisory variable annuity sales from new advisers8
— Major transformation programme already showing improvements in digital service for customers
— Demerger preparation progressing at pace with several major milestones reached
M&GPrudential is the UK and Europe savings and investments business of Prudential plc. It was formed in 2017 through the merger of Prudential’s UK and Europe insurance operations with M&G Investments, Prudential’s international asset manager.
We believe M&GPrudential is well placed to help our customers build and protect their savings because of the mix of our businesses, capabilities and people. We combine the best of fund management with compelling customer propositions in a highly collaborative culture. Our competitive advantages arise from the strength and depth of this business mix built over many years.
We have a full set of diversified investment capabilities with expertise spanning a range of fixed income, equity, multi-asset, real estate and private asset classes. We are one of the largest multi-asset managers in Europe through the £131 billion Prudential With-Profits Fund and our range of branded M&G funds, and manage £59 billion of private assets, including an international real estate portfolio. We are a UK market leader in savings solutions with our PruFund proposition, a modern way of with-profits investing. We also have one of the fastest growing advised platforms3 in the UK, reaching £13.3 billion in assets under administration in the 24-month period since launch. We have a growing international distribution network with multi-channel breadth and depth, and two of the strongest brands in the market.
— to prepare M&GPrudential for demerger and its future as an independent company with its own listing on the stock market.
In the institutional market, clients are increasingly seeking bespoke solutions from asset managers with diversified investment capabilities and global reach. The combination of M&GPrudential’s expertise in private assets, which are much in demand in this sector, and our growing international network of offices means we are well placed to serve these clients.
For customers of our traditional insurance business, our modernisation programme is already improving service levels. Deployment of new digital technology has reduced markedly the time it takes to process a redemption from a Prudential savings bond. Customers can now register for our MyPru online service in minutes.
During 2018, we transferred £21 billion of our key European fund offerings into new Luxembourg-based SICAVs, with the process expected to be completed as planned in the first quarter of 2019. This positions us well to minimise any potential disruption for our European clients stemming from the UK’s withdrawal from the European Union, while also creating a more flexible and robust platform for international growth.
Our investment capabilities span the traditional public markets, from cash through fixed income and on to international equities. We also have a large range of private asset capabilities with £59 billion of assets under management, covering real estate, private debt, corporate loans and infrastructure investments such as broadband and solar energy.
Our savings and investments business took the approach of transforming the whole customer journey – the customer experience from start to finish – rather than looking at each stage of the process individually, as they had done previously.
Following further cross-team collaboration, the business has just launched a version for independent financial advisers (IFAs) too and the initial response has been great. One IFA told us that being able to gain access to this data ‘at the touch of a button is market-leading and saves two weeks when compared to some competitors’ manual processes.’
The With-Profits Fund has acted as an incubator for other products too. Among these are a range of investment strategies based on private asset investments – such as real estate, infrastructure assets and private debt – and marketed to clients seeking this type of exposure.
Currently, we choose to serve our customers’ needs through our many business-to-business relationships. These relationships include thousands of independent financial advisers, most of the high-street banks, wealth managers, institutional investment managers and pension funds. Two years ago, we established an adviser platform in the UK to give the market better access to PruFund. Since then, we have diversified the range of products on the platform to include M&G mutual funds. In 2018, it was among the fastest growing platforms in the UK, reaching £13.3 billion of assets under administration.
Outside the UK, we distribute our investment products with the support of our financial advisers, independent asset managers, insurers and some of the world’s largest banks. From a standing start just under two decades ago, we have built an international distribution network to distribute M&G products and support clients in 29 markets, with offices most recently opened in Australia and the United States. Our new Luxembourg investment platform, as well as readying our business for Brexit, enables us to distribute our mutual funds more efficiently in Europe and beyond by offering our investment strategies in the SICAV format favoured by many of our clients.
The build of our corporate infrastructure is well advanced. The M&GPrudential leadership team is in place, a new governance model has been implemented and we have built a set of unified corporate support services.
In September, we announced the appointment of an M&GPrudential Chair, Mike Evans. During the first half of 2019, Mike and I will lead the recruitment of the board for the new listed company, including the appointment of independent non-executive directors including the heads of the key committees.
2 Household deposit data, Eurostat 2017. 3 UK Advised Platform Market data, Platforum, Q3 2018. 4 Based on the UK’s Top 50 Pension Schemes by size,
Customers Meeting the growing and fast-evolving saving and investment needs of customers across retail, institutional and direct channels.
In the US, we saw growth in fee income driven by higher average account balances offset by an increase in market-related deferred acquisition costs (DAC) amortisation and an expected reduction in spread-based revenues, leading to a fall in operating profit of 11 per cent. Jackson’s hedge programme performed as expected as equity markets weakened towards the end of 2018 and contributed to an increased risk-based capital ratio of 458 per cent, up from 409 per cent at year-end 2017.
— Total IFRS post-tax profit was up 30 per cent at £3,013 million (26 per cent on an actual exchange rate basis) after a £508 million pre-tax loss following the reinsurance of £12 billion4 of UK annuities to Rothesay Life. This increase was driven by Jackson, whose IFRS profit after tax in 2018 was £1,484 million, up from £245 million (£254 million on an actual exchange rate basis) reflecting higher interest rates and gains from Jackson’s hedging instruments as equity markets fell towards the end of 2018. Group IFRS shareholders’ equity was 7 per cent higher at £17.2 billion.
— Underlying free surplus generation2, our preferred measure of cash generation, from our life and asset management businesses, increased by 14 per cent to £4,047 million
— Full year ordinary dividend increased by 5 per cent to 49.35 pence per share, reflecting our 2018 performance and our confidence in the future prospects of our businesses.
Amortisation of acquisition accounting adjustments (46) (63) 27 (61) 25 (Loss) gain on disposal of businesses and corporate transactions (588) 223 n/a 218 n/a
Tax charge attributable to shareholders' returns (622) (906) 31 (876) 29
Basic earnings per share based on operating profit after tax 156.6 145.2 8 140.4 12 Basic earnings per share based on total profit after tax 116.9 93.1 26 90.0 30
Adjusted IFRS operating profit based on longer-term investment returns (operating profit) 2018 total operating profit increased by 6 per cent (3 per cent on an actual exchange rate basis) to £4,827 million.
US total operating profit at £1,919 million decreased by 11 per cent (14 per cent on an actual exchange rate basis). Higher fee income was more than offset by higher market-related DAC amortisation and lower spread-based income. Although equity markets declined in the fourth quarter, average separate account balances were above the prior year, given positive net inflows which supported higher levels of fee income. The higher market-related DAC amortisation arises mainly from £194 million acceleration of amortisation compared with £83 million favourable deceleration in 2017 (on a constant exchange rate basis), leading to an adverse year-on-year movement of £277 million. Excluding the acceleration and deceleration in 2018 and 2017, operating profit in 2018 would have been 2 per cent higher than 2017 on a constant exchange rate basis. The variability in DAC from year-on-year is dependent on separate account return and its interaction with the mean reversion formula applied by Jackson when determining the amortisation charge for the year. In the current year the dominant factors driving this calculation have been the equity market falls in 2018 (whereas 2017 saw equity market rises). Spread-based income decreased 20 per cent (22 per cent on an actual exchange rate basis), as anticipated, reflecting the impact of lower yields on our fixed annuity portfolio and a reduced contribution from asset duration swaps. While we expect these effects to continue to compress spread margins, the continued upwards movements in US reinvestment yields may help to reduce the speed of the decline.
Asset management operating profit decreased 5 per cent to £477 million, largely reflecting a normalisation of performance fees to £15 million, compared with a particularly high contribution of £53 million in the prior year. Excluding the contribution of performance fees, operating profit was 3 per cent higher. This reflects both the higher average level of funds managed by M&G (up from £275.9 billion in 2017 to £276.6 billion in 2018) and a higher revenue margin9 of 40 basis points (2017: 37 basis points). Operating profit is after charges of £27 million incurred in preparing the business for the UK’s proposed exit from the European Union, including the migration of fund assets to our Luxembourg-domiciled SICAV platform. The cost-income ratio7 of 59 per cent remains broadly in line with the prior year (2017: 58 per cent).
Focusing on business supported by shareholder capital, which generates the majority of the life profit, in 2018 net flows into our businesses were overall positive at £0.3 billion driven by our Asian operations. In the US, net outflows were £0.2 billion with positive separate account net inflows of £1.1 billion being more than offset by general account net outflows of £1.3 billion, as a result of higher surrenders as the portfolio develops. In the UK and Europe, the net outflows principally reflect the run-off of the in-force annuity portfolio following our effective withdrawal from selling new annuity business. Market and other movements have reduced shareholder-back liabilities by £7.8 billion. This includes the removal of £10.9 billion4 of UK annuity liabilities, representing the portion of the £12 billion4 reinsured liabilities that will be subject to a Part VII transfer to Rothesay Life, following their reclassification as held for sale, offset by additions of £4.1 billion in Jackson as a result of the agreement in November 2018 to reinsure a portfolio of business from John Hancock. The remaining £1.0 billion primarily reflects the effects of negative investment markets offset by currency effects as sterling weakened over the period. In total, business flows and market movements have decreased shareholderbacked policyholder liabilities from £274.5 billion to £267.0 billion.
Analysis of long-term insurance business pre-tax adjusted IFRS operating profit based on longer-term investment returns by driver
Margin on revenues 2,254 2,287 2,210 Expenses: Expected return on shareholder assets 242 234 228
Long-term business adjusted IFRS operating profit based on longerterm investment returns 5,031 4,874 4,725 * The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. The acquisition costs include only those relating to shareholder-backed business. † Other items includes share of related tax charges from joint ventures and associate and other items considered non-core to the UK and Europe business, see note I(a) of the Additional unaudited financial information.
We continue to maintain our preference for high-quality sources of income such as insurance margin from life and health and protection business, and fee income. We favour insurance margin because it is relatively insensitive to the equity and interest rate cycle and prefer fee income to spread income because it is more capitalefficient. In line with this approach, on a constant exchange rate basis, insurance margin has increased by 12 per cent (up 8 per cent on an actual exchange rate basis) and fee income by 8 per cent (up 4 per cent on an actual exchange rate basis), while as anticipated, spread income decreased by 18 per cent (down 20 per cent on an actual exchange rate basis). Administration expenses increased to £2,413 million (2017: £2,231 million) as the business continues to expand in Asia, alongside higher asset-based commissions within the US business, which are treated as an administrative expense in this analysis.
Asset management profit drivers Movements in asset management operating profit are also influenced primarily by changes in the scale of these businesses, as measured by funds managed on behalf of external institutional and retail customers and our internal life insurance operations.
M&GPrudential’s external asset management net outflows were £9.9 billion (2017: net inflows of £17.3 billion) driven by the expected redemption of a single £6.5 billion low-margin institutional mandate, and net outflows from wholesale and direct clients from bond and equity classes in volatile financial markets. This was partially offset by inflows into multi-asset wholesale offerings and other institutional business products, including public debt and illiquid credit strategies. Internal life insurance assets under management were £174.3 billion (2017: £186.8 billion) benefiting from PruFund net flows of £8.5 billion, offset by the effect of the £12 billion4 annuities reinsurance and lower equity market levels. As a result, total M&GPrudential assets under management16 reduced to £321.2 billion (2017: £350.7 billion).
Other income and expenditure and restructuring costs Other income and expenditure consists of interest payable on core structural borrowings, corporate expenditure and other income. These items, together with restructuring costs, increased 2 per cent to a net charge of £890 million (2017: £872 million). This reflects higher restructuring costs of £165 million (2017: £103 million), partly offset by a lower interest expense. Restructuring costs include investment spend of £99 million in relation to M&GPrudential merger and transformation bringing the cumulative cost to £143 million, on an IFRS basis, since the project began. Other restructuring costs relate to efficiency and change programmes across the Group, for example the rationalisation of US locations in 2018.
In 2018, the total short-term fluctuations in investment returns on shareholder-backed business were negative £558 million (2017: negative £1,563 million on an actual exchange rate basis) and comprised negative £512 million (2017: negative £1 million on an actual exchange rate basis) for Asia, negative £100 million (2017: negative £1,568 million on an actual exchange rate basis) in the US, positive £34 million (2017: negative £14 million on an actual exchange rate basis) in the UK and Europe and positive £20 million (2017: positive £20 million on an actual exchange rate basis) in other operations.
Rising interest rates in many territories in Asia led to unrealised bond losses in the period. In the US, lower equity market levels, alongside higher interest rate levels, as expected, resulted in gains on equity hedge instruments which are designed to protect Jackson’s capital position, balanced by higher technical reserve requirements.
The main driver of the Group’s effective tax rate is the relative mix of the profits between jurisdictions with higher tax rates (such as Indonesia and Malaysia), jurisdictions with lower tax rates (such as Hong Kong and Singapore), and jurisdictions with rates in between (such as the UK and the US).
Total tax contribution The Group continues to make significant tax contributions in the jurisdictions in which it operates, with £2,839 million remitted to tax authorities in 2018. This was similar to the equivalent amount of £2,903 million remitted in 2017.
Life insurance new business profit was up 11 per cent (7 per cent on an actual exchange rate basis) to £3,877 million, and life insurance new business APE sales increased by 1 per cent (decreased by 2 per cent on an actual exchange rate basis) to £6,802 million, including an increase of 4 per cent during the second half of 2018 compared with the second half of 2017, led by 8 per cent growth in Asia.
In the US, new business profit increased by 5 per cent to £921 million (up 2 per cent on an actual exchange rate basis) as a 4 per cent reduction in new APE sales was more than balanced by the favourable effect of higher interest rates and spread assumption changes compared with the prior period.
Underlying free surplus generated from in-force life business and asset management 4,862 4,553 7 4,429 10
Market related movements, timing differences and other non-operating movements (1,282) (1,012)
Profit attaching to corporate transactions 283 172 Net cash remitted by business units (1,732) (1,788)
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.
Net cash remitted by business units: UK and Europe 654 643 Other UK (including Prudential Capital) 37 25
EEV operating profit On an EEV basis, Group post-tax operating profit based on longer-term investment return increased by 19 per cent (up 15 per cent on an actual exchange rate basis) to £7,563 million in 2018.
EEV operating profit includes new business profit from the Group’s life business, which increased by 11 per cent (up 7 per cent on an actual exchange rate basis) to £3,877 million. It also includes in-force life business profit of £3,999 million, which was 27 per cent higher than prior year (up 23 per cent on an actual exchange rate basis), primarily reflecting the growth in our in-force business and higher interest rates. This is most evident in the profit from the unwind of the in-force business, which was 22 per cent higher at £2,573 million.
Experience and assumption changes were positive at £1,426 million (2017: £1,044 million), reflecting the continuing performance of our in-force policies.
In Asia, EEV life operating profit was up 23 per cent to £4,387 million, driven by 14 per cent growth in new business profit and 39 per cent growth in in-force profit, reflecting the growth of the in-force business and positive assumption changes and experience variances, as a result of the high quality of the existing portfolio.
Actual exchange rate Constant exchange rate 2018 pence 2017 pence Change % 2017 pence Change %
The loss attaching to corporate transactions of £451 million primarily relates to the reinsurance of the shareholder annuity portfolio to Rothesay Life. A more detailed explanation of this and other corporate transactions occurring in the period are set out in note 17 of the EEV financial statements.
In addition to its net core structural borrowings of shareholder-financed businesses 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 2018, we had issued commercial paper under this programme totalling US$599 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 2023. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 31 December 2018. 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.
