The directors’ report of Prudential plc for the year ended 31 December 2010 is set out on pages 1 to 121, pages 353 to 374 and on pages 438 to 442 and includes the sections of the Annual Report referred to in these pages.
We believe our proven strategy, our discipline in putting value ahead of volume and our focus on execution will continue to allow us to grow profitably and to generate significant returns for our shareholders.
2 Highlights 4 Business overview 6 Chairman’s statement 8 Group Chief Executive’s report 18 Financial highlights 20 Chief Financial Officer’s review 26 Business unit review
54 Financial review 80 Risk and capital management 87 Other corporate information 91 Corporate responsibility review 100 Board of directors 104 Governance report 121 Additional disclosures 122 Index to principal Directors’ Report disclosures 124 Directors’ remuneration report 438 Risk factors 443 Shareholder information 445 How to contact us 150 Summary of statutory and supplementary International Financial Reporting Standards (IFRS) basis and EEV basis results 152 Index to Group financial statements 153 Consolidated income statement 154 Consolidated statement of comprehensive income 155 Consolidated statement of changes in equity 157 Consolidated statement of financial position 159 Consolidated statement of cash flows 160 Notes on the Group financial statements 354 Additional unaudited information 375 Balance sheet of the parent company 376 Notes on the parent company financial statements 387 Statement of directors’ responsibilities in respect of the Annual Report and the financial statements 388 Independent auditor’s report to the members of Prudential plc 389 EEV basis supplementary information 395 Notes on the EEV basis supplementary information 434 Statement of directors’ responsibilities in respect of the EEV basis supplementary information 435 Independent auditor’s report to Prudential plc on the EEV basis supplementary information
2 Including Solvency II implementation, restructuring, Asia development and Asia Regional Head Office costs.
3 The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in the supplementary analysis of profit in short-term fluctuations in investment returns. 2009 amounts have been amended accordingly.
INTERNATIONAL FINANCIAL REPORTING STANDARDS OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS3 £1,564m £1,941m +24%
• New business profit up 24 per cent to £902 million
• IFRS operating profit up 29 per cent to £536 million
• Record total APE retail sales of £1,164 million – highest level in Jackson’s history
• Strength and investment performance of With-Profits Fund allowed Prudential to deliver strong annualised returns for policyholders
• Retained ‘Five Star’ rating for excellent service in the Investment category at the Financial Adviser Service Awards
• IFRS total operating profits up nine per cent to £719 million
Jackson is also one of the top three providers of variable annuities in the US.
Prudential UK is a leading life and pensions provider to approximately 7 million customers in the United Kingdom.
M&G has been investing money for individual and institutional clients for 80 years. Today it is one of Europe’s largest active investment managers as well as being a powerhouse in fixed income.
* % of Group EEV long-term operating profits. † % of Group IFRS operating profits, based on longer-term investment returns before restructuring costs and other income and expenditure.
% of Group new business profit1 43% Asia 33% US 24% UK
I am delighted to welcome you to Prudential’s 2010 Annual Report. We have followed our excellent year in 2009 with another very strong performance.
As a company, our purpose has remained the same since our foundation in 1848. We meet our customers’ changing needs for savings, income and protection wherever we do business. Prudential is uniquely positioned in the industry, delivering both rapid, profitable growth in emerging markets and generating strong cash flows.
We also announced the appointment of Mike Wells as President and Chief Executive Officer of Jackson National Life Insurance Company and as an executive director on the Board of Prudential with effect from 1 January 2011. Mike, who has been with Jackson for 15 years and was Vice Chairman and Chief Operating Officer, succeeds Clark Manning, who decided to step down after 15 years with Jackson.
In December, John Foley was appointed Group Chief Risk Officer and he became an executive director on the Board of Prudential with effect from 1 January 2011. John was previously Chief Executive, Prudential Capital and Group Treasurer. The decision to make the position of Group Chief Risk Officer a Board role underlines the importance of risk management to the Group.
I am very pleased to welcome Mike, John, Howard and Paul to the Board of Prudential and I look forward to working with them. I would like to thank Clark and James for their invaluable service and significant contribution over their time on the Board.
In the US, we continue to build on the strength of our operations to make them a more significant component of the Group in terms of IFRS earnings as well as cash generation. In the UK, we remain focused on generating cash and capital and providing resilience to the Group’s balance sheet.
“ At the centre of our strategy is the acceleration of our profitable growth in Asia, which offers many of the highest growth and return opportunities.”
“ We have focused on allocating capital with total discipline to the highest return and shortest payback opportunities across the Group.”
Even in our preferred region of Asia, we acted decisively when necessary for the Group, as illustrated by our decision to sell our back book of business in Taiwan, to curtail writing new life business in Japan, or exchange short-term sales volume in Korea for long-term shareholder value. In the UK, we have closed down the equity release business and significantly increased our minimum return criteria for bulk purchase annuities. In the US, we have managed our sales of annuities, fixed and variable, with a clear focus on returns and payback periods, not hesitating to lose market share when necessary and putting value ahead of volume.
Net inflows in our asset management businesses were £8.9 billion, following an exceptional year in 2009 (2009: £15.4 billion). These continued strong inflows underpin the robust performance of our asset management operations during the year and are a direct driver of the growth in our profits.
On the statutory IFRS basis, our operating profit before tax from continuing operations increased by 24 per cent in 2010 to £1,941 million (2009: £1,564 million). IFRS profit for the year after tax increased by 112 per cent to £1,431 million (2009: £676 million). IFRS shareholder funds increased 28 per cent in 2010 to £8.0 billion (2009: £6.3 billion).
On the EEV basis, Group operating profit before tax increased by 20 per cent in 2010 to £3,696 million (2009: £3,090 million). New business profit1 for the year was £2,028 million, an increase of 25 per cent (2009: £1,619 million), and we continued to deliver very strong margins of 58 per cent (2009: 57 per cent). Our total investment in new business1 in 2010 was £643 million (2009: £660 million), a reduction of 3 per cent. As a result of our focus on rigorous capital allocation, we are delivering higher returns on capital invested for our shareholders, while managing to use less capital in absolute terms.
As these results show, we achieved strong growth on our three key metrics of EEV, IFRS and cash simultaneously. From 2009 to 2010, both our IFRS and EEV operating profits have grown by 20 per cent or more, while consuming less capital in absolute terms.
Our ability to generate significant growth while providing increasing cash returns to our shareholders – ‘growth and cash’ – is the result of our differentiated strategy. This strategy and the quality of our teams, both in our business units and our head office, allows us to provide value to our customers and shareholders. Each of our businesses is a clear leader in its market.
A year ago, we announced an agreement with AIG to acquire its Asia operations, AIA. The proposed acquisition was a unique opportunity to accelerate our strategy of focusing on the fast growing markets in Asia. We could not agree a purchase price that was acceptable to the AIG Board. The costs associated with the transaction were announced at our half year results and are detailed in the full year results statement.
Prudential Corporation Asia In 2010, in line with our strategy, our core investment was in the fast growing and highly profitable markets of South-East Asia and Hong Kong and Singapore. Due to the long-term structural changes taking place in these economies, we continue to believe they offer the most attractive opportunity in the global life insurance market today.
Our financial performance in Asia will continue to be based on three principal drivers. First, as a result of our strong new business growth, and its contribution to the increase in our in-force policies book, net inflows will be a major contributor to our IFRS earnings. Second, there will continue to be a contribution from investment returns, which will increase as the business grows. Third, as the scale of the business increases, our profitability will continue to benefit from the efficiency of our Asian platform, with revenues growing faster than our cost base. These three drivers support our confidence in our ability to double our 2009 IFRS profits by 2013.
Jackson In the US, we have maintained our focus on value over sales volume growth, ensuring sales are delivered at highly profitable margin levels. We have maintained our pricing discipline and have been consistent in our approach of not chasing market share for its own sake. In 2010 we continued to benefit from the market changes following the financial turmoil in 2008 and 2009. As part of a trend, mostly driven by distributors who guide their customers towards the companies that held firm through the crisis and never closed to business, Jackson has significantly improved its position in the key variable annuity market. This flight to quality has allowed the Jackson team to increase sales volumes and market share. Our consistent pricing approach, product flexibility and Jackson’s strong credit rating, which has remained unchanged for eight years, have served us well.
We have continued to grow the number of advisers appointed to sell our products, increasing licensed agents and registered representatives in 2010 to more than 130,000.
Asset management M&G had a very good 2010, a performance which is all the more impressive as it comes after an exceptional year in 2009. M&G continues to focus on offering customers superior investment performance over the longer term, building on its proven track record of success in the retail investment market through ongoing expansion in Europe. M&G’s retail business achieved net inflows of £7.4 billion. M&G’s IFRS operating profit was £284 million, up 19 per cent compared to 2009.