Group IFRS shareholders’ funds at 31 December 2018 increased by 7 per cent to £17.2 billion (31 December 2017: £16.1 billion on an actual exchange rate basis), driven by the strength of the operating result, offset by dividend payments of £1,244 million. During the period, UK sterling has weakened relative to the US dollar and various Asian currencies. With approximately 51 per cent of the Group’s IFRS net assets (74 per cent of the Group’s EEV net assets) denominated in non-sterling currencies, this generated a positive exchange rate movement on the net assets in the period. In addition, the increase in US long-term interest rates between the start and the end of the reporting period produced unrealised losses on fixed income securities held by Jackson accounted through other comprehensive income.
Renewal and expansion of regional strategic bancassurance alliance with UOB In January 2019, Prudential and UOB renewed their regional bancassurance alliance until 2034, extending the scope to include a fifth market, Vietnam, alongside
Under the terms of the renewal, Prudential’s life insurance products will be distributed through UOB’s extensive network of more than 400 branches in five markets, providing access to over four million UOB customers. In addition, Prudential will use its digital capabilities to deliver protection-focused propositions to aid UOB’s digital bank expansion and customer acquisition aspirations. An initial fee of £662 million will be paid under the agreement which will be funded through internal resources. This amount will be paid in three instalments. £230 million was paid in February 2019 with £331 million to be paid in January 2020 and £101 million to be paid in January 2021.
Acquisition of majority stake in Group Beneficial Prudential plc is acquiring a majority stake in Group Beneficial (Beneficial), one of the leading life insurers in Cameroon, Côte d’Ivoire and Togo. Beneficial provides savings and protection products to over 300,000 customers through 41 branches and more than 2,000 agents. The acquisition will significantly add to Prudential’s growing scale in Africa, and is subject to various conditions and regulatory approvals.
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 business25.
Notes 1 Increase stated on a constant exchange rate basis. 2 For insurance operations, underlying free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and excludes non-operating items. For asset management businesses, it equates to post-tax operating profit for the period. Restructuring costs are presented separately from the underlying business unit amount. Further information is set out in note 10 of the EEV basis results.
3 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.
4 Relates to IFRS shareholder annuity liabilities, valued as at 31 December 2017.
12 Includes unallocated surplus of with-profits business. 13 Includes Group’s proportionate share in PPM South Africa and the Asia asset management joint ventures.
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.
15 Net inflows exclude Asia Money Market Fund (MMF) inflows of £1,500 million (2017: £1,495 million). External funds under management exclude Asia MMF balances of £11,602 million (2017: £9,317 million).
16 Represents M&GPrudential asset management external funds under management and internal funds included on the M&GPrudential long-term insurance business balance sheet.
17 Net cash remitted by business units are included in the Holding company cash flow, which is disclosed in detail in note II(a) of the Additional unaudited financial information. This comprises dividends and other transfers from business units that are reflective of emerging earnings and capital generation.
18 The methodology and assumptions used in calculating the Solvency II capital results are set out in note II(c) of the Additional unaudited financial information.
21 Based on hierarchy of Standard and Poor’s, Moody’s and Fitch, where available and if unavailable, internal ratings have been used.
25 Refer to note 11 on the parent company financial statements for further detail on the distributable profits of Prudential plc.
This section explains the main risks inherent in our business and how we manage those risks, with the aim of ensuring an appropriate risk profile is maintained.
The world economy The beginning of 2018 saw strong and broad economic growth following the significant US tax reforms enacted toward the end of 2017. As the year progressed the global economic backdrop evolved and a divergence in growth between the US and the rest of the world was observed. Rising US policy rates, tightening financial conditions and increasing trade tensions raised concerns and impacted emerging markets in particular. In the fourth quarter, fears of a more pronounced global economic slowdown also impacted the US as reductions in monetary stimulus continued, contributing to a sharp shift in risk sentiment. At the start of 2019, the outlook for the global economy remains uncertain and while growth remains positive, it has become more fragile and risks are weighted towards the downside. Political tensions in Europe, including uncertainty surrounding the nature of the UK’s exit from the EU and its future trading relationship, geopolitical developments and the potential increase of international trade tensions between the US and China pose risks to global growth and the economic environment.
Regulations Prudential operates in highly regulated markets across the globe, and the nature and focus of regulation and laws remains fluid. A number of national and international regulatory developments are in progress, with a continuing focus on solvency and capital standards, conduct of business, systemic risks and macroprudential policy. Such developments will continue to be monitored at a national and global level and form part of Prudential’s engagement with government policy teams and regulators. The Group announced in August 2018 that the Hong Kong Insurance Authority would be the Group-wide supervisor after the demerger of M&GPrudential, and constructive engagement on the future Group-wide regulatory framework, led by the Group Chief Risk Officer, will continue in 2019.
Group Chief Risk Officer’s report of the risks facing our business and how these are managed
A dditional inform ation 2. Key internal, regulatory, economic and (geo)political events over the past 12 months
President Xi Jinpingenters a second term in office in China after election by the National People’s Congress in March 2018.
A coalition government is formed in Italy between the centre right League and anti-establishment Five Star Movement, after general elections in March 2018.
The US Department of Labor’s (DoL’s) fiduciary rule is effectively ended after a decision in the US courts in March 2018. The deadline for the DoL to appeal lapses in June. Other proposals, such as the US Securities and Exchanges Commission’s best interest standard, remain in progress.
US President Trump and North Korean Chairman Kim Jong Un meet in Singapore on 12 June 2018 for a historic summit, where denuclearisation of the Korean peninsula is discussed.
The Indonesia President approves regulations on ‘grandfathering’ foreign ownership of insurance companies. Q3 In August the Group announces that the Hong Kong Insurance Authority will become the Group-wide supervisor for Prudential plc after the demerger of M&GPrudential, and constructive engagement on the future regulatory relationship begins.
In July the International Association of Insurance Supervisors (IAIS) releases consultation documents for both the Common Framework for the Supervision of Insurers (ComFrame) and Insurance Capital Standard (ICS) v2.0. The Group submits ICS field results to the PRA in August 2018.
The Bank of England raises rates for the second time since the 2008 financial crisis to 0.75 per cent in August, while highlighting significant Brexit-driven uncertainties to the economy.
PPM America (PPMA) becomes the fourth Prudential signatory to the UN Principles for Responsible Investment in October 2018.
Democrats win control of the House of Representatives in the November US midterm elections, while the Republicans retain control of the Senate. As bipartisan disputes increase, the US government partially shuts down between late December 2018 and January 2019.
In December, the UK Parliament rejects the negotiated agreement on the UK’s withdrawal from the EU. Uncertainty on the nature of the UK’s exit from the EU persists as the UK government seeks to renegotiate the agreement in early 2019.
The reduction in global accommodative monetary policy continues, with the European Central Bank (ECB) confirming that net asset purchases would cease at the end of 2018, and the US Federal reserve raises rates for the fourth time in 2018 in December.
China reports a large manufacturing decline in December, prompting concerns of a global growth slowdown. Additional stimulus measures from the People’s Bank of China are enacted.
Fears of tightening financial conditions and a global economic slowdown trigger a sharp sell-off in US equity markets, which had remained resilient through the first three quarters of 2018, while global equities fall further. The S&P500 ends 2018 with an annual decline of circa 6 per cent. In early 2019 risk sentiment improves, contributing to a broad rally in equity markets.
Our strategy Significant risks arising from the delivery of the strategy
Providing asset accumulation and retirement income products to US baby boomers
Financial risks Maintaining, and enhancing where necessary, appropriate risk limits, hedging strategies and Group oversight that are in place.
Meeting the savings and retirement needs of an ageing UK and continental European population
Managing the merger and transformation risks to the delivery of strategic, financial and operational objectives.
Managing the inter-connected execution risks from this transformation activity under the Group’s transformation risk framework, as well as providing other risk management support and review.
Prudential has in place a system of governance that promotes and embeds a clear ownership of risk, processes that link risk management to business objectives, a proactive Board and senior management providing oversight of risks, mechanisms and methodologies to review, discuss and communicate risks, and risk policies and standards to ensure risks are identified, measured, managed, monitored and reported.
How ‘risk’ is defined Prudential defines ‘risk’ as the uncertainty that is faced in implementing the Group’s strategies and achieving its objectives successfully, and includes all internal or external events, acts or omissions that have the potential to threaten the success and survival of the Group. Accordingly, material risks will be retained selectively when it is considered that there is value in doing so, and where it is consistent with the Group’s risk appetite and philosophy towards risk-taking.
How risk is managed Risk management is embedded across the Group through the Group Risk Framework, which details Prudential’s risk governance, risk management processes and risk appetite. The Framework has been developed to monitor the risks to our business and is owned by the Board. The aggregate Group exposure to its key risk drivers is monitored and managed by the Group Risk function which is responsible for reviewing, assessing, providing oversight and reporting on the Group’s risk exposure and solvency position from the Group economic, regulatory and ratings perspectives.
In 2018, the Group continued to update its policies and processes around new product approvals, management of critical third-party arrangements and oversight of model risks. A transformation risk framework is being applied directly to manage programme delivery risks. Prudential manages key ESG issues through a multi-disciplinary approach with first-line functional ownership for ESG topics.
lo ba l e co no m ic co nditio ns
The Group Risk Committee reviews the Group Risk Framework and recommends changes to the Board to ensure that it remains effective in identifying and managing the risks faced by the Group. A number of core risk policies and standards support the Framework to ensure that risks to the Group are identified, assessed, managed and reported.
An evaluation of risk culture forms part of the Group Risk Framework and in particular seeks to identify evidence that: — Senior management in business units articulate the need for effective risk management as a way to realise long-term value and continuously support this through their actions; — Employees understand and care about their role in managing risk – they are aware of and discuss risk openly as part of the way they perform their role; and
Prudential’s Code of Conduct and Group Governance Manual include a series of guiding principles that govern the day-to-day conduct of all its people and any organisations acting on its behalf. This is supported by specific risk policies which require that the Group act in a responsible manner. This includes, but is not limited to, policies on anti-money laundering, financial crime and anti-bribery and corruption. The Group’s third-party supply policy ensures that human rights and modern slavery considerations are embedded across all of its supplier and supply chain arrangements. Embedded procedures to allow individuals to speak out safely and anonymously against unethical behaviour and conduct are also in place.
Risk identification Group-wide risk identification takes place throughout the year as the Group’s businesses undertake a comprehensive bottom-up process to identify, assess and document its risks. This concludes with an annual top-down identification of the Group’s key risks, which considers those risks that have the greatest potential to impact the Group’s operating results and financial condition and is used to inform risk reporting to the risk committees and the Board for the year.
Our risk identification process also includes the Group’s Own Risk and Solvency Assessment (ORSA), as required under Solvency II, and horizon-scanning performed as part of our emerging risk management process.
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 undertaken as part of the business planning review, including how they are managed and mitigated.
Reverse stress testing, which requires the Group 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.
iii. Risk appetite, limits and triggers The extent to which Prudential is willing to take risk in the pursuit of its business strategy and objective to create
Group risk appetite is set with reference to economic and regulatory capital, liquidity and earnings volatility which is aimed at ensuring that an appropriate level of aggregate risk is taken. Appetite is also defined for the Group’s financial and non-financial risks. Further detail is included in sections 5 and 6, as well as covering risks to shareholders, including those from participating and third-party business. Group limits operate within these expressions of risk appetite to constrain material risks, while triggers and indicators provide further constraint and defined points for escalation.
Capital requirements: Limits on capital requirements aim to ensure that the Group meets its internal economic capital requirements, achieves its desired target rating to meet its business objectives, and ensures that supervisory intervention is not required. The two measures used at the Group level are Solvency II capital requirements and internal economic capital (ECap) requirements. In addition, capital requirements are monitored on local statutory bases.
The Group Risk Committee is responsible for reviewing the risks inherent in the Group’s business plan and for providing the Board with input on the risk/reward trade-offs implicit therein. This review is supported by the Group Risk function, which uses submissions from our local business units to calculate the Group’s aggregated position (allowing for diversification effects between local business units) relative to the aggregate risk limits.
Material risks which are modelled are included in appropriately validated regulatory and economic capital models.
Manage and control Risk appetite and limits allow for the controlled growth of our business, in line with business strategy and plan.
Risk governance and culture Risk governance comprises the Board, organisational structures, reporting relationships, delegation of authority, roles and responsibilities, and risk policies. Risk culture is a subset of broader organisational culture, and shapes the organisation-wide values used to prioritise risk management behaviours.
Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued
Liquidity: The objective of the Group’s liquidity risk appetite is to ensure that the Group is able to generate sufficient cash resources to meet financial obligations as they fall due in business-as-usual and stressed scenarios. Risk appetite with respect to liquidity risk is measured using a Liquidity Coverage Ratio (LCR) which considers the sources of liquidity against liquidity requirements under stress scenarios.
5. Summary risks Broadly, the risks assumed across the Group can be categorised as those which arise as a result of our business operations, our investments and those arising from the nature of our products. Prudential is also exposed to those broad risks which apply because of the global environment in which it operates. These risks, where they materialise, may have a financial impact on the Group, and could also impact on the performance of its products or the services it provides to our customers and distributors, which gives rise to potential risks to its brand and reputation and have conduct risk implications. These risks are summarised below. The materiality of these risks, whether material at the level of the Group or its business units, is also indicated. The Group’s disclosures covering risk factors can be found at the end of this document.
Regulatory risk Prudential operates under the ever-evolving requirements set out by diverse regulatory, legal and tax regimes. The increasing shift towards macro-prudential regulation and the number of regulatory changes under way across Asia (in particular focusing on consumer protection) are key areas of focus, while both Jackson and M&GPrudential operate in highly regulated markets. Regulatory reforms can have a material impact on Prudential’s businesses. The proposed demerger of M&GPrudential will result in a change in Prudential’s Group-wide supervisor to the Hong Kong Insurance Authority. The Group is, led by the Group Chief Risk Officer, proactively engaging with the supervisor-elect on the supervisory framework that will apply to the Group after the demerger.
Technological change The emergence of advanced technologies such as artificial intelligence and blockchain is providing an impetus for companies to rethink their existing operating models and how they interact with their customers. Technological change is considered from both an external and internal view. The external view considers the rise of new technologies and how this may impact on the insurance industry and Prudential’s competitiveness within it, while the internal view considers the risks associated with the Group’s internal developments in meeting digital change challenges and opportunities. Prudential is embracing the opportunities from new technologies, and any risks which arise from them are closely monitored.
ESG risks As a Group, responding effectively to those material risks with ESG implications is crucial in maintaining Prudential’s brand and reputation, and in turn its financial performance and its long-term strategy. Further information on the Group’s approach to governance on ESG issues and the relevant Group-wide policies for managing these are included in the Corporate responsibility review on pages 71 to 74.
Market risk Is the potential for reduced value of Prudential’s investments resulting from the volatility of asset prices, driven by fluctuations in equity prices, interest rates, foreign exchange rates and property prices.
M&GPrudential invests in a broad range of asset classes and its income is subject to the price volatility of global financial and currency markets.
Credit risk Is the potential for reduced value of Prudential’s investments driven by the market’s perceptions for potential for defaults of investment and other counterparties.
The Group’s asset portfolio also gives rise to invested credit risk. The assets backing the UK and Jackson annuity businesses means credit risk is considered a material risk for these business units in particular.
Liquidity risk Is the risk of not having sufficient liquid assets to meet obligations as they fall due, and we look at this under both normal and stressed conditions. This is a risk which is considered material at the level of the Group.
Persistency and morbidity risks are among the most material insurance risks for the Asia business given the focus on health and protection products in the region.
Conduct risk The design and distribution of Prudential’s products is crucial in ensuring that the Group’s commitment to meeting customers’ needs and expectations are met, and are factors which the Group considers as part of its overall conduct of business.
Strategic and transformation risks A number of significant change programmes are currently running to effect both the Group’s strategy and to comply with emerging regulatory changes. The breadth of these activities, and the consequences, including the reputational impact, to the Group should they fail to meet their objectives, mean that these risks are material at the level of the Group.