In Asia, our asset management business also had a very successful year, with operating profits of £72 million, 31 per cent ahead of 2009. It is a key feature of our strategy that asset management profits are very capital efficient and are ‘cash rich’ profits. For the first time, funds under management passed the £50 billion mark, up from £42.4 billion in 2009, a trend that should also lead to continued profit growth.
These achievements underline the potential we see for asset management across Asia. We continue to believe that this is one of the most exciting opportunities for the Group today. In 2010, we appointed a new Chief Executive, and we are determined to continue to invest to capture a significant share of the growth and profits available in asset management in Asia. The priorities for our asset management business in Asia are: to build and develop institutional relationships, securing pan-Asia discretionary mandates; to increase our focus on Japan and China, as the region’s largest and fastest growing markets respectively; and, finally, to grow our offshore funds business.
Capital and risk management A strong capital position is key to our development. It gives confidence to our customers in what is a long-term business, and it allows us to write large amounts of new business. Strict management and allocation of capital remain a core focus for our Group. Using the regulatory measure of the IGD, our Group capital surplus at 31 December 2010 was estimated at £4.3 billion (31 December 2009: £3.4 billion). The Group’s required capital is covered 3.0 times. This ratio means we continue to be one of the world’s best-capitalised insurers.
Dividend In view of the progress that the Group has made in recent years to improve IFRS operating profitability and free surplus generation, the Board has decided to rebase the full year dividend upwards by 4 pence per share, equivalent to an increase of 20 per cent. In line with this, the directors recommend a final dividend of 17.24 pence per share, which brings the total dividend for the year to 23.85 pence per share (2009: 19.85 pence per share).
The scrip dividend scheme is not being offered in respect of this dividend. In its place shareholders will be offered a Dividend Reinvestment Plan (DRIP).
Our core objectives are: (i) In Asia, to double the 2009 value of IFRS life and asset management pre-tax operating profit in 2013 (2009: £465 million) and to double the 2009 value of new business profits in 2013 (2009: £713 million).
(ii) For each business unit to remit net cash to the Group: Asia to deliver £300 million of net cash remittance to the Group in 2013 (2009: £40 million); Jackson to deliver £200 million of net cash remittance to the Group in 2013 (2009: £39 million); UK to deliver £350 million of net cash remittance to the Group in 2013 (2009: £2842 million).
(iii) All business units in aggregate to deliver cumulative net cash remittances of at least £3.8 billion over the period 2010 to end-2013. These net remittances are to be underpinned by a targeted level of cumulative underlying free surplus generation of £6.5 billion over the same period.
“ M&G continues to focus on offering customers superior investment performance over the longer term, building on its proven track record.”
Outlook By continuing to implement our strategy with discipline, allocating capital to the most attractive markets and products, and managing risk and capital prudently, but proactively, we have generated differentiated performance from our peers.
The outlook for economic growth in Asia, particularly in our preferred markets in South-East Asia, remains positive. The prospects for sustainably growing our leading platform in the region continue to be strong. Our confidence is reflected in the ambitious, yet achievable, objectives we have set for our business in Asia in December 2010.
Our disciplined process of capital allocation will, I believe, enable us to continue to deliver improved cash returns to shareholders. Our diversification, combined with our flexibility to choose where to allocate our capital, have proved to be significant sources of competitive advantage. We successfully navigated the extreme economic and market cycle of the past two years and are confident we will continue to outperform in the markets where we compete in the future.
• Net remittances underpinned by targeted level of cumulative underlying free surplus generation of £6.5 billion over the period 2010 to end-2013
ASIA • Continue expanding multi-channel distribution platform and improving its productivity
• Double 2009 value of new business profits • Deliver £300 million of net cash remittance to the Group
M&G • Maintain superior long-term investment performance for both internal and external funds • Continue growth in third-party retail and institutional businesses
18 Financial highlights 20 Chief Financial Officer’s review 26 Business unit review
54 Financial review 80 Risk and capital management 87 Other corporate information 91 Corporate responsibility review
LIFE NEW BUSINESS: DELIVERING GROWTH IN VALUE AND VOLUME – BALANCING CAPITAL CONSUMPTION AND VALUE OPTIMISATION £m
Payback period2 3 years 3 years 1 year 2 years 4 years 5 years 2 years 3 years Internal rate of return >20% >20% >20% >20% >20% >15% >20% >20%
BASIC EARNINGS PER SHARE – BASED ON OPERATING PROFIT AFTER TAX AND NON-CONTROLLING INTERESTS 5
Notes 1 Asia new business amounts exclude Japan, which ceased writing new business in 2010.
3 Net liability flows defined as movements in shareholder-backed policyholder liabilities arising from premiums, surrenders, maturities and deaths.
4 The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in the supplementary analysis of profit in short-term fluctuations in investment returns. 2009 amounts have been amended accordingly.
5 2010 excludes an exceptional tax credit of £158 million which primarily relates to the impact of a settlement agreed with the UK tax authorities.
6 Underlying free surplus comprises underlying free surplus generated from in-force business less investment in new business.
7 For 2010, IGD amounts are estimated. 8 Operating profit after tax and non-controlling interests (but excluding in 2010 exceptional tax credit of £158 million) as percentage of opening shareholders’ funds.
Prudential plc Annual Report 2010 2010 was a good year for Prudential as we delivered strong performance in our key growth metrics. EEV new business profit (‘new business profit’) was up 25 per cent to £2,028 million (2009: £1,619 million) and IFRS operating profit based on longer-term investment returns (‘IFRS operating profit’) increased 24 per cent to £1,941 million (2009: £1,564 million).
Growth In life insurance, APE sales1 in 2010 were up 23 per cent to £3,485 million (2009: £2,844 million) and new business profit has increased by 25 per cent to £2,028 million (2009: £1,619 million) as our new business margins1 increased to 58 per cent (2009: 57 per cent).
In the UK, we delivered total retail and bulk annuity APE sales of £820 million (2009: £723 million) and new business profit of £365 million (2009: £230 million), up 13 per cent and 59 per cent respectively. At a retail level, new business profit of £257 million was up 15 per cent from £223 million in 2009 at an expanded margin of 35 per cent versus 31 per cent in the prior year. This reflects improved margins on with-profits bond sales where we have seen volumes 11 per cent higher on improved demand and the strong annuity margins experienced in 2009 continuing into 2010.
Note 1 Excluding Japan which ceased writing new business in 2010.
It is encouraging to note that we continue to grow our balance sheet with shareholderbacked policyholder liabilities up by 22 per cent to £122 billion, benefiting from both net inflows and investment market movements. We continue to see positive net inflows into our life businesses, with a net £9.7 billion being received in 2010, an increase from the net £7.2 billion received in 2009. In asset management our Group net inflows as a percentage of opening external funds under management stands at 9.9 per cent for 2010. Both measures emphasise the significant organic growth we are delivering across the Group. In addition, the returns we expect to generate on the capital we invest in writing life new business have also reached a new high. For every £1 we invested in new business strain in 2010 we expect to generate £2.2 of post-tax new business profit and our initial capital investment is expected to be paid back within two years.
Central to this achievement is the active management of our portfolio of products and businesses, which in 2010 saw us cease writing new business in our Japanese life operations, exit from the equity release market in the UK, reduce our appetite for sales of fixed annuities in the US and target, instead, the highly profitable markets in South-East Asia (including Hong Kong) and variable annuities in the US. We have also remained opportunistic in the UK bulk annuity market and entered into one large transaction which comfortably exceeded our high return and short payback requirements.
In Asia, long-term business IFRS operating profit was up 29 per cent to £536 million in 2010 (2009: £416 million), a strong performance in and of itself, even before factoring in the £63 million one-off credit to the 2009 result from a change in reserving basis in Malaysia. The result benefited notably from strong performance in Indonesia, Malaysia, Singapore and Vietnam. In addition, management actions to close Japan to new business and refocus our operations in Korea and Taiwan have also helped to eliminate some of the negatives that were holding back our profitability. The ongoing build-out of distribution across South-East Asia, the success of our health and protection rider strategy, and the underlying strength of the economies in which we operate should drive continuing strong growth in Asia IFRS operating profit going forward. Asia’s long-term EEV operating profit, a measure of the economic value creation in the year, grew by 31 per cent in 2010 to £1,450 million (2009: £1,105 million) further underlining the creation of sustainable value by these operations.