Operational risks A combination of the complexity of the Group, its activities and the extent of transformation in progress creates a challenging operating environment.
Information security and data privacy risks are significant considerations for Prudential and the cyber security threat continues to evolve globally in sophistication and potential significance This includes the continually evolving risk of malicious attack on its systems, network disruption as well as risks relating to data security, integrity, privacy and misuse. The scale of the Group’s IT infrastructure and network, stakeholder expectations and high profile cyber security and data misuse incidents across industries means that these risks continue to be considered material at the level of the Group.
Prudential’s designation as a G-SII was last reaffirmed on 21 November 2016. The FSB, in conjunction with the IAIS, did not publish a new list of G-SIIs in 2017 and did not engage in G-SII identification for 2018 following IAIS’ launch of the consultation on the Holistic Framework (HF) on 14 November 2018, which aims to assess and mitigate systemic risk in the insurance sector and is intended to replace the current G-SII measures. The IAIS intends to implement the HF in 2020 and it is proposed that G-SII identification be suspended from that year. In the interim, the relevant group-wide supervisors have committed to continue applying existing enhanced G-SII supervisory policy measures with some supervisory discretion, which includes a requirement to submit enhanced risk management plans. In November 2022, the FSB will review the need to either discontinue or re-establish an annual identification of G-SIIs in consultation with the IAIS and national authorities. The Higher Loss Absorbency (HLA) standard (a proposed additional capital measure for G-SII designated firms, planned to apply from 2022) is not part of the proposed HF. However, the HF proposes more supervisory powers of intervention for mitigating systemic risk, including temporary financial reinforcement measures such as capital add-ons and suspension of dividends.
The IAIS is also developing the ICS as part of ComFrame – the Common Framework for the supervision of Internationally Active Insurance Groups (IAIGs). The implementation of ICS will be conducted in two phases – a five-year monitoring phase followed by an implementation phase. ComFrame will more generally establish a set of common principles and standards designed to assist supervisors in addressing risks that arise from insurance groups with operations in multiple jurisdictions. The ComFrame proposals, including ICS, could result in enhanced capital and regulatory measures for IAIGs, for which Prudential satisfies the criteria.
In certain jurisdictions in which Prudential operates 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, including the US Dodd-Frank Wall Street Reform and Consumer Protection Act, addressing Financial Conduct Authority (FCA) reviews and ongoing engagement with the
Prudential Regulation Authority (PRA). 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.
There has, in recent years, been regulatory focus in the UK on insurance products and market practices which may have adversely impacted customers, including the FCA’s Legacy Review and Thematic Review of Annuity Sales Practices. The management of customer risk remains a key focus of management in the UK business. Merger and transformation activity at M&GPrudential, new product propositions and new regulatory requirements may also have customer risk implications which are monitored.
In May 2017, the International Accounting Standards Board (IASB) published IFRS 17 which will introduce fundamental changes to the IFRS-based reporting of insurance entities that prepare accounts according to IFRS from 2021. In November 2018, the IASB tentatively agreed to delay the effective date of IFRS 17 by one year to periods beginning on or after 1 January 2022 and is considering introducing further amendments to this new standard. IFRS 17 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. The Group is reviewing the complex requirements of this standard and considering its potential impact.
In the US, various initiatives are underway to introduce fiduciary obligations for distributors of investment products, which may reshape the distribution of retirement products. Jackson has introduced fee-based variable annuity products in response to the potential introduction of such rules, and we anticipate that the business’s strong relationships with distributors, history of product innovation and efficient operations should further mitigate any impacts.
In the EU, the European Commission began a review in late 2016 of some aspects of the Solvency II legislative package, which is expected to continue until 2021 and includes a review of the Long Term Guarantee measures.
On 27 July 2017, the UK FCA announced that it will no longer persuade, or use its powers to compel, panel banks to submit rates for the calculation of LIBOR after 2021. The discontinuation of LIBOR in its current form and its replacement with the Sterling Overnight Index Average benchmark (SONIA) in the UK (and other alternative benchmark rates in other countries) could, among other things, impact the Group through an adverse effect on the value of Prudential’s assets and liabilities which are linked to, or which reference LIBOR, a reduction in market liquidity during any period of transition and increased legal and conduct risks to the Group arising from changes required to documentation and its related obligations to its stakeholders.
Risk management and mitigation of regulatory and political risk at Prudential includes the following: — Risk assessment of the Business Plan which includes consideration of current strategies; — Close monitoring and assessment of our business environment and strategic risks; — The consideration of risk themes in strategic decisions; and
— Ongoing engagement with national regulators, government policy teams and international standard setters.
— Foreign exchange risk, through translation of its profits and assets and liabilities denominated in various currencies, given the geographical diversity of the business.
The Group’s interest rate risk is driven by the need to match the duration of its assets and liabilities in the UK and Europe insurance business and the fixed annuity business in Jackson. Interest rate risk also arises from the guarantees of some non unit-linked investment products in Asia; and the cost of guarantees in Jackson’s fixed index and variable annuity business. Further detail is provided below.
Equity and property investment risk (Audited) In the UK and Europe business, the main investment risk arises from the assets held in the with-profits funds through the shareholders’ proportion of the funds’ declared bonuses and policyholder net investment gains (future transfers). This investment risk is driven mainly by equities in the funds and some hedging to protect against a reduction in the value of these future transfers is performed outside the funds. The UK with-profits funds’ Solvency II own funds, estimated at £9.7 billion as at 31 December 2018, helps to protect against market fluctuations and is protected partially against falls in equity markets through an active hedging programme within the fund.
The Group’s appetite for interest rate risk is limited to where assets and liabilities can be tightly matched and where liquid assets or derivatives exist to cover interest rate exposures.
Foreign exchange risk (Audited) The geographical diversity of Prudential’s businesses means that it has some exposure to the risk of foreign exchange rate fluctuations. The operations in the US and Asia, which represent a large proportion of operating profit and shareholders’ funds, generally write policies and invest in assets in local currencies. Although this limits the effect of exchange rate movements on local operating results, it can lead to fluctuations in the Group financial statements when results are reported in UK sterling. This risk is accepted within our appetite for foreign exchange risk.
b. Credit risk Prudential invests in bonds that provide a regular, fixed amount of interest income (fixed income assets) in order to match the payments needed to policyholders. It also enters 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, it is exposed to credit risk and counterparty risk across its business.
The Group has some appetite to take credit risk where it arises from profit-generating insurance activities, to the extent that it remains part of a balanced portfolio of sources of income for shareholders and is compatible with a robust solvency position.
A number of risk management tools are used to manage and mitigate this credit risk, including the following: — A credit risk policy and dealing and controls policy; — Risk appetite statements and limits that have been defined on issuers, and counterparties; — Collateral arrangements for derivative, secured lending reverse repurchase and reinsurance transactions; — The Group Credit Risk Committee’s oversight of credit and counterparty credit risk and sector and/or namespecific reviews; — Regular assessments; and
Credit risk also arises from the debt portfolio in the Asia business, the value of which was £45.8 billion at 31 December 2018. The majority (68 per cent) of the portfolio is in unit-linked and with-profits funds and so exposure of the shareholder to this component is minimal. The remaining 32 per cent of the debt portfolio is held to back the shareholder business.
In the general account of the Jackson business £41.6 billion of fixed income assets are held to support shareholder liabilities including those from our fixed annuities, fixed index annuities and life insurance products. Jackson’s general account portfolio increased by circa £4 billion due to the John Hancock acquisition.
Group sovereign debt (Audited) Prudential also invests in bonds issued by national governments. This sovereign debt represented 18 per cent or £14.4 billion of the shareholder debt portfolio as at 31 December 2018 (31 December 2017: 19 per cent or £16.5 billion). 3 per cent of this was rated AAA and 87 per cent was considered investment grade (31 December 2017: 90 per cent investment grade).
Bank debt exposure and counterparty credit risk (Audited) Prudential’s exposure to banks is a key part of its core investment business, as well as being important for the hedging and other activities undertaken to manage its various financial risks. Given the importance of its relationship with its banks, exposure to the sector is considered a material risk for the Group.
The exposures held by the shareholderbacked business and with-profits funds in bank debt securities at 31 December 2018 are given in note C3.2(f) of the Group’s IFRS financial statements.
At 31 December 2018, shareholder exposures by rating1 and sector2 are shown below: — 95 per cent of the shareholder portfolio is investment grade rated. In particular, 66 per cent of the portfolio is rated A- and above (or equivalent); and
c. Liquidity risk Prudential’s 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 where redemption requests are made against Prudential external funds.
Shareholder exposure by rating1 5 BB or below, or non-rated assets 5%
6.3 Risks from our products a. Insurance risk Insurance risk makes up a significant proportion of Prudential’s overall risk exposure. The profitability of its businesses depends on a mix of factors, including levels of, and trends in, mortality (policyholders dying), morbidity (policyholders becoming ill) and policyholder behaviour (variability in how customers interact with their policies, including utilisation of withdrawals, take-up of options and guarantees and persistency, ie lapsing of policies), and increases in the costs of claims, including the level of medical expenses increases over and above price inflation (claim inflation).
— Failures in programme and/or project design, execution or transition into business as usual.
b. Non-financial risks In the course of doing business, the Group is exposed to non-financial risks arising from its operations, the business environment and its strategy. The main risks across these areas are detailed below.
The performance of the Group’s core business activities places reliance on the IT infrastructure that supports day-to-day transaction processing and administration. The IT environment must also be secure and an increasing cyber risk threat needs to be addressed as the Group’s digital footprint increases and the sophistication of cyber threats continue to evolve – see separate information security risk sub-section below. The risk that Prudential’s IT infrastructure does not meet these requirements is a key area of focus for the Group, 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. The change in Group-wide supervisor, and the supervisory framework, to which Prudential plc will be subject to after the demerger of M&GPrudential, means that additional processes, or changes to existing ones, may be required to ensure ongoing compliance. See the ‘Global regulatory and political risk’ section above. 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, the Group focuses on conduct regulation, including those related to sales practice and anti-money laundering, bribery and corruption. There is a particular focus on regulations related to the latter in newer/emerging markets.
Group-wide framework and risk management for operational risk The risks detailed above form key elements of the Group’s operational risk profile. In order to identify, assess, manage, control and report effectively on all operational risks across the business, a Group-wide operational risk framework is in place. The key components of the framework are: — Application of a risk and control assessment (RCA) process, where operational risk exposures are identified and assessed as part of a periodical cycle. The RCA process considers a range of internal and external factors, including an assessment of the control environment, to determine the business’s most significant risk exposures on a prospective basis; — An internal incident management process, which identifies, quantifies and monitors remediation conducted through root cause analysis and application of action plans for risk events that have occurred across the business; — A scenario analysis process for the quantification of extreme, yet plausible manifestations of key operational risks across the business on a forwardlooking basis. This is carried out at least annually and supports external and internal capital requirements as well as informing risk oversight activity across the business; and
The objectives of the programme include achieving consistency in the execution of security disciplines across the Group and improving visibility across the Group’s businesses; deployment of automation to detect and address threats; and achieving security by design by aligning subject matter expertise to the Group’s digital and business initiatives to embed security controls across platforms and ecosystems.
The Board receives periodic updates on information security risk management throughout the year. Group functions work with the business units to address risks locally within the national and regional context of each business following the strategic direction of the Group-wide information security function.
The Directors regularly consider strategic matters that may affect the longer-term prospects of the Group. In the current year this included the impact of the proposed demerger of M&GPrudential, announced in March 2018. 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 Group’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 50.
Period of viability assessment The Directors have assessed the viability of the Group for a period longer than the 12 months required by the going concern statement.
The intended demerger of M&GPrudential from the Group, if approved by shareholders, is expected to occur within the period covered by the viability statement. The Directors have therefore considered the ability of the Group to continue in its current form (ie the scenario in which the demerger does not proceed) for the three-year period ending 31 December 2021 as well as the viability of the Group if the demerger proceeds as planned.
Assessment of risks over the period The Group’s business plan implements the Group’s strategic objectives through the business model and activities discussed on pages 10 to 13. This year’s business planning process considered the results of the current Group over the planning period as well as those of the Group post demerger. As noted above, underpinning the projections in the business plan are a number of economic and other assumptions. Assessment of the risks to achieving the projected performance therefore remains an integral part of the planning process. The Group’s approach to risk management and a summary of the key risks facing the Group are set out on pages 52 to 69.
For the purposes of assessing the Group’s viability, the Directors considered those risks where the impact of possible adverse external developments could be of such speed and severity to present a shock to the Group’s financial position. The risks considered, from those detailed on pages 58 to 59, are: market risk, credit risk, liquidity risk and regulatory risk. In addition the Directors considered the operational and financial risks arising from the UK’s intended departure from the European Union in a number of possible scenarios, including those which assume no withdrawal agreement is enacted.
To evaluate the Group’s resilience to significant deteriorations in market and credit conditions and other shock events, these risks are grouped together into severe but plausible scenarios which are then applied to the assumptions underlying the business plans considered. For example, the impacts of scenarios assuming a disorderly transition to a higher, more normalised interest rate environment and an international recession (causing a fall in interest rates and in equity and property values, together with an increase in credit spreads and credit losses on debt assets and higher policyholder lapse rates) were considered in the preparation of the most recent business plan, together with the impact on liquidity of a scenario assuming the closure of short-term debt markets for three months. In addition, the Group conducts an annual reverse stress test which gives the Directors an understanding of the maximum resilience of the Group to extremely severe adverse 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 and its subsidiaries’ ability to generate significant capital annually through operational delivery and the availability of compensating actions designed to restore key capital and solvency metrics.
Notes 1 Based on hierarchy of Standard & Poor’s, Moody’s and Fitch, where available and if unavailable, other rating agencies or internal ratings have been used.
Non-financial information statement As a global provider of savings and protection products, stewardship is core to what we do. We recognise that to help our customers look to the future with confidence, we need to take a long-term view on a wide range of issues that affect our business and the communities in which we operate. To do this, we maintain a proactive dialogue with our stakeholders – customers, investors, employees, communities, regulators and governments – to ensure that we are managing these issues sustainably and delivering long-term value. Further information on our engagement with our stakeholders will be provided in our upcoming 2018 ESG report, which will be published in May 2019.
Suppliers Overview, relevant risks and associated management practices – page 72
Relevant KPIs: community investments, fundraising and donations, employee voluntary hours – page 85
Business integrity Overview, relevant risks and associated management practices – page 71
For us, ESG means: — What we do – the products we offer, our customer service, our human capital and our investment management; and
— How we do it – understanding our customers and providing suitable solutions that meet their needs, building long-term profitable relationships, investing in our people and making responsible investments, to generate sustainable long-term returns in line with our risk appetite, to meet our customers’ needs.
Environment We recognise the risks and opportunities posed by climate change and our impact on the environment, and as such we strive to play our part in reducing both our direct and indirect impacts where possible. Our approach includes not only understanding our impact on the environment, through measuring and improving the environmental performance of our global operations, but also developing our understanding of the environment’s potential impact on our business.
People We foster a diverse and inclusive organisation that develops and protects our people’s interests, wellbeing and health. Developing talent and valuing diversity is key to how we operate and deliver outstanding results for our customers, shareholders and communities.
Communities Our business purpose, the interests of our stakeholders and our drive to ensure economic and social progress for the long term are central to our community investment strategy. This strategy has four principal themes: social inclusion, financial education and life skills, disaster preparedness and employee engagement, and we continued to be active in all these areas during 2018.
Customers Our relationships with our customers are long-term and are central to our ability to continue creating sustainable value. We provide fair, transparent, inclusive and accessible products to best serve our customers’ needs and to support them in de-risking their lives. We are constantly looking for new ways to innovate and provide the highest level of service.