In the US, long-term business IFRS operating profit was up 35 per cent from £618 million in 2009 to £833 million in 2010. Jackson’s impressive growth in the variable annuity market is a key driver behind its improved profitability. The ‘fees on assets’ that Jackson earns on separate account assets are the highest across the Group’s unit-linked businesses, and these revenues have increased significantly as these assets have grown by over 51 per cent during 2010 to £31 billion at the end of the year. The majority of this asset growth has come from £5.8 billion of net inflows in the period (2009: £3.6 billion). Jackson’s general account has also contributed to the growth in IFRS profits during the period. The size of the general account was up slightly during 2010, and closed the year with policyholder liabilities of £29 billion but the average spread margin that we earn on these liabilities increased from 179 bps in 2009 to 243 bps in 2010. This included a £108 million benefit from various transactions undertaken during 2010 to more closely match the overall asset and liability duration, as well as management actions to lower crediting rates on fixed annuities. These actions also had the effect of improving the 2010 EEV operating profits by 18 per cent to £1,458 million (2009: £1,233 million).
In the UK long-term business IFRS operating profit was up by 11 per cent from £606 million in 2009 to £673 million in 2010. Our UK business continues to optimise the balance between growth and cash generation. The improvement in IFRS operating profit reflects the benefit of cost saving initiatives, higher with-profits income and increased annuity profits arising principally from a bulk annuity contract which contributed £63 million to the total. At eight per cent, growth in EEV operating earnings to £936 million (2009: £870 million) was in line with our strategy.
Capital generation Our strategy of efficiently deploying our capital to those products and geographies with the most attractive profitability characteristics has, over the past three years, transformed the capital position of our business. Across the Group, we are now producing very significant amounts of free capital, which we measure as free surplus generated. Our first priority for the use of this capital is reinvestment in new business as we can achieve attractive internal rates of return (IRRs) and rapid paybacks on this investment. However, such is the scale and efficiency of our businesses, we are now producing significant amounts of free surplus over and above that which we can reinvest in new business. This excess free surplus generation is being used to continue to strengthen our balance sheet and to increase cash returns to our shareholders.
“ Our strategy of efficiently deploying our capital to those products and geographies with the most attractive profitability characteristics has, over the past three years, transformed the capital position of our business.”
At our 2010 investor conference entitled ‘Growth and Cash’ we announced new financial objectives demonstrating our confidence in continued rapid growth in Asia, and increasing levels of cash remittances from all of our businesses. These objectives were defined as follows: (i) Asia growth and profitability objectives1: • To double the 2009 value of IFRS life and asset management pre-tax operating profit in 2013 (2009: £465 million); and • To double the 2009 value of new business profits in 2013 (2009: £713 million).
(ii) Business unit cash remittance objectives1: • Asia to deliver £300 million of net cash remittance to the Group in 2013
(2009: £40 million); • Jackson to deliver £200 million of net cash remittance to the Group in 2013
Notes 1 The objectives assume current exchange rates and a normalised economic environment consistent with the economic assumptions made by Prudential in calculating the EEV basis supplementary information for the half-year ended 30 June 2010. They have been prepared using current solvency rules and do not pre-judge the outcome of Solvency II, which remains uncertain.
The table below shows our progress towards these objectives from our results in 2010. We believe we have made a strong start towards achieving these objectives.
CUMULATIVE UNDERLYING GROUP FREE SURPLUS GENERATION NET OF INVESTMENT IN NEW BUSINESS 6,500 * Total Asia operating profit from long-term business and asset management after development costs.
† In 2009, the net remittances from the UK include the £150 million in 2009 arising from the pro-active financing techniques used to bring forward cash emergence of the in-force book during the financial crisis. The 2010 net remittances include an amount of £120 million representing the releases of surplus and net financing payments.
Our financing and liquidity position has remained strong throughout the period. The next call on external financing is in December 2011 on the ¤500 million Tier 2 subordinated notes. In early 2011 we successfully issued US$550 million Tier 1 subordinated debt in anticipation of calling the ¤500 million Tier 2 notes.
Embedded value EEV shareholders’ funds increased by 19 per cent during 2010 to £18.2 billion (2009: £15.3 billion). On a per share basis EEV at the end of 2010 stood at 715 pence, up 19 per cent from the end of 2009 (2009: 603 pence).
2010 dividend In view of the progress that the Group has made in recent years to improve IFRS operating profitability and free surplus generation, the Board has decided to rebase the full year dividend upwards by 4 pence per share, equivalent to an increase of 20 per cent. In line with this, the directors recommend a final dividend of 17.24 pence per share, which brings the total dividend for the year to 23.85 pence per share (2009: 19.85 pence per share). The scrip dividend scheme is not being offered in respect of this dividend. In its place shareholders will be offered a Dividend Reinvestment Plan (DRIP).
Summary 2010 was a good year for the Group in uncertain conditions as global economies emerged from the financial crisis. These results demonstrate that we are maximising the growth opportunities of our high quality franchises in Asia, the US, and the UK. We remain disciplined in our approach of optimising value and are very focused on improving the quality of our earnings. We have accelerated the generation of free surplus and we are signalling our confidence in the future potential of our business by proposing an increase in the payout to shareholders.
“ These results demonstrate that we are maximising the growth opportunities of our high quality franchises in Asia, the US, and the UK.”
The Asian economies continue to lead the world in terms of current and prospective growth and it is clear that Asia’s historic reliance on exports is increasingly balanced with rapidly growing domestic consumption. Across the region, we are seeing major demographic and socioeconomic changes – with the emergence of a sizeable and growing middle class.
The Asian Development Bank estimates that there are now over 1.9 billion middle class Asians, a threefold increase since 1990 and this means that, within a generation, hundreds of millions of households in the region have ascended from poverty to living standards and lifestyle aspirations that are consistent with those seen in Western Europe and the US. These are urbanised households that are smaller, that are better educated, that want good quality housing, consumer goods, access to good medical services, transport, holidays, entertainment, education, to provide a quality of life for their children that is better than the one they had and not least to have a long life with a comfortable retirement.
Although there will inevitably be some short-term fluctuations in demand for life insurance and asset management products as other factors come into play, the fundamental social and political drivers for growth in these sectors will continue to support long-term growth.
Market overview Overall, Asia’s life insurance industry saw a sharp recovery in new business volumes during 2010 as markets moved beyond the 2008/2009 crisis.
The region’s life insurance regulators tend to adopt a conservative stance and remain focused on driving development of the sector in a way that balances the need to ensure consumers have, first and foremost, access to appropriate products that are sold in a fair and transparent manner with the need to reward shareholders for taking on the risks of investing in the development of a relatively young and capital intensive industry. The industry also employs millions of people in the region, an important consideration when high unemployment rates can be a catalyst for political friction. India saw the most impactful regulatory change during 2010, which in summary, was designed to shift the emphasis of the industry away from products which are mostly investment orientated and encourage more traditional savings and protection.
Prudential’s agency management competencies drive effective selection discipline and training designed to ‘fast start’ new agents and improve the skills and productivity of the more experienced ones. Our combination of training programmes, comprehensive product suites, specialised support allowing agents to address the evolving needs of existing customers and technology solutions to facilitate the fact finding and proposal submission processes combine to add value to agents, shareholders and customers.
Prudential is a pioneer and regional leader in partnership distribution in Asia. Key success drivers are our expertise in developing, training and motivating in branch insurance specialists and our investment in enduring and mutually beneficial relationships with our partners, including Standard Chartered Bank across the region, E.Sun in Taiwan and most recently United Overseas Bank in Singapore, Thailand and Indonesia.
Prudential currently insures over 11 million life customers in Asia and has 15 million in-force policies. Highlighting the value Prudential policies have for our customers, we paid out £2.6 billion in claims and maturities during 2010. This customer base is a tremendously valuable asset as over 40 per cent of new business APE came from existing customers in 2010 (excluding India). This reflects our enduring relationship with our customers and how our solutions are meeting their needs over time. The customer retention rate continues to improve and at 91 per cent it is one per cent up on 2009.
In-force operating profits from long-term business of £549 million are up 40 per cent on prior year. This increase reflects the growing size of the in-force book and a significantly reduced level of net negative operating experience variance at £1 million compared to negative £85 million in 2009, which, in part, reflects lower adverse persistency variances of negative £48 million compared with the 2009 level of negative £76 million. The net negative variance level of £1 million is small relative to the size of the EEV shareholders’ funds (before goodwill) of £7.4 billion.
“ Prudential currently insures over 11 million life customers in Asia and has 15 million in-force policies. Highlighting the value Prudential policies have for our customers, we paid out £2.6 billion in claims and maturities during 2010.”
Underlying free surplus net of investment in new business has improved to £326 million in 2010 compared to £119 million in 2009 driven principally by growth in in-force profits reflecting the increasing size and inherent profitability of the in-force book.
The life business significantly increased remittance of cash to the Group in 2010, at £267 million up from £80 million in 2009. This includes an exceptional £130 million from Malaysia representing the remittance of distributable earnings accumulated over recent years. Whilst this one-off type of remittance will not be repeated, it further demonstrates our ability to upstream cash from the region.