In Asia, the health protection gap remains large and continues to expand. In line with our commitment to help close this gap and protect our customers’ health, we have continued our efforts to create best-inclass health capabilities by offering more comprehensive and flexible coverage and a wider range of value-added services. Increasing access to financial protection is a significant socio-economic issue and we seek to provide the right products through appropriate means to improve access for new and existing customers. We also strive to communicate information about our products in a fair and transparent way. In the US, Jackson continues to be a leader in shifting perspectives and simplifying the language around financial products.
Suppliers Managing ESG risks when sourcing goods and services, and throughout the lifecycle of our third-party relationships, is vital to our position as an ethical and responsible business. We take this position seriously and seek to both maximise value and minimise risk throughout our interactions with our supply chain.
Our business units are responsible for managing third-party supply arrangements and able to adopt further policies as they require, to meet localised operating conditions. Business units conduct due diligence before engaging with and ultimately selecting a new supplier. During this process, our employees are trained to ensure that the contractual arrangements reflect the requirements of those policies. We perform regular due diligence, review meetings and audits, where required, and our policies and procedures are supported by regular employee training exercises. Our ‘Speak Out’ whistleblowing service enables employees to raise any concerns they may have in relation to our third-party relationships, and our contractors and third-party suppliers are also able to use this service.
ESG policy framework – Group Governance Manual The Group Governance Manual (GGM) establishes standards for managing key material ESG issues across the Group, setting out the policies and procedures to support how we operate. The GGM is used to ensure that we comply with relevant statutory and regulatory requirements. Our Group-wide policies relating to our identified material issues include: Material ESG issues Our Group-wide policies*
— Sanctions Policy details the commitment we have to comply with sanctions laws and regulations by screening, prohibiting or restricting business activity, and following up through investigation.
— Tax Risk Policy includes our processes to manage tax-related risk, by identifying, measuring, controlling and reporting on issues considered an operational, reputational or regulatory risk.
— Political Donations Policy outlines our position, that as an organisation we do not donate to political parties.
— 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.
People — Diversity and Inclusion Policy sets out how we foster an inclusive workforce and ensure all our employees are treated fairly and feel valued, and together have the diversity in skill sets and backgrounds that enriches the organisation. Our policy considers a range of diversity aspects of our employees, including gender, age, ethnicity, disability, sexual orientation and background. Further information on the diversity of our Board, our policy in respect of this, how this is implemented and the associated results in 2018 can be found in our Governance statement on pages 109 to 114.
— Performance and Learning Policy sets out the importance of our people and frames 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 outlines our effective approach to appropriately rewarding our employees in a way that 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.
Communities — Community Investment Policy covers how we are committed to working with the communities we operate in as active and supportive members. This also outlines our strategy for investing in the community and how we make investments and report against them.
* In addition to our Group-wide policies, our business units have underlying business-specific policy frameworks, reflecting their individual risks and operating environments. For the purposes of this report, we focus primarily on the Group policy framework.
Due diligence on ESG-related policies Our GGM forms part of the Group Risk Framework, which details how business units should put in place sufficient processes that identify, evaluate and manage risks, incorporating key ESG issues. Due diligence is conducted by the business units to ensure that the policies are complied with and we require evidence to demonstrate this.
Further information on ESG issues Responsible investment As a life insurer, asset owner and manager, we are long term stewards of our customers’ assets and we recognise the importance of ESG matters. We also recognise our responsibility to our customers, society and the environment to effectively integrate associated considerations into investment decisions and fiduciary and stewardship duties, helping to finance a more sustainable economy. We believe that our investment activities should help our customers both today and over the long term. We take our commitment to ESG and responsible investment seriously, which is why our asset management business units, M&G Investments, PPMA, PPMSA and Eastspring Investments, are signatories to the Principles for Responsible Investment. Similarly, as a life insurer we remain committed to servicing our customers’ evolving needs, providing product solutions that support their financial resilience and enable them to face the future with confidence.
Assessing the implications of evolving expectations of the Group in financing a sustainable and low-carbon economy Over 2018 there have been a number of regulatory, supervisory and investor-driven sustainable finance and climate-related financial risk initiatives. From a supervisory perspective, the International Association of Insurance Supervisors and the Prudential Regulation Authority (PRA) have made clear that they expect insurers to assess and consider the risks from climate change, with the PRA releasing a consultation on a draft supervisory statement. We engaged with the PRA on the topic during 2018 and continue to focus on developing our practices in this area, with the implications for us as a Group being considered by our Board. Climate risk is under similar scrutiny from the Financial Conduct Authority, which issued a draft discussion paper on the topic, and the Securities and Futures Commission in Hong Kong launched its Strategic Framework for Green Finance. In addition to assessing the implications for the Group of evolving regulatory and supervisory expectations, we continued to monitor the changing legislative landscape, including developments set out in the European Commission’s (EC) Action Plan for Financing Sustainable Growth. Our approach to meeting these evolving expectations of financial institutions is twofold: to consider the need for enhancing our ESG integration and disclosure practices and to continue to increase our industry participation and collaboration towards positive change. Further detail on the progress we have made in responsible investing in 2018, through engagement with investees and the assets in which we invest with regard to financing sustainable growth, will be provided in our forthcoming 2018 ESG report.
Strengthening our governance of responsible investment Following on from the establishment of our Group Responsible Investment Advisory Committee (GRIAC) and Group Responsible Investment Framework in 2017, our governance of responsible investment activities has continued to be strengthened during 2018 by our businesses. Each asset management business now has a clearly designated responsible investment committee. The GRIAC links these independent business unit committees, serving as a forum for sharing best practice innovations across the Group. It also enables our Group-wide Responsible Investment Standards to be adopted in a consistent manner across our business units, while still affording them the flexibility to manage investments in a way that balances the needs of their clients and the local regulatory environments in which they operate.
Industry participation and collaboration on climate change We have long believed in the benefits that collaboration and collective action can bring on important issues. Active consideration of ESG factors is integral to our stewardship responsibilities. For this reason, we as a Group and our businesses remain active participants in industry initiatives on sustainable finance on climate change. M&G continues to participate in the Climate Action 100+ initiative and remains a member of the Institutional Investors Group on Climate Change. During 2018, Eastspring participated in roundtables organised by its local regulator, the Monetary Authority of Singapore (MAS), to help raise awareness of climate risk in the region and promote the integration of ESG frameworks in investment strategies. Similarly, Prudential Singapore has engaged with its local regulators (the Life Insurance Association Singapore and MAS) to discuss its approach to climate change risk as an Asian asset owner.
Managing climate risks and opportunities and the FSB’s TCFD As a life insurer, asset owner, asset manager and occupier of over 400 properties worldwide, we recognise both the risks and opportunities posed by climate change on our businesses, and our Group’s impact on the environment. Our approach includes not only understanding our impact on the environment, through measuring and improving the environmental performance of our global operations, but also developing our understanding of the environment’s potential impact on our business. With respect to the impact that climate change poses to our businesses, we are cognisant that the risks and opportunities may manifest in a number of different ways. We outline further detail on the specific climate-related risks within the Group Chief Risk Officer’s report on page 61.
Our strategy needs to be tailored to the local US, Asian, European and African countries in which we operate. Climate change is a material challenge for the global economy and, in conjunction with other global trends, may impact each part of the world differently. The physical risks will be as difficult to determine as the risks resulting from transitioning to a low-carbon economy. Accompanying those risks are inherent investment opportunities that we will continue to explore, including the emergence of infrastructure investments as a new asset class. We are keen to position our organisation in order to best place us to respond to and manage material climate risks and capitalise on the opportunities from the economy’s transition. Demonstrating our approach and performance transparently to our external stakeholders has always been central to our vision, mission and values.
Prudential Group Scope 1 and 2 GHG Emissions We achieved a ranking of B in the 2018 CDP Climate Change disclosure benchmark, and in ClimateWise, the insurance sector climate initiative managed by the Cambridge Institute for Sustainability Leadership, we improved our score, achieving 78 per cent (2017: 72 per cent). Our performance in ClimateWise against six core principles is independently audited by PwC.
As our business becomes increasingly global, we recognise the importance of understanding the impact of air travel on our overall corporate carbon footprint. We have collated air travel data internally across all three regions for the first time. We have elected to disclose Scope 3 GHG emissions data from air travel for the UK and Europe business unit. This amounted to 21,622 tCO2e, representing a 50 per cent increase over preliminary estimates (2017: 14,413 tCO2e). The scope of this data now includes air travel from our sites in the UK,
Japan, Kenya, Poland and Zambia, which are controlled by the UK and Europe business unit.
In the US, Jackson completed a further three Energy Star assessments in addition to the two completed in 2017. The US Environmental Protection Agency Energy Star scheme is a certification programme and performance benchmark identifying the buildings nationwide that use 35 per cent less energy than typical buildings.
In Asia we have developed Green Design, Construction and Leasing Guidelines, as well as a smart leasing toolkit to ensure good environmental performance of new sites, focusing on energy and water efficiency.
M&G Real Estate, part of M&GPrudential, 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 targeting low and no cost energy reduction measures such as LED lighting installations, real time monitoring of high energy users through smart building technology and realising energy efficiency through refurbishment. Further details on 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/
Please refer to our Basis of Reporting and supplementary reporting online for further detail on our methodology, reported consumption and drivers of variation.
kg CO2e per m2 – Scope 1, 2 and 3 Group1 32 34 -8%
Consistency with financial statements: The reporting period does not correspond with the Directors’ Report period (01 January 2018 to 31 December 2018) as it was brought forward by three months to improve the availability of invoice data and reduce reliance on estimated data.
Emission factor: Scope 1 and 3 reporting uses the UK DEFRA 2018 GHG Conversion Factors.
Note 1 2017 figure restated as revised data became available from suppliers.
People An inclusive working environment, where we continually develop our talent, reward great performance, protect our people and value our differences, is key in delivering outstanding results for our customers, shareholders and communities.
Over time, we aspire to have a senior management team that better represents the experiences and backgrounds of our customers and stakeholders. Diversity contributes to Board effectiveness and is essential for successfully delivering the strategy of an international Group. Our Board is committed to recruiting the best available talent and appointing the most appropriate candidate to each role. This process ensures appropriate diversity of experience, skill sets and professional backgrounds. For more information on diversity within our Board, please refer to page 109 of the Governance section within the Annual Report.
We have a strategic, long-term approach to D&I and the Board monitors progress regularly through the Group D&I Advisory Committee, including reviewing our benchmarked progress against industry advances on key aspects such as the diversity of our Leadership Team. The majority of D&I activity is managed by the individual business units, which focus on the priorities that make a key difference in their specific markets, in alignment with the Group-wide strategy. The articulation of our D&I strategy has been updated in 2018 to reflect the evolution of our D&I journey. Prudential Corporation Asia continued to develop its D&I Works Committee, made up of representatives from across its regional businesses. Its purpose is to drive the D&I strategies and initiatives in the respective countries, provide support and share best practices. In the US, Jackson has introduced a D&I Advisory Council to support senior leadership by helping guide, implement and oversee D&I strategies and initiatives, providing updates on progress and communicating D&I efforts and commitment internally and externally.
Across our businesses, our commitment to all employees regarding D&I includes making reasonable adjustments to those with special requirements and is supported 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. In 2018, building on the unconscious bias leadership workshops for senior managers and executives delivered in 2017, we aimed to reach all employees via the Group-wide roll-out of unconscious bias e-learning. Completion rates exceeded 90 per cent throughout and positive feedback was received from participants. We again sponsored Dive In, the D&I festival for insurance and the financial services sector, which took place in 27 countries and 53 cities in the Americas, Asia, Africa, the Middle East and Europe. In 2018 we published two Group-wide D&I newsletters for all employees on the themes of mentoring and sponsorship and cultural inclusion. The cultural inclusion newsletter highlighted how our African businesses reflect the cultural diversity of the countries in which we operate through engaging with clients in their native languages to improve understanding of our products, helping us to provide a better service.
In addition to the established affinity networks – Prudential Women’s Network, Pride (LGBT), CAN (cultural awareness) and Mind Matters (mental health) – we launched Enable (the Group-wide network for employees with physical and mental disabilities, allies, carers and champions) and PruPride – the first LGBT and allies network in Asia. We were part of the first cohort of companies to sign the HM Treasury Women in Finance Charter in 2016. In 2018, we achieved our commitment to have 27 per cent of women in senior management, a year ahead of the target date of the end of 2019. We continue to work towards the target of 30 per cent women in senior management by the end of 2021. See below for the gender breakdown of our workforce for 2018.
Talent development Development of our people is key to our strategic objectives. Group Human Resources focuses on senior leadership through an annual talent review process. We continue to develop leaders and critical specialists for senior roles through succession planning. We segment our talent to identify short, medium and long-term successors. Development of our senior executive leaders is a bespoke exercise that we base on their requirements.
Jackson offers customised onsite programmes, as well as access to an online university, to meet the personal and professional development needs of employees with all levels of experience. Development programmes have been aligned to known enterprise-wide skills gaps to further develop critical capabilities for the future.
M&GPrudential supports talent development through a range of programmes to increase personal and organisational capability, alongside bespoke development support for individuals in key roles, including leadership roles and critical specialists such as fund managers, technologists and actuaries.
Senior managers Excludes the Chairman, all directors and GEC members 79 56 23 – –
Full time equivalent Includes the Chairman, all directors, GEC members and senior managers 23,792 11,354 12,375 33.0 30.5
The Group-wide cyber assurance programme, which is based on standards like the NIST Cyber Security Framework, became operational in 2018. It has provided valuable insights regarding our capabilities and performance in the way we manage cyber risk across the business. The information and analysis provided by the Group-wide Oversight and Assurance team has been used in a number of ways to inform our cyber security-related choices. For example, it is used to provide senior executives with assurance that our cyber risk is being appropriately managed, while business unit leaders have used the insight to make better-informed and targeted investment decisions.
The Group has an established Cyber Threat Intelligence team that assists our businesses with understanding the cyber threats we face and provides guidance on how to protect and mitigate against these threats. We believe that knowledge sharing across our businesses is key to a mature intelligence function and we use a variety of mechanisms, including a Group-wide threat intelligence-sharing platform and weekly telephone conferences with representatives of business security teams, to ensure timely visibility and dissemination of intelligence to proactively defend the business. In the last year, we have further enhanced our collaboration tools and launched a weekly threat bulletin to provide situational awareness to a wider audience in information security.
Looking ahead to 2019 and recognising that the threat landscape will continue to evolve, we will continue to evolve and strengthen our cyber defences and management of cyber risk. To maximise effectiveness and efficiencies we are looking to establish global cyber centres of excellence. We will be exploring new machine learning and augmented intelligence technologies to identify if they can be used Group-wide to enhance and/ or improve our understanding and management of cyber risk.
Education and life skills Cha-Ching – the first global financial education programme Developed by Prudential to address financial illiteracy, Cha-Ching is a global financial responsibility and education platform. Now in its eighth year, the programme is aimed at primary school-age children and has expanded from its origins in Asia to each of the four continents where the Group does business. In all the markets where it has been launched it has been very positively received, with strong feedback from parents, teachers, children and political stakeholders. In Asia, the programme reaches over 34 million households a day through a multidistribution platform including Cartoon Network Asia, and through its own standardised curriculum and school contact programme, has reached more than 400,000 children so far. The curriculum developed in partnership with Junior Achievement has continued to be well received during 2018 and rolled out to a further 180,000 students in Indonesia, the Philippines, Malaysia and Thailand.
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.