In China, Prudential’s 50 per cent share of new business volumes for 2010 was £58 million up 29 per cent on prior year. Agency remains the largest distribution channel although bank distribution grew at a slightly faster pace, up 35 per cent. Leading bank partners are SCB, CITIC and ICBC. In a market where bank sales are overwhelmingly dominated by single premium investment products it is important to note that 25 per cent of our bank channel APE is now regular premium unit-linked business.
Our average agency headcount increased by 15 per cent, principally through organic recruitment initiatives, closing the year with an agency count in excess of 5,000. Our long-term bancassurance relationship with Standard Chartered Bank saw a strong rebound following the 2008/2009 crisis. In-branch insurance specialists continue to focus on recurring premium savings and protection products and the profitability of the product mix continues to improve. Bancassurance now accounts for 37 per cent of our total sales, growing by 24 per cent in 2010.
The India market has been through a significant period of change during 2010, particularly with the regulatory driven refocus on savings and protection products, which came into effect on 1 September. Sales have fallen by 56 per cent in the last quarter of the year and we expect that the unit-linked market will remain disrupted in the short-term. Nevertheless during 2010 ICICI-Prudential grew new business APE by 12 per cent to £723 million (Prudential’s 26 per cent share is £188 million). Agency remains the largest distribution channel and following reductions in the size of the agency force, initiatives to improve agency productivity are delivering good results.
Prudential’s business in Indonesia where we sell both conventional and takaful products, continues to be a clear market leader. New business volumes for 2010 of £283 million were driven by a very effective agency management approach that prioritises not only disciplined recruitment but also professional training and activation programmes. Average agency numbers have increased by 5 per cent during 2010 (to 81,000) and APE per active agent is higher by 21 per cent. Our agency generates over 90 per cent of total new business and this is predominantly regular premium unit-linked with protection riders.
Our traditional and takaful businesses in Malaysia had a record 2010 with new business APE of £204 million. In local currency terms we are the first insurer in the history of the industry to pass RM1 billion in new business APE in a year. This growth has been driven primarily by the agency channel where the strategy to expand into the Bumi and takaful sectors has proven to be successful with our average agent numbers increasing by nine per cent (to 13,000 of which 46 per cent are Bumi).
Productivity initiatives targeting the enhancement of existing policies have also been very effective, for example a recent offer to upgrade a health plan resulted in a 30 per cent take up rate. Average APE per agent is 16 per cent higher reflecting both renewed confidence in the market and the impact of these cross selling initiatives.
Vietnam delivered a very strong result in 2010, up 17 per cent on the prior year, driven by improvements in agency manpower and productivity. Although still relatively small both Philippines and Thailand delivered excellent results with APE up 109 per cent and 63 per cent respectively. Our new distribution agreement with UOB in Thailand has made a strong start, contributing 41 per cent of total APE and helping to nearly double our market share.
As previously announced, PCA Life Japan ceased writing new business with effect from 15 February 2010. Sales for Japan in 2010 amounted to £7 million (2009: £52 million). In order to reflect the results of our ongoing Asian operations, APE sales and NBP metrics included in this report exclude the contribution from Japan.
During 2010, the US financial services industry continued to face many challenges. The recovery witnessed in the first quarter reversed in the second quarter but was more visible again in the third and fourth quarters. At half year, the S&P 500 index was down 7.6 per cent, 10-year Treasury rates had dropped below three per cent, swap rates had declined to near historic lows, AA corporate spreads had increased slightly and volatility had risen to levels more consistent with the first half of 2009. By year-end, the S&P 500 index was up 12.8 per cent for the year. Rates on 10-year Treasuries, which continued to decline through the third quarter before increasing in the fourth quarter, finished the year at 3.3 per cent, down from 3.9 per cent at the end of 2009. Swap rates also declined through the third quarter before rebounding slightly in the fourth quarter, although they still were near historic lows at year-end. Corporate AA spreads and volatility both declined through the second half of the year to fall below year-end 2009 levels.
We believe these unstable market conditions continue to provide a competitive advantage to companies with strong financial strength ratings and a relatively consistent product set. Companies that were hardest hit by the market disruption over the last few years are in general still struggling to regain market share as customers and distributors continue to seek product providers that offer consistency, stability and financial strength. Jackson continues to benefit significantly from this flight to quality as its financial strength ratings from the four primary rating agencies have remained unchanged for more than eight years. Through its financial stability and innovative products that provide clear value to the consumer, Jackson has enhanced its reputation as a high-quality and reliable business partner, with sales increasing as more advisers have recognised the benefits of working with Jackson.