First Read – investing in early childhood development Prudence Foundation has funded and supported the First Read programme since 2013, partnering with Save the Children to focus on investing in early childhood care and development in Cambodia and the Philippines. First Read helps parents to develop their children’s numeracy and literacy skills by providing books in the local language or dialect, and encouraging them to read, sing and count together. It also helps parents understand the importance of healthy and nutritious food for children’s development. Since 2013, more than 300,000 children aged up to six and their parents have benefited through this home-based early childhood development programme, while over 700,000 people have also benefited indirectly through shared knowledge and resources.
A new three-year partnership formed with the China Development Research Foundation will comprise two programmes, focusing on rural education and child health; and on nutrition improvement. Both programmes are aligned with the strategic development focus of the Chinese national government and will be delivered in rural China.
Cha-Ching financial literacy programme Prudential colleagues collaborated with Junior Achievement Kenya to provide financial literacy skills to children aged seven to 11 years using Cha-Ching education materials.
Volunteers acted as student mentors and shared their experiences of dealing with money, using the Cha-Ching concepts of Earn, Save, Spend and Donate. The programme culminated in a graduation ceremony, which provided a platform for pupils from different schools to come together and test their knowledge through a series of fun and engaging financial literacy games and challenges.
Supporting young people with employability and financial skills M&GPrudential is a partner member of the KickStart Money primary financial education programme. The programme aims to reach 20,000 primary school children and focuses on saving, budgeting, careers, borrowing and consumer and public finance.
Through three secondary school partnerships in Paddington, Reading and Stirling, M&GPrudential has also been directly involved in building the knowledge and skills of young people. These partnerships have supported over 4,100 young people since 2013, with 370 employees giving their time and sharing their knowledge and skills.
Secondary school scholarships across Africa In our 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 several charities operating in Ghana, Kenya, Uganda and Zambia to deliver the Prudential Scholarship Programme with the aim of improving quality and access to education for all, and ensuring that everyone marginalised by society receives education, skills and support towards employability. The Prudential Scholarship Programme has supported more than 7,000 academically able but financially disadvantaged high school students to complete their secondary education over either four or five years of high school. This has included financial bursaries to cover the cost of school fees and boarding fees where necessary, uniforms and books, as well as a programme to upgrade conditions to increase attendance at three schools in Uganda.
Jackson employees volunteer with Chicago Youth Programmes throughout the year, mentoring students from under-resourced neighbourhoods, serving as important role models and creating a safe space for students to grow, learn and have fun.
During 2018, Prudence Foundation continued to support the Safe Schools programme, partnering with Plan International and Save the Children in Cambodia, Indonesia, the Philippines, Thailand and Vietnam. The programme focuses on capacity-building for students, teachers and local community members on disaster preparedness. Since 2013, more than 85,000 students and 40,000 adults have participated.
In 2018, the Foundation formed a new partnership with Save the Children and the Philippines’ Department of Education to implement a nationwide focused programme. The three-year programme will aim to develop a disaster risk reduction management information system, together with training and capacity building of teachers and local government officials. This innovative new approach to Safe Schools aims to ensure that every school in the Philippines will be able to benefit from the Safe Schools programme, providing the Department of Education with the information to help allocate its resources and expertise to support the ongoing implementation of the global and ASEAN Comprehensive Safe Schools framework.
Volunteering to support communities in need During 2018, Prudence Foundation formed a partnership with Habitat for Humanity to implement a regional volunteering programme that supports communities in need, complementing the volunteer support we provide when appropriate during disaster recovery. In April 2018, over 70 volunteers from across the region spent one week in Yogyakarta, Indonesia, helping to build homes for those in need and an early childhood development centre. In November 2018, the Foundation led another group of more than 80 regional volunteers to Siem Reap in Cambodia to build houses for families desperate for new homes and support the refurbishment of a primary school. During 2018 the Foundation provided support to help with relief and recovery efforts in Taiwan (following the Hualien earthquake) and Laos (following the flooding). In 2019, we will also be supporting longer-term recovery in Lombok and Sulawesi, Indonesia which were both severely affected by natural disasters in 2018.
Social inclusion Commitment to social inclusion in the UK through Prudential RideLondon Prudential RideLondon has established itself as a major mass-participation and charity fundraising event in the UK, and in the past six years, has raised more than £66 million for charity. In 2018 it raised more than £13 million for charity to set a European record for a cycling event, beating the previous year’s record of £12.75 million. There was a sharp rise in the number of participants riding for charity – 55 per cent, up from 44 per cent in 2017. More than 900 charities have benefited.
Prudential has sponsored the event since inception in 2013 and our own community engagement partnership, PruGOals, supported 420 16 to 18-year olds from 41 schools across the UK to improve their self-esteem, aspiration and educational outcomes. The PruGOals programme helps young people to achieve their goals regardless of social or economic background by providing aspirational challenges, culminating in taking on the Prudential RideLondon-Surrey 46. The 2018 post-event evaluation report from the charity Teach First reveals that students’ ‘resilience’ and ‘determination’ rose by a third after completing the programme.
Enhancing later life M&GPrudential’s partnership with Royal Voluntary Service (RVS) continues with First Time for Everything. This programme aims to tackle loneliness and social isolation by encouraging 2,700 older people across the UK to stay active, engaged and connected to their community in 2018. Prudential has also continued to fund the Later Life Links programme with Age UK, providing long-term companionship, advice and practical help to older people. Running in six UK communities, the programme supported over 4,900 older people in 2018 through telephone and face-to-face support.
PruGOals aims to empower young people to achieve their goals, focusing on building confidence, raising aspirations and increasing self-esteem. The core programme takes the riders on a journey of commitment, endurance, training and fitness, and culminates in taking on the Prudential RideLondonSurrey 46.
Apprenticeships in the UK Youth unemployment remains a growing problem in the UK and M&GPrudential continues to help to shape future job prospects for young people. M&GPrudential’s asset management and insurance businesses have run successful apprenticeship programmes for the last seven years, gaining recognition and awards for the success of the schemes. Over 300 apprentices have been through both programmes and over two-thirds of those who completed the programme secured ongoing employment with the business, while others chose to work elsewhere or moved on to higher education. In 2018, 15 Prudential UK apprentices joined the programmes, with an increased emphasis on recruitment from diverse backgrounds. All Prudential UK apprentices are on fixed-term contracts, with the exception of two graduate apprentices who are on permanent contracts. All M&G apprentices are offered permanent positions from the outset and UCAS points have been removed from graduate/internship applications to try and reach those from a low socio-economic background who may not have excelled at school but have done so at university. CVs have also been removed from the face-to-face interview stage, so that assessors are able to assess purely on potential, rather than being influenced by a candidate’s background or experience.
In 2018, the Group spent £27.3 million supporting community activities. The direct cash donations to charitable organisations amounted to £19.6 million, of which approximately £4.4 million came from our UK and Europe operations. The remaining £15.2 million was contributed to charitable organisations by Jackson and Prudential Corporation Asia.
The cash contribution to charitable organisations from our UK and Europe operations is broken down as follows: education £2,337,000; social, welfare and environment £1,995,000 and cultural £64,000.
The balance includes in-kind donations as set out on the Group website at www.prudential.co.uk/responsibility/ standards prepared in accordance with LBG guidelines. This included 11,710 employees who dedicated 117,491 hours of volunteer service in their communities. Furthermore, £479,633 was donated across the Group by our employees through our payroll giving scheme.
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 Referendums Act 2000. The Group did not make any such donations or incur any such expenditure in 2018.
Accountability and governance for corporate responsibility The Board The Board regularly reviews the Group’s corporate responsibility performance and scrutinises and approves the Group corporate responsibility report and strategy on an annual basis.
Code of Business Conduct Consideration of environmental, social and community matters is integrated in our Code of Business Conduct. Our code is reviewed by the Board on an annual basis. Refer to page 72 for more information.
Our�Senior�Independent�Director,� Mr�Remnant,�has�therefore�been�consulting� with�major�shareholders�on�my�tenure� extending�to�May�2021,�subject�to�reelection �each�year.�We�are�mindful�of�the� provisions�of�the�Corporate�Governance� Code�which�state�that�a�chair�should�not� remain�in�post�beyond�nine�years�from� the�date�of�first�appointment�to�the�board,� which�in�my�case�would�be�October�2019.� However,�given�the�Group’s�planned� demerger�of�the�M&GPrudential�business,� and�in�light�of�the�shareholder�support�we� have�received�the�Board�has�considered�
We�have�also�looked�at�our�Board� composition�as�part�of�our�progress�towards� demerger.�As�Chief�Executive�of� M&GPrudential,�Mr�Foley�will�naturally�stand� down�from�the�Board�as�part�of�the�demerger� transition.�Having�taken�into�account�the� changed�shape�of�the�Prudential�Group� post-demerger�and�the�reduced�number� of�business�units,�the�Board�has�taken�a� decision�that�the�roles�of�Chief�Executive� Prudential�Corporation�Asia�and�Chief� Executive�Officer�of�Jackson�Holdings�LLC� will�no�longer�be�Executive�Director�roles�on� the�Board,�although�will�continue�to�serve� on�the�Group�Executive�Committee.�As� announced�to�the�market�on�28�February� 2019�all�of�these�Board�changes�will�take� effect�from�the�conclusion�of�our�2019� Annual�General�Meeting.�My�thanks�go�to� Mr�Foley,�Mr�Nicandrou�and�Mr�Falcon�for� their�service.�
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),�global�CEO�of�Rothschild� Asset�Management�(1999�to�2002),�directorships� of�Eagle�Star�and�Allied�Dunbar,�holding�the� offices�of�European�CEO�of�Deutsche�Asset� Management�(2002�to�2005),�chairman�of� Bridgewell�Group�plc�and�a�director�of�Henderson� Smaller�Companies�Investment�Trust�plc.
Mark�previously�worked�at�Deloitte�for�26�years,� building�his�industry�focus�on�insurance�and� investment�management�globally.�During�this� time,�Mark�was�managing�partner�for�Clients� and�Markets,�a�member�of�the�executive� committee�and�a�member�of�the�board�of� Deloitte�UK.�He�was�a�vice�chairman�of�Deloitte� for�four�years,�leading�the�CFO�Programme�and� developing�the�CFO�Transition�labs.�Mark� previously�led�the�Insurance�&�Investment� Management�audit�practice�and�the�insurance� industry�practice.�
Between�2000�and�2008�Michael�worked�at� Merrill�Lynch,�serving�as�head�of�the�retirement� group�and�other�roles,�including�head�of�strategy� and�finance�for�the�US�Private�Client�business.� Michael�later�served�as�a�consultant�and� strategic�adviser�to�companies�in�the�retirement,� equity�awards,�wealth�management�and�asset� management�industries�until�joining�J.P.�Morgan� Asset�Management�in�2010.�Michael�has�served� as�a�trustee�and�executive�committee�member�of� EBRI�(the�Employee�Benefit�Research�Institute)� and�was�founding�chairman�of�the�Advisory� Board�of�EBRI’s�Center�for�Retirement�Income� Research�between�2011�and�2014.�
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.�He�also�contributes� his�detailed�knowledge�of�the�Group’s�key� international�markets�including�the�UK,�Europe,� North�America�and�Asia�as�well�as�international� regulatory�experience.�
Relevant skills and experience David�has�experience�across�the�Group’s�key� international�markets�including�the�UK,�Europe,� North�America�and�Asia,�and�across�a�number� of�industry�sectors.�He�contributes�extensive� technical�knowledge�of�audit,�accounting�and� financial�reporting�essential�to�his�role�as� Chair�of�the�Audit�Committee.�
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.�
Fields�started�her�career�at�Philadelphia�National� Bank�in�1982�before�joining�Strategic�Planning� Associates�(now�Oliver�Wyman)�as�a�senior� partner�in�1989.�She�became�chief�financial� officer�and�director�of�strategy�at�the�London� Stock�Exchange�in�1994,�leader�of�the�global� markets�practice�of�AT�Kearney�in�1998�and� managing�director�of�Vesta�Capital�Advisors� in�2000.�She�was�appointed�to�Nasdaq’s� Technology�Advisory�Council�in�2000�and�was� a�member�of�the�panel�of�experts�advising�the� European�Parliament�on�financial�markets� harmonisation�for�four�years�from�2002.�She� became�a�non-executive�director�and�chair� of�the�audit�committee�of�Savills�plc�in�2002� and�a�non-executive�director�and�chair�of�the� investment�committee�of�the�Royal�London� Group�in�2003.��
Chair � Chair Audit � Audit N&G � Nomination�&�Governance Rem � Remuneration Risk � Risk
An�evaluation�of�the�board,�audit�and�risk� committees�of�each�Material�Subsidiary� was�carried�out�in�respect�of�2018�which� concluded�that�each�of�those�boards�and� committees�operated�effectively�during� the�year.�An�assessment�of�whether�each� business�unit�audit�and�risk�committee� has�fulfilled�their�mandates�is�conducted� annually�and�the�results�reported�to�the� Group�Audit�Committee�and�Group�Risk� Committee.�
Board effectiveness Actions during 2018 arising from the 2017 review At�the�end�of�2017,�an�externally�facilitated�review�of�the�Board’s�effectiveness�was�carried�out�by�Boardroom�Review�Limited.�During� 2018,�the�action�points�that�had�been�identified�in�that�review�were�addressed�and�the�Board�received�an�update�on�progress�against� those�actions�in�September�2018�and�February�2019.�
Building Directors’ knowledge Induction – new Directors The�two�new�Directors�appointed�during� 2018,�Mr�Turner�and�Mrs�Wicker-Miurin,� each�received�a�comprehensive�induction,� tailored�to�reflect�their�experience�and� position�as�Executive�and�Non-executive� Directors�respectively.
�— The�Board�holds�an�annual�strategy� session,�which�allows�for�detailed� updates�on�each�of�the�business�units� and�deep�dives�on�strategic�direction� and�objectives�for�the�Group; �— The�Board�receives�updates�on�brand,� diversity�and�inclusion,�health�and�safety� matters�and�corporate�responsibility� activities,�usually�once�a�year; �— The�Board�receives�updates�on�corporate� governance,�political�and�regulatory� developments,�and�the�dynamics�of� equity�and�currency�markets�at�every� scheduled�meeting;�
�— The�Board�reviews�each�business�unit�in� depth�at�least�once�a�year�and�conducts� periodic�site�visits�as�part�of�this.�In�2018,� the�Board�met�in�Singapore�and� Washington,�DC,�USA.�Details�of�the� activities�undertaken�on�these�visits�are� set�out�in�the�box�on�page�100; �— The�Board�and�the�Risk�Committee� receive�regular�updates�on�market� developments�and�key�risks,�including� Solvency�II�and�cyber�risk.�The�Risk� Committee�reviews�top�risks�on�an� annual�basis�and�deep�dives�into�specific� topics�in�response�to�the�identification�of� key�risks.�This�review�covers�the�financial,� operational�and�strategic�risks,�whilst�also� identifying�and�addressing�business� environment�and�insurance�risks�within� the�Group.�The�identification�of�such� risks�inform�the�risk�reporting�provided� to�the�Committee�and�the�Board; �— The�Risk�Committee�received�updates� and�training�on�matters�including�General� Data�Protection�Regulation,�reputational� risks�and�LIBOR�discontinuation�over� the�year;��
Internal control The�Group�Governance�Manual� (the�Manual)�sets�out�delegated�authorities� and�establishes�the�requirements�for� subsidiaries�to�seek�approvals�from�or� report�to�Group�Head�Office.�Group-wide� standards�are�established�through�policies� and�other�governance�arrangements.� These�policies�are�also�included�within�the� Manual.�Internal�controls�and�processes,� based�on�the�provisions�established�in�the� Manual,�are�in�place�across�the�Group.� These�include�controls�covering�the� preparation�of�financial�reporting.�The� operation�of�these�controls�and�processes� facilitates�the�preparation�of�reliable� financial�reporting�and�the�preparation�of� local�and�consolidated�financial�statements� in�accordance�with�the�applicable� accounting�standards,�and�requirements� of�the�Sarbanes-Oxley�Act.�These�controls� include�certifications�by�the�chief�executive� and�chief�financial�officer�of�each�business� unit�with�respect�to�the�accuracy�of� information�provided�for�use�in�preparation� of�the�Group’s�consolidated�financial� reporting,�and�the�assurance�work�carried� out�in�respect�of�US�reporting�requirements.
The�Board�has�delegated�authority�to�the� Audit�Committee�to�review�the�framework� and�effectiveness�of�the�Group’s�systems� of�internal�control.�The�Audit�Committee� is�supported�in�this�responsibility�by�the� assurance�work�carried�out�by�Group-wide� Internal�Audit�and�the�work�of�the�business� unit�audit�committees,�which�oversee�the� effectiveness�of�controls�in�each�respective� business�unit.�Details�of�how�the�Audit� Committee�oversees�the�framework�of� controls�and�their�effectiveness�on�an� ongoing�basis,�is�set�out�more�fully�in�the� report�on�pages�115�to�123.
Formal review of controls A�formal�evaluation�of�the�systems�of� internal�control�and�risk�management� is�carried�out�at�least�annually.�Prior�to� the�Board�reaching�a�conclusion�on�the� effectiveness�of�the�systems�in�place,�the� full�report�is�considered�by�the�Disclosure� Committee�and�Audit�Committee,�with� risk-specific�disclosures�within�the�report� also�reviewed�by�the�Risk�Committee.� This�evaluation�takes�place�prior�to�the� publication�of�the�Annual�Report.
Effectiveness of controls In�accordance�with�provision�C.2.3�of�the� UK�Code�and�provisions�C.2.1�and�C.2.2� of�the�HK�Code,�the�Board�reviewed�the� effectiveness�and�performance�of�the� system�of�risk�management�and�internal� control�during�2018.�This�review�covered� all�material�controls,�including�financial,� operational�and�compliance�controls,� risk�management�systems,�budgets�and�the� adequacy�of�the�resources,�qualifications,� experience�of�staff�of�the�Group’s� accounting,�internal�audit�and�financial� reporting�functions.�The�review�identified� a�number�of�areas�for�improvement,� particularly�in�respect�of�the�general�IT�
Management 1st line of d efence 2nd line of d efence 3rd line of d efence Board
The�new�structure�of�the�Board�will�include� Mr�Wells,�Mr�FitzPatrick�and�Mr�Turner�as� Executive�Directors.�We�took�the�decision� that�our�business�unit�chief�executives� would�step�down�from�their�Board�roles� although�they�will�continue�to�attend� relevant�parts�of�Board�meetings.�We�are� making�that�change�to�our�Board�from�the� Annual�General�Meeting�this�year,�and� accordingly�Mr�Falcon,�Mr�Nicandrou�and� Mr�Foley�will�not�stand�for�election�or� re-election�in�May�2019.
Diversity Although�improving�gender�diversity�at� Board�level�has�received�a�great�deal�of� the�Committee’s�attention,�this�remains� a�challenge�and�one�which�the�Committee� is�focusing�on.�Gender�diversity�is�an� important�factor�in�identifying�candidates� for�Board�level�succession�and�there�is� more�work�to�be�done�across�building� our�internal�pipeline,�ensuring�external� recruitment�is�producing�a�diverse�pool� and�appointing�at�Board�level.
Committee members �— Paul�Manduca�(Chair)� �— Howard�Davies �— David�Law� �— Anthony�Nightingale �— Philip�Remnant
Audit Committee report Dear Shareholder As�Chair�of�the�Audit�Committee,� I�am�pleased�to�present�this�report�on� the�Committee’s�activities�during�2018.� The�Committee�provides�the�Board�with� assurance�as�to�the�integrity�of�the�Group’s� financial�reporting�and,�together�with� the�Risk�Committee,�monitors�the� effectiveness�of�the�second�and�third�lines� of�defence,�which�are�an�integral�part�of� our�internal�control�environment.�
It�remains�the�Committee’s�current�view� that,�without�exceptional�circumstances,� change�to�the�current�auditor�should�not� occur�during�a�period�of�significant�change� for�Prudential.�It�is�therefore�the� Committee’s�intention�to�appoint�a�new� auditor�for�the�2023�financial�year-end,� after�the�first�year�of�implementation�of�the� new�insurance�accounting�standard.�A�plan� to�identify�KPMG’s�successor�to�ensure�a� smooth�transition�has�been�developed.� Further�explanation�of�the�Committee’s� approach�is�set�out�in�this�report.�
Internal audit During�2018�the�Committee�continued� to�receive�regular�briefings�from�the� Group-wide�Internal�Audit�(GwIA)� Director.�GwIA�undertook�a�programme�of� risk-based�audits�covering�matters�across� the�business�units�in�addition�to�assurance� work�on�significant�change�programmes.� Delivery�of�the�internal�audit�plan�and�the� independent�assurance�provided�by�GwIA� represent�important�components�of�the� Committee’s�oversight�of�the�Group’s� internal�controls�procedures.�The� effectiveness�of�GwIA�was�assessed�during� the�year,�together�with�a�review�of�progress� against�suggested�enhancements� identified�by�the�external�review� undertaken�by�Deloitte�in�2017.�I�meet� regularly�with�the�GwIA�Director�to�discuss� the�work�done�and�matters�arising�and�the� Committee�also�asked�that�management� responsible�for�rectifying�some�of�the� issues�identified�to�attend�the�Committee� to�ensure�that�appropriate�action�was�being� taken.�The�Committee�also�approved�the� 2019�internal�audit�plan�which�takes� account�of�the�business�and�organisational� changes�arising�from�the�planned� demerger.�The�work�highlighted�GwIA’s� role�in�supporting�the�demerger�and�the� creation�of�two�appropriately�sized,� resourced�and�experienced�independent� internal�audit�functions.�
Regular attendees �— Chairman�of�the�Board �— Group�Chief�Executive� �— Chief�Financial�Officer �— Group�Chief�Risk�Officer �— Director�of�Group�Finance �— Director�of�Group�Financial� Accounting�&�Reporting
Compliance The�Committee�received�updates�on� matters�arising�from�the�annual�Compliance� Plan�(the�Plan)�throughout�2018.�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,�including� monitoring�compliance�with�key�elements� of�the�compliance�framework�such�as� conflicts�of�interest,�anti-money�laundering� and�anti-bribery�and�corruption�policies.� The�Committee�also�approved�the�2019� Compliance�Plan�in�the�context�of�the� proposed�demerger,�and�is�monitoring� relevant�aspects�of�the�proposed�transition� of�Prudential’s�lead�regulator�from�the� Prudential�Regulatory�Authority�to�the� Hong�Kong�Insurance�Authority�(IA).�
Committee governance The�Committee�works�closely�with�the�Risk� Committee�to�make�sure�both�Committees� are�updated�and�aligned�on�matters�of� common�interest.�Where�responsibilities� are�perceived�to�overlap�between�the�two� Committees,�Sir�Howard�and�I�agree�the� most�appropriate�Committee�to�consider� the�matter.�In�October�2018�the�two� Committees�held�a�joint�session�on�cyber� security,�including�updates�on�the� Group-wide�cyber�security�strategy�and� information�security�programme,�more� details�of�which�are�set�out�in�the�Risk� Committee�report�on�pages�124�and�125.�
Periodic�financial�reporting�including: �— Full�and�half-yearly�report�and�accounts �— Key�accounting�judgements�and�disclosures,�including�tax �— Solvency�II�results�and�governance�processes �— Associated�audit�reports l l l l l l l
Going concern and viability statements 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�(see�page�128),�and�that�the� disclosures�on�the�Group’s�longer-term�viability�(see�page�68)�were�both�reasonable�and�appropriate.� The�Committee�considered�information�on�the�risks�to�the�Group’s�liquidity�and�capital�position�as� well�as�the�impact�of�the�proposed�demerger�and�the�scenarios�that�could�arise�as�part�of�the�UK’s� intended�withdrawal�from�the�EU.
Key matters considered during the year continued Matter considered How the Committee addressed the matter
Risk Committee report Dear Shareholder As Chair of the Risk Committee, I am pleased to report on the Committee’s activities and focus during 2018.
Committee operation 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. It also oversees and advises 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. In March 2018, the Group announced the appointment of Mr Turner as Group Chief Risk Officer (CRO) and Executive Director. During the year, the Committee welcomed Ms Schroeder and Mr Watjen as members in March and November respectively.
The Committee received regular reports from the CRO, who is advised by the Group Executive Risk Committee (GERC). I provided feedback on the performance of the CRO to the Group Chief Executive Officer as part of the annual evaluation of the Board and its members. The Committee also received regular reports from the Group-wide Internal Audit and Compliance functions and updates from other areas of the business as needed.
Transformation activity and demerger of M&GPrudential During 2018, a key area of consideration for the Committee was the risk associated with the Group’s portfolio of key strategic change initiatives, including the merger and transformation programmes at M&GPrudential and the planned demerger of M&GPrudential from the rest of the Group. In March 2018, prior to the announcement of the demerger, the Committee considered the associated risks of proceeding and weighed them against the risks of retaining the current Group structure. Analyses of the key financial risks to the execution of the demerger under various stress scenarios were considered. During the year, the Committee considered updates, risk opinions, guidance and assurance on critical change and demerger activity.
Risk appetite and principal risks During 2018 we reviewed the Group’s risk policies and the aggregate limits accompanying the Group risk appetite statements, updating limits where necessary to reflect changes in the Group’s risk profile and the evolving regulatory and macroeconomic environments. We also reviewed the principal risks facing the Group and received regular updates on these through the course of the year and received regular reports from the chief risk officers of our Material Subsidiaries. A fuller explanation of principal risks facing the Group and the way in which the Group manages these is set out in the CRO’s report on pages 52 to 69. During 2018, the Committee considered risk assessments and opinions on key areas covering the risks associated with the Group’s Business Plan and executive remuneration, further details of which are noted below.
In respect of our principal risks, we continued to focus on those arising from the products we offer our customers, those inherent in our investment portfolios and the risks that arise from the operation of our businesses. We regularly reviewed the strength of our capital and liquidity positions, which included the results of stress and scenario analyses, and the significant ongoing changes to the regulatory framework and environment. In addition, we closely monitored risks arising from the macroeconomic environment and the pace of regulatory developments across the globe.
Dependent on the business to be discussed at each meeting, chief risk officers of the business units and members of the Group Risk Leadership Team are invited to attend each meeting as appropriate
Number of meetings in 2018: Five. (In addition a joint meeting was held with the Audit Committee)
Company�law�requires�the�Directors�to� prepare�financial�statements�for�each� financial�year�that�give�a�true�and�fair�view� of�the�financial�affairs�of�the�Company�and� of�the�Group.�The�criteria�applied�in�the� preparation�of�the�financial�statements� are�set�out�in�the�statement�of�Directors’� responsibilities�on�pages�329�and�375.� Company�law�also�requires�the�Board�to� approve�the�Strategic�report.�In�addition,� the�UK�Code�requires�the�Directors’� statement�to�state�that�they�consider�the� Annual�Report�and�financial�statements,� taken�as�a�whole�is�fair,�balanced�and� understandable�and�provides�the� information�necessary�for�shareholders� to�assess�the�Company’s�position�and� performance,�business�model�and�strategy.
The�Directors�who�held�office�at�the�date� of�approval�of�this�Directors’�report�confirm� that,�so�far�as�they�are�each�aware,�there�is� no�relevant�audit�information�of�which�the� Company’s�auditor�is�unaware;�each� Director�has�taken�all�the�steps�that�he�or� she�ought�to�have�taken�as�a�Director�to� make�himself�or�herself�aware�of�any� relevant�audit�information�and�to�establish� that�the�Company’s�auditor�is�aware�of�that� information.�This�confirmation�is�given�and� should�be�interpreted�in�accordance�with� the�provisions�of�Section�418�of�the� Companies�Act�2006.
Powers of the Board The�Board�may�exercise�all�powers� conferred�on�it�by�the�Company’s�Articles� and�the�Companies�Act�2006.�This� includes�the�powers�of�the�Company�to� borrow�money�and�to�mortgage�or�charge� any�of�its�assets�(subject�to�the�limitations� set�out�in�the�Companies�Act�2006�and� the�Company’s�Articles)�and�to�give�a� guarantee,�security�or�indemnity�in� respect�of�a�debt�or�other�obligation�of� the�Company.
Change of control Under�the�agreements�governing� Prudential�Corporation�Holdings�Limited’s� life�insurance�and�fund�management�joint� ventures�with�China�International�Trust�&� Investment�Corporation�(CITIC),�if�there�is� a�change�of�control�of�the�Company,�CITIC� may�terminate�the�agreements�and�either� (i)�purchase�the�Company’s�entire�interest� in�the�joint�venture�or�require�the�Company� to�sell�its�interest�to�a�third�party�designated� by�CITIC,�or�(ii)�require�the�Company�to� purchase�all�of�CITIC’s�interest�in�the�joint� venture.�The�price�of�such�purchase�or�sale� is�to�be�the�fair�value�of�the�shares�to�be� transferred,�as�determined�by�the�auditor� of�the�joint�venture.�
Agreements for compensation for loss of office or employment on takeover
Financial instruments Strategic report and Additional information 52 to 69 and 407
In addition, the risk factors set out on pages 407 to 415 and the additional unaudited financial information set out on pages 378 to 406, are incorporated by reference into the Directors’ report.
Dear shareholder, I am pleased to present the Remuneration Committee’s report for the year to 31 December 2018.
Performance measures Group performance (£m)3 2017-2018 growth (AER/CER)4 2018 bonus achievement
I would like to thank them for their engagement. During this consultation, there was a great deal of support for the proposals which the Committee made for 2019 and valuable discussions on other areas for consideration.
In light of conversations with shareholders and their advisers, and given the unusual circumstances of the Group as it prepares for the planned demerger of the M&GPrudential business, the Committee has made the following changes for 2019 which aim to enhance the transparency of executive remuneration arrangements; simplify the connection between performance and reward; and reflect changes in market practice which are developing in the context of the new UK Corporate Governance Code: Reduced proportion of 2019 PLTIP awards vesting for threshold performance The Committee has reduced the proportion of 2019 PLTIP awards which would vest for threshold performance from 25 per cent to 20 per cent. This would see the value available for threshold performance decrease from 100 per cent of salary for the Group Chief Executive to 80 per cent of salary.
Revised 2019 PLTIP award performance measures It is imperative that the performance measures attached to PLTIP awards create a clear focus within the executive team and a straightforward connection with the value to be delivered to shareholders, particularly as the Group prepares for the planned demerger. On this basis, the Committee has decided that a different mixture of performance conditions are used, specifically for the awards to be made in 2019, which will vest based on performance over the 2019 to 2021 financial years.
Reduced pension benefits for newly recruited Executive Directors The Committee is mindful of the recent developments with regards to the alignment of retirement benefits across the Group, and for externally recruited Executive Directors appointed on or after 1 March 2019 has committed to reducing the pension benefits from the current level of 25 per cent of salary to 20 per cent of salary. As part of next year’s review of the Directors’ remuneration policy, the Committee will consider its approach to Executive Director pension benefits further in the light of market developments, to ensure they are appropriately aligned to the retirement arrangements offered across the wider workforce taking into account the composition of the Group at that time.
Early publication of the CEO pay ratio The Committee has decided to publish the CEO pay ratio in the 2018 Directors’ remuneration report, one year in advance of the disclosure becoming a requirement under the UK Companies (Miscellaneous Reporting) Regulations 2018. This has been welcomed by many shareholders.
Enhanced disclosure of performance against personal and functional Annual Incentive Plan targets This report includes more detail about the process for setting personal and strategic targets, and about levels of achievement against the targets used for 2018 bonuses. There is also a new section on the functional objectives used in the determination of the Group Chief Risk Officer’s bonus. These disclosures can be found in the Annual report on remuneration.
Post cessation share ownership policy Our current policy is that existing remuneration arrangements, including the deferral under the bonus into Prudential plc shares or ADRs for three years and a post-performance holding period of two years for awards of Prudential plc shares or ADRs under the PLTIP, will normally continue to provide alignment between the interests of our senior executives and our other shareholders for a period after the end of employment. This will be reviewed as part of the development of the new Directors’ remuneration policy in 2019.
Key elements1 How we implemented the policyKey features of the policy
Salary increase of 2% in 2018Broadly aligned with pay budget for other employees
The Group Chief Executive has a maximum bonus opportunity of 200% of salary. For other Executive Directors the maximum is 180% of salary or less 2018 bonuses were paid based on financial performance or functional measures as well as personal objectives
Awards in 2018 were below the plan limits: — Group Chief Executive: 400% of salary — CEO, NABU: 460% of salary — CEO, M&G: 450% of salary3
What performance means for Executive Directors’ pay At�Prudential,�remuneration�packages�are�designed�to�ensure�a�strong�alignment�between�pay�and�performance.�As�you�can�see�from�the� charts�within�the�Annual�statement�from�the�Chairman�of�the�Remuneration�Committee,�sustained�growth�across�our�key�performance� metrics�has�delivered�substantial�value�to�our�shareholders.�This�has�been�reflected�in�both�the�annual�bonuses�paid�and�the�release�of� long-term�incentive�awards,�as�set�out�in�the�Annual�report�on�remuneration.
Fixed pay Performance related 2018 single figure 2017 single figure1 salary
Nic�Nicandrou2 Chief�Executive,�PCA3 £1,023,000 £654,000 £1,692,000 £1,433,000 £4,802,000� £4,705,000 Anne�Richards4 Chief�Executive,�M&G� £249,000 £164,000 – – £413,000� £3,053,000 Barry�Stowe2,5 Chairman�and�CEO,�NABU6 £867,000 £287,000 £4,935,000 £2,761,000 £8,850,000� £9,541,000 James�Turner7 Group�Chief�Risk�Officer £521,000 £239,000 £793,000 £347,000 £1,900,000� �N/A Mike�Wells Group�Chief�Executive £1,126,000 £689,000 £2,133,000 £3,486,000 £7,434,000� £8,560,000
Michael Falcon Mark FitzPatrick John Foley James Turner Nic Nicandrou Mike Wells
Statement of consideration of shareholder views The�Committee�and�the�Company�undertake�regular�consultation�with�key�institutional�investors�on�the�remuneration�policy�and� its�implementation.�This�engagement�is�led�by�the�Remuneration�Committee�Chair�and�is�an�integral�part�of�the�Company’s�investor� relations�programme.�The�Committee�is�grateful�to�shareholders�for�their�feedback�and�takes�this�into�account�when�determining� executive�remuneration.�As�set�out�in�the�Annual�statement�from�the�Chairman�of�the�Remuneration�Committee,�feedback�from� shareholders�and�their�advisers�informed�a�number�of�changes�to�the�Company’s�2019�remuneration�arrangements.
The�principal�responsibilities�of�the�Committee�are: �— Determining�and�recommending�to�the�Board�for�approval,�the�framework�and�policy�for�the�remuneration�of�the�Chairman,�Executive� Directors�and�other�members�of�the�Group�Executive�Committee; �— Approving�the�design�of�performance-related�pay�schemes�operated�for�the�Executive�Directors�and�other�members�of�the�Group� Executive�Committee,�and�determining�the�targets�and�individual�payouts�under�such�schemes; �— Reviewing�the�design�and�development�of�all�share�plans�requiring�approval�by�the�Board�and/or�the�Company’s�shareholders; �— Approving�the�share�ownership�guidelines�for�the�Chairman�and�Executive�Directors�and�other�members�of�the�Group�Executive� Committee,�and�monitoring�compliance; �— Reviewing�and�approving�individual�packages�for�the�Executive�Directors�and�other�members�of�the�Group�Executive�Committee,� and�the�fees�of�the�Chairman�and�the�Non-executive�Directors�of�the�Group’s�material�subsidiaries; �— Reviewing�and�approving�packages�to�be�offered�to�newly�recruited�Executive�Directors�and�other�members�of�the�Group�Executive� Committee; �— Reviewing�and�approving�the�structure�and�quantum�of�any�severance�package�for�Executive�Directors�and�other�members�of�the� Group�Executive�Committee�to�ensure�they�are�fair�and�do�not�reward�failure; �— Ensuring�the�process�for�establishing�remuneration�policy�is�transparent�and�consistent�with�the�Group’s�risk�framework�and� appetites,�encouraging�strong�risk�management�and�solvency�management�practices;�
During�2018,�Deloitte�LLP�was�the�independent�adviser�to�the�Committee.�Deloitte�was�appointed�by�the�Committee�in�2011�following� a�competitive�tender�process.�As�part�of�this�process,�the�Committee�considered�the�services�that�Deloitte�provided�to�Prudential�and�its� competitors,�as�well�as�other�potential�conflicts�of�interest.�Deloitte�is�a�member�of�the�Remuneration�Consultants’�Group�and�voluntarily� operates�under�their�code�of�conduct�when�providing�advice�on�executive�remuneration�in�the�UK.�Deloitte�regularly�meets�with�the� Chair�of�the�Committee�without�management�present.�The�Committee�is�comfortable�that�the�Deloitte�engagement�partner�and�team� providing�remuneration�advice�to�the�Committee�do�not�have�connections�with�Prudential�that�may�impair�their�independence�and� objectivity.�The�total�fees�paid�to�Deloitte�for�the�provision�of�independent�advice�to�the�Committee�in�2018�were�£48,400�(2017:� £56,000)�charged�on�a�time�and�materials�basis.�During�2018,�Deloitte�gave�Prudential�management�advice�on�remuneration,�as�well�as� providing�guidance�on�capital�optimisation,�digital�and�technology,�taxation,�internal�audit,�real�estate,�global�mobility�and�other�financial,� risk�and�regulatory�matters.�Remuneration�advice�is�provided�by�an�entirely�separate�team�within�Deloitte.�As�set�out�in�the�table�above,� the�Committee�reviewed�Deloitte’s�appointment�during�2018�and�considered�Deloitte�to�be�independent.�
Penny�James2 �478� �81� – – – – �119� 678 *�Benefits�include�(where�provided)�the�cost�of�providing�the�use�of�a�car�and�driver,�medical�insurance,�security�arrangements�and�relocation/expatriate�benefits. †�The�deferred�part�of�the�bonus�is�subject�to�malus�and�clawback�in�accordance�with�the�malus�and�clawback�policies�but�no�further�conditions.� ‡�In�line�with�the�regulations,�the�estimated�value�of�2017�LTIP�releases�has�been�recalculated�based�on�the�actual�share/ADR�price�on�the�date�awards�were�released,�being�£17.47/US$49.24�
Remuneration in respect of performance in 2018 Base salary Executive�Directors’�salaries�were�reviewed�in�2017�with�changes�effective�from�1�January�2018.�When�the�Committee�took�these� decisions�it�considered: �— The�salary�increase�budgets�for�other�employees,�which�vary�across�our�business�units,�reflecting�local�market�conditions; �— �The�performance�and�experience�of�each�Executive�Director;�
Mark�FitzPatrick1 £730,000 £745,000 John�Foley £765,000 £781,000 Nic�Nicandrou2 HK$10,500,000 HK$10,710,000 Anne�Richards3 £400,000 £408,000 Barry�Stowe US$1,134,000 US$1,157,000 James�Turner4 N/A £625,000 Mike�Wells £1,103,000 £1,126,000
�— Announced�the�demerger�of�M&GPrudential�from�Prudential�plc�resulting� in�two�separately-listed�companies,�each�with�its�own�distinct�investment� prospects�in�order�to�further�strengthen�two�already�strong�businesses�for� the�benefit�of�customers; �— Announced�that�the�Hong�Kong�Insurance�Authority�would�be�the� Group-wide�supervisor�after�the�demerger�of�M&GPrudential; �— Raised�£1.6�billion�of�subordinated�debt,�with�substitution�clauses�to�be� activated�on�demerger,�supporting�the�capital�rebalancing�across� Prudential�plc�and�M&GPrudential;�and�
�— Launched�Jackson’s�Financial�Freedom�For�Life�campaign�to�encourage� Americans�to�sign�up�for�an�annuity�that�will�protect�them�in�retirement; �— Collaborated�with�the�Envestnet�Insurance�Exchange�to�offer�our�products� on�its�platform; �— Jackson�launched�MarketProtector�and�MarketProtector�Advisory,�two� new�fixed�annuities�with�index-linked�interest�to�provide�consumers�with� a�combination�of�tax-deferred�investment�growth,�protection�from�market� risk�and�the�flexibility�to�adapt�to�changing�needs�in�retirement;�
�— Reinsured�£12�billion�of�UK�annuity�policies�and�completed�the�first�stages� at�the�High�Court�of�England�and�Wales�for�the�transfer�of�Prudential�UK� annuities�to�Rothesay�Life�Plc; �— Established�a�new�M&GPrudential�leadership�team,�implemented�a�new� governance�model�and�built�a�set�of�unified�corporate�support�services�in� preparation�for�demerger�from�Prudential�plc; �— Introduced�a�new�digital�service�for�investment�bond�customers�which�has� reduced�cash�withdrawal�waiting�times�by�almost�80�per�cent;�and�
Functional performance The�Chair�of�the�Group�Risk�Committee�undertakes�the�assessment�of�performance�against�functional�objectives�for�the�Group�Chief� Risk�Officer.�2018�achievement�is�summarised�below: Overview of functional objectives 2018 performance against objectives
Mark�FitzPatrick Chief�Financial�Officer £745,000 175% 95% �£1,241,000� John�Foley Chief�Executive,�M&GPrudential £781,000 180% 84% �£1,186,000� Nic�Nicandrou Chief�Executive,�Prudential�
Corporation�Asia HK$10,710,000 180% 92% �£1,692,000� Anne�Richards2 Chief�Executive,�M&G £249,000 600% 0% £nil Barry�Stowe3 Chairman�&�CEO,�NABU US$1,157,000 160% 92% �£4,935,000 James�Turner4 Group�Chief�Risk�Officer £521,000 160% 95% �£793,000� Mike�Wells Group�Chief�Executive £1,126,000 200% 95% �£2,133,000�
Remuneration in respect of performance periods ending in 2018 Prudential Long Term Incentive Plan (PLTIP) Target setting Our�long-term�incentive�plans�have�stretching�performance�conditions�that�are�aligned�to�the�strategic�priorities�of�the�Group.�In�2016,� all�Executive�Directors�were�granted�awards�under�the�PLTIP.�In�determining�the�targets�the�Committee�had�regard�to�the�stretching� nature�of�the�three-year�Business�Plan�for�operating�profit�set�by�the�Board.�
The�peer�group�for�the�2018�awards�is�set�out�below: Aegon AIA AIG Allianz Aviva AXA Generali Legal�&�General Manulife MetLife Old�Mutual Prudential�Financial Standard�Life�Aberdeen Sun�Life�Financial Zurich�Insurance�Group
Update on performance against targets for awards made in 2017 and 2018 under the Prudential Long Term Incentive Plan
Year Method 25th percentile pay ratio Median pay ratio 75th percentile pay ratio 2018 Option�B 155�:�1 102�:�1 68�:�1
Basic�fee 97,000 97,000 Additional�fees: Audit�Committee�Chair 75,000 75,000 Audit�Committee�member� 27,500 30,000 Remuneration�Committee�Chair� 60,000 60,000 Remuneration�Committee�member� 27,500 30,000 Risk�Committee�Chair� 75,000 75,000 Risk�Committee�member 27,500 30,000 Nomination�Committee�member� 10,000 12,500 Senior�Independent�Director 50,000 50,000
1 January 2018 (or on date of appointment) During 2018 31 December 2018 (or on date of retirement) Share ownership guidelines
Mark�FitzPatrick 21�Sep�17 1,455 1,402 01�Dec�22 31�May�23 2,061 – – – – – 2,061 John�Foley 21�Sep�16 1,104 1,402 01�Dec�19 31�May�20 815 – – – – – 815 John�Foley 21�Sep�17 1,455 1,402 01�Dec�20 31�May�21 618 – – – – – 618 Nic�Nicandrou 23�Sep�14 1,155 1,402 01�Dec�19 31�May�20 1,311 – – – – – 1,311 Nic�Nicandrou 21�Sep�16 1,104 1,402 01�Dec�21 31�May�22 1,358 – – – – – 1,358 Anne�Richards 21�Sep�16 1,104 1,402 01�Dec�19 31�May�20 1,630 – – – – – 1,630 Mike�Wells 22�Sep�15 1,111 1,402 01�Dec�18 31�May�19 1,620 – 1,620 – – – –
Notes 1� No�gain�was�made�by�Directors�in�2018�on�the�exercise�of�SAYE�options. 2� No�price�was�paid�for�the�award�of�any�option.� 3� The�highest�and�lowest�closing�share�prices�during�2018�were�£19.81�and�£13.44�respectively. 4� All�exercise�prices�are�shown�to�the�nearest�pence. 5� Anne�Richards�participated�in�the�plan�during�her�time�as�an�Executive�Director.�The�column�above�marked�’End�of�period’�reflects�Anne�Richards’�position�as�at�10�August�2018,�
Executive Directors Mark�FitzPatrick 17�May�2017 12�months 12�months – – John�Foley 8�December�2010 12�months 12�months – – Nic�Nicandrou 27�April�2009 12�months 12�months – – Anne�Richards 4�July�2016 12�months� 12�months – – Barry�Stowe 18�October�2006 12�months 12�months – – James�Turner� 1�March�2018 12�months 12�months Yes £45,833 Mike�Wells 21�May�2015 12�months 12�months – –
Letters of appointment of the Chairman and Non-executive Directors Details�of�Non-executive�Directors’�individual�appointments�are�outlined�below.�The�Directors’�remuneration�policy�contains�further� details�on�their�letters�of�appointment.�
Non-executive Directors Philip�Remnant 1�January�2013 6�months 6�years�4�months Howard�Davies 15�October�2010 6�months 8�years�7�months David�Law 15�September�2015 6�months 3�years�8�months Kai�Nargolwala 1�January�2012 6�months 7�years�4�months Anthony�Nightingale 1�June�2013 6�months 5�years�11�months Alice�Schroeder 10�June�2013 6�months 5�years�11�months Lord�Turner 15�September�2015 6�months 3�years�8�months Thomas�Watjen 11�July�2017 6�months 1�years�10�months Fields�Wicker-Miurin 3�September�2018 6�months 8�months
Statement of voting at general meeting At�the�2017�Annual�General�Meeting,�shareholders�were�asked�to�vote�on�the�current�Directors’�remuneration�policy�and�at�the� 2018�Annual�General�Meeting,�shareholders�were�asked�to�vote�on�the�2017�Directors’�remuneration�report.�Each�of�these�resolutions� received�a�significant�vote�in�favour�by�shareholders�and�the�Committee�is�grateful�for�this�support�and�endorsement�by�our� shareholders.�The�votes�received�were: Resolution Votes for % of votes cast Votes against % of votes cast Total votes cast Votes withheld
Statement of implementation in 2019 Aligning 2019 pay to performance Executive�Directors’�remuneration�packages�were�reviewed�in�2018�with�changes�effective�from�1�January�2019.�When�the�Committee� took�these�decisions,�it�considered�the�salary�increases�awarded�to�other�employees�in�2018�and�the�expected�increases�in�2019.� The�external�market�reference�points�used�to�provide�context�to�the�Committee�were�identical�to�those�used�for�2018�salaries.�
Demerger and review of the Directors’ remuneration policy During�2018�the�Group�announced�its�intention�to�demerge�M&GPrudential�from�Prudential�plc,�resulting�in�two�separately�listed� companies,�each�with�its�own�distinct�investment�prospects.�In�preparation�for�the�demerger�process�the�Committee�has�established� a�set�of�principles�to�underpin�decisions�on�remuneration�relating�to�the�demerger,�including: �— Executives�should�not�be�advantaged�or�disadvantaged�by�the�demerger;�the�value�of�outstanding�awards�and�their�key�terms� (release�dates,�holding�periods,�malus�and�clawback�provisions)�should�be�unaffected; �— Where�performance�conditions�need�to�be�revised,�the�new�conditions�should�be�no�more�or�less�stretching�that�those�originally� attached�to�the�awards;�
Five highest paid individuals Of�the�five�individuals�with�the�highest�emoluments�in�2018,�three�were�Executive�Directors�whose�emoluments�are�disclosed�in�this� report.�The�aggregate�of�the�emoluments�of�the�other�two�individuals�for�2018�were�as�follows: Base�salaries,�allowances�and�benefits�in�kind 2,810 Pension�contributions 104 Performance�related�pay 20,993
Primary statements Consolidated income statement 173 Consolidated statement of comprehensive income 174 Consolidated statement of changes in equity 175 Consolidated statement of financial position 177 Consolidated statement of cash flows 178
B1.1 Segment results – profit before tax 193 B1.2 Short-term fluctuations in investment returns on shareholder-backed business
B1.4 Segmental income statement 200 B1.5 Other investment return 202 B1.6 Additional analysis of performance by segment components B1.6(a) Asia 202 B1.6(b) US 203 B1.6(c) UK and Europe 204
B2 Acquisition costs and other expenditure B2.1 Staff and employment costs 205 B2.2 Share-based payment 206 B2.3 Key management remuneration 208 B2.4 Fees payable to the auditor 208
C5 Intangible assets C5.1 Goodwill 265 C5.2 Deferred acquisition costs and other intangible assets 266
C7 Risk and sensitivity analysis C7.1 Group overview 272 C7.2 Asia insurance operations 274 C7.3 US insurance operations 275 C7.4 UK and Europe insurance operations 280 C7.5 Asset management and other operations 282
C9 Defined benefit pension schemes 284 C10 Share capital, share premium and own shares 291 C11 Provisions 292 C12 Capital
D2 Contingencies and related obligations 298 D3 Post balance sheet events 299 D4 Related party transactions 299 D5 Commitments 300 D6 Investments in subsidiary undertakings, joint ventures and associates
Earned�premiums,�net�of�reinsurance B1.4 33,201 41,943 Investment�return B1.4 (10,263) 42,189 Other�income note (ii) B1.4 1,993 2,258
Benefits�and�claims note (i) C4.1(a)(iii) (27,411) (71,854) Outward�reinsurers’�share�of�benefit�and�claims note (i) C4.1(a)(iii) 13,554 2,193 Movement�in�unallocated�surplus�of�with-profits�funds C4.1(a)(iii) 1,289 (2,871)
Profit�before�tax�(being tax attributable to shareholders’ and policyholders’ returns) note (iii) 3,309 3,970 Less�tax�credit�(charge)�attributable�to�policyholders’�returns 326 (674)
Items that will not be reclassified to profit or loss Shareholders’�share�of�actuarial�gains�and�losses�on�defined�benefit�pension�schemes: Actuarial�gains�and�losses�on�defined�benefit�pension�schemes 134 200 Related�tax (23) (33)
Reserves Profit�for�the�year – – 3,010 – – 3,010 3 3,013 Other�comprehensive�income: Exchange�movements�on�foreign� operations�and�net�investment� hedges,�net�of�related�tax – – – 348 – 348 1 349
Net�unrealised�valuation�movements,� net�of�related�change�in� amortisation�of�deferred� acquisition�costs�and�related�tax – – – – (1,083) (1,083) – (1,083)
Share capital and share premium New�share�capital�subscribed� C10 1 16 – – – 17 – 17
share-based�payments� – – 89 – – 89 – 89 Change�in�non-controlling�interests – – – – – – 5 5
Share capital and share premium New�share�capital�subscribed� C10 – 21 – – – 21 – 21
Liabilities Insurance�contract�liabilities C4.1 322,666 328,172 Investment�contract�liabilities�with�discretionary�participation�features C4.1 67,413 62,677 Investment�contract�liabilities�without�discretionary�participation�features C4.1 19,222 20,394 Unallocated�surplus�of�with-profits�funds C4.1 15,845 16,951 Core�structural�borrowings�of�shareholder-financed�businesses C6.1 7,664 6,280 Operational�borrowings�attributable�to�shareholder-financed�businesses C6.2 998 1,791 Borrowings�attributable�to�with-profits�businesses C6.2 3,940 3,716 Obligations�under�funding,�securities�lending�and�sale�and�repurchase�agreements 6,989 5,662 Net�asset�value�attributable�to�unit�holders�of�consolidated�unit�trusts�and�similar�funds 11,651 8,889 Deferred�tax�liabilities C8.1 4,022 4,715 Current�tax�liabilities C8.2 568 537 Accruals,�deferred�income�and�other�liabilities C1 15,248 14,185
Operating�cash�items: Interest�receipts�and�payments 5,793 6,900 Dividend�receipts 2,361 2,612 Tax�paid note (iv) (625) (915)
Issue�of�subordinated�debt,�net�of�costs 1,630 565 Redemption�of�subordinated�debt (434) (751) Fees�paid�to�modify�terms�and�conditions�of�senior�debt note (ii) (33) – Interest�paid� (376) (369)
Basis of preparation These�statements�have�been�prepared�in�accordance�with�IFRS�Standards�as�issued�by�the�International�Accounting�Standards�Board� (IASB)�and�as�endorsed�by�the�European�Union�(EU)�as�required�by�EU�law�(IAS�Regulation�EC1606/2032).�EU-endorsed�IFRS�Standards� may�differ�from�IFRS�Standards�issued�by�the�IASB�if,�at�any�point�in�time,�new�or�amended�IFRS�Standards�have�not�been�endorsed�by� the�EU.�At�31�December�2018,�there�were�no�unendorsed�standards�effective�for�the�two�years�ended�31�December�2018�which�impact� the�consolidated�financial�information�of�the�Group.�There�were�no�differences�between�IFRS�Standards�endorsed�by�the�EU�and�IFRS� Standards�issued�by�the�IASB�in�terms�of�their�application�to�the�Group.�These�statements�have�been�prepared�on�a�going�concern�basis.� The�parent�company�statement�of�financial�position�prepared�in�accordance�with�the�UK�Generally�Accepted�Accounting�Practice� (including�Financial�Reporting�Standard�101�Reduced�Disclosure�Framework)�is�presented�on�page�320.�
Asia�operations* 222 (295) US�operations 329 (477) UK�and�Europe�operations – 3 Unallocated�to�a�segment�(other�funds)† (207) 304 *�2017�included�the�recycling�of�the�cumulative�exchange�gain�of�the�sold�Korea�life�business�of�£61�million�to�the�income�statement.� †�The�exchange�rate�movement�unallocated�to�a�segment�mainly�reflects�the�translation�of�currency�borrowings,�issued�by�the�Group�parent�company,�that�have�been�designated�as�a�net�
Other new accounting pronouncements In�addition�to�the�above,�the�following�new�accounting�pronouncements�are�also�effective�from�1�January�2018: �— IFRIC�22,�‘Foreign�Currency�Transactions�and�Advance�Consideration’; �— Classification�and�measurement�of�share-based�payment�transactions�(amendments�to�IFRS�2,�‘Share-based�payment’); �— Transfers�of�Investment�Property�(amendments�to�IAS�40,�‘Investment�property’);�and �— Annual�Improvements�to�IFRSs�2014–2016�Cycle.
A3.1 Critical accounting policies, estimates and judgements This�note�presents�the�critical�accounting�policies,�accounting�estimates�and�judgements�applied�in�preparing�the�Group’s�consolidated� financial�statements.�Other�significant�accounting�policies�are�presented�in�note�E1.�All�accounting�policies�are�applied�consistently�for� both�years�presented�and�normally�are�not�subject�to�changes�unless�new�accounting�standards,�interpretations�or�amendments�are� introduced�by�the�IASB.
For�the�majority�of�the�Group’s�contracts,�classification�is�based�on�a�readily�identifiable� scenario�that�demonstrates�a�significant�difference�in�cash�flows�if�the�covered�event� occurs�(as�opposed�to�does�not�occur)�reducing�the�level�of�judgement�involved.� Contracts�that�transfer�financial�risk�to�the�Group�but�not�significant�insurance�risk�are� classified�as�investment�contracts.�Furthermore,�some�contracts,�both�insurance�and� investment,�contain�discretionary�participating�features�representing�the�contractual�right� to�receive�additional�benefits�as�a�supplement�to�guaranteed�benefits�that�(i)�are�likely�to� be�a�significant�portion�of�the�total�contract�benefits;�(ii)�have�an�amount�or�timing� contractually�at�the�discretion�of�the�insurer;�and�(iii)�are�contractually�based�on�asset�or� fund�performance,�as�discussed�in�IFRS�4.�Insurance�contracts�and�investment�contracts� with�discretionary�participation�features�are�accounted�for�under�IFRS�4.�Investment� contracts�without�such�discretionary�participation�features�are�accounted�for�as�financial� instruments�under�IAS�39.
UK and Europe insurance operations The�UK�regulated�with-profits�funds’�liabilities�are�the�realistic�basis�liabilities�in� accordance�with�‘grandfathered’�FRS�27.�The�realistic�basis�requires�the�value�of�liabilities� to�be�calculated�as: �— A�with-profits�benefits�reserve;�plus �— Future�policy-related�liabilities;�plus �— The�realistic�current�liabilities�of�the�fund.
Represents�the�excess�of�assets�over�policyholder�liabilities�that�are�determined�in� accordance�with�the�Group’s�accounting�policies�and�are�based�on�local�GAAP�for�the� Group’s�with-profits�funds�in�the�UK,�Hong�Kong�and�Malaysia�that�have�yet�to�be� appropriated�between�policyholders�and�shareholders.�The�unallocated�surplus�is� recorded�wholly�as�a�liability�with�no�allocation�to�equity.�The�annual�excess�(shortfall)� of�income�over�expenditure�of�the�with-profits�funds,�after�declaration�and�attribution� of�the�cost�of�bonuses�to�policyholders�and�shareholders,�is�transferred�to�(from)�the� unallocated�surplus�each�year�through�a�charge�(credit)�to�the�income�statement.� The�balance�retained�in�the�unallocated�surplus�represents�cumulative�income�arising� on�the�with-profits�business�that�has�not�been�allocated�to�policyholders�or�shareholders.� The�balance�of�the�unallocated�surplus�is�determined�after�full�provision�for�deferred�tax� on�unrealised�appreciation�on�investments.
If�the�market�for�a�financial�investment�of�the�Group�is�not�active,�the�Group�establishes� fair�value�by�using�quotations�from�independent�third�parties,�such�as�brokers�or�pricing� services,�or�by�using�internally�developed�pricing�models.�Priority�is�given�to�publicly� available�prices�from�independent�sources�when�available,�but�overall�the�source�of� pricing�and/or�the�valuation�technique�is�chosen�with�the�objective�of�arriving�at�a�fair� value�measurement�which�reflects�the�price�at�which�an�orderly�transaction�would�take� place�between�market�participants�on�the�measurement�date.�The�valuation�techniques� include�the�use�of�recent�arm’s�length�transactions,�reference�to�other�instruments�that� are�substantially�the�same,�discounted�cash�flow�analysis,�option-adjusted�spread�models� and,�if�applicable,�enterprise�valuation�and�may�include�a�number�of�assumptions�relating� to�variables�such�as�credit�risk�and�interest�rates.�Changes�in�assumptions�relating�to�these� variables�could�positively�or�negatively�impact�the�reported�fair�value�of�these�financial� investments.�Details�of�the�financial�investments�classified�as�‘level�3’�to�which�valuation� techniques�are�applied,�and�the�sensitivity�of�profit�before�tax�to�a�change�in�these�items’� valuation,�are�presented�in�note�C3.1(d).�
Notes Further information on the loans and debt securities that pass the SPPI test (1)� The�loans�that�pass�the�SPPI�test�in�the�table�above�are�primarily�carried�at�amortised�cost�under�IAS�39.�Further�information�on�these�loans�is�as�provided�in�note�C3.3. (2)� The�debt�securities�that�pass�the�SPPI�test�in�the�table�above�are�wholly�held�by�Jackson�and�are�classified�as�available-for-sale�under�IAS�39.�The�credit�ratings�of�these�securities,�
AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- Other Total fair value
Accrued�investment�income 131 – – – Other�debtors 212 – – – Loans 117 – – – Equity�securities�and�portfolio�holdings�in�unit�trusts – – 3,677 (281) Debt�securities – – 4,247 86 Deposits 355 – – – Cash�and�cash�equivalents 396 – – –
Accounting pronouncements not yet endorsed by the EU IFRS 17, ‘Insurance Contracts’ In�May�2017,�the�IASB�issued�IFRS�17,�‘Insurance�Contracts’�to�replace�the�existing�IFRS�4,�‘Insurance�Contracts’.�The�standard,�which� is�subject�to�endorsement�in�the�EU�and�other�territories,�applies�to�annual�periods�beginning�on�or�after�1�January�2021.�In�November� 2018,�the�IASB�tentatively�decided�to�delay�the�effective�date�of�IFRS�17�by�one�year�to�periods�beginning�on�or�after�1�January�2022� and�is�considering�further�amendments�to�this�new�standard.�Early�application�is�permitted,�provided�the�entity�also�applies�IFRS�9� on�or�before�the�date�it�first�applies�IFRS�17.�The�Group�intends�to�adopt�the�new�standard�on�its�mandatory�effective�date,�alongside� the�adoption�of�IFRS�9.
Asset�management�fee�income 1,098 1,027 Other�income 2 7 Staff�costs* (384) (400) Other�costs* (270) (202)
B1.2 Short-term fluctuations in investment returns on shareholder-backed business 2018� £m 2017� £m
Net�equity�hedge�result note (a) (58) (1,490) Other�than�equity-related�derivatives note (b) (64) (36) Debt�securities note (c) (31) (73) Equity-type�investments:�actual�less�longer-term�return� 38 12 Other�items 15 19
Fair�value�movements�on�equity�hedge�instruments* 299 (1,871) Accounting�value�movements�on�the�variable�and�fixed�index�annuity�guarantee�liabilities† (894) (99) Fee�assessments�net�of�claim�payments 537 480 *�Held�to�manage�equity�exposures�of�the�variable�annuity�guarantees�and�fixed�index�annuity�options. †�The�accounting�value�movements�on�the�variable�and�fixed�index�annuity�guarantee�liabilities�reflect�the�impact�of�market�movements�and�changes�in�economic�and�actuarial�
� (b)� Other�than�equity-related�derivatives � � The�fluctuations�for�this�item�comprise�the�net�effect�of: � � –��Fair�value�movements�on�free-standing,�other�than�equity-related�derivatives; � � –��Fair�value�movements�on�the�Guaranteed�Minimum�Income�Benefit�(GMIB)�reinsurance�asset�that�are�not�matched�by�movements�in�the�underlying�GMIB�liability,�which�is