Jackson’s strategy continues to focus on balancing volume and capital consumption for both variable and fixed annuities. Jackson continued to sell no institutional products during 2010, as available capital was directed to support higher-margin variable annuity sales.
Business overview Initiatives in 2010 Continue to innovate around our key variable annuity product Jackson continues to be innovative in its product offerings, implementing various changes in 2010 to increase sales, to comply with revised regulations or to enhance risk management flexibility and/or increase profitability.
• Deliver £200 million of net cash remittance to the Group £833m Total IFRS operating profit*†
At 31 December 2010, Jackson had £31 billion in separate account assets, more than doubling the balance in the last 18 months. Separate account assets in 2010 averaged £9 billion higher than during 2009, reflecting the impact of sales and the higher average market levels. This growth resulted in variable annuity separate account fee income of £506 million in 2010, up 56 per cent over the £324 million in 2009.
Acquisition costs have increased in absolute terms compared to 2009 due to the significant increase in sales. However, acquisition costs as a percentage of APE has fallen from 76 per cent in 2009 to 73 per cent in 2010 as more advisors are electing to take asset based commissions which are paid over the life of the policy based on fund value. This asset based commission is not a deferrable acquisition cost and is expensed in the current period as an administration expense.
Gross unrealised losses improved from £966 million at 31 December 2009 to £370 million at 31 December 2010. The net unrealised gain position has also improved significantly, from £4 million at 31 December 2009 to £1,210 million at 31 December 2010 due primarily to a decline in the US Treasury rates.
While the equity markets rebounded in 2010, reaching two-year highs in December, and in light of continued volatility in US equity markets and historically low interest rates, customers continue to seek to mitigate equity risk while receiving an acceptable return through the purchase of variable annuities with guaranteed living benefits. Jackson is a beneficiary of this trend while being well placed to benefit from the huge wave of baby boomers starting to retire, as they increasingly use variable annuities to structure their retirement income.
In 2010, record variable annuity APE sales of £948 million were up 48 per cent from 2009. Jackson ranked third in new variable annuity sales in the US in 2010 with a market share of 11 per cent, up from fourth and a market share of eight per cent in 20091. With significant sales increases and continued low surrender rates, Jackson held steady with its ranking of second in variable annuity net flows in 20104.
Retail annuity net flows increased 38 per cent, benefiting from record sales and continued low levels of surrender activity.
Jackson achieved extraordinary EEV new business margins in 2009, partially as a result of our ability to take advantage of the extreme dislocation prevalent in the corporate bond market. While the recovery in the corporate bond market has led to somewhat lower EEV new business margins due to lower spreads in 2010, we continue to write new business at internal rates of return in excess of 20 per cent.
The exceptionally high EEV spread levels in 2009 included an allowance that crediting rates and spreads would normalise in the future.
The fixed index annuity new business margin decreased from 51 per cent in 2009 to 41 per cent in 2010 due to decreased spread assumptions and lower interest rates, offset somewhat by longer maturity contracts sold in 2010. These same interest rate and spread factors also caused the fixed annuity new business margin to normalise from 57 per cent to 34 per cent. For both products, the spread assumptions decreased due primarily to abnormally high investment yields during 2009.
Total EEV basis operating profit for the long-term business in 2010 was £1,458 million, compared to £1,233 million in 2009. In-force EEV profits of £697 million for 2010 were 22 per cent higher than 2009 profit of £569 million. During 2010, EEV basis operating profit benefited as a result of the interest rate swap transactions noted earlier. Including this benefit, experience variances and other items were £201 million higher in 2010 due primarily to favourable spread and persistency variances that were partially offset by lower expense and mortality variances.
Notes 1 Source: Morningstar 2 Source: LIMRA 3 Source: AnnuitySpecs 4 Source: SimFund
UK consumers are insufficiently prepared as they will have to face increasingly long periods of retirement. This will result in longer working lives and a more flexible approach towards retirement. It will also mean that the baby-boomers will need to target their wealth on the provision of dependable retirement income. Prudential UK’s expertise in areas such as longevity risk management and multi-asset investment, together with its financial strength and strong brand, mean that the business is strongly positioned in the retirement planning space with a particular focus on with-profits and annuities.
Internal vestings annuity sales of APE £124 million were nine per cent down on 2009, principally due to the number of customers retiring being lower than in 2009. Although fewer Prudential customers invested in conventional annuities, there continues to be a positive increase in the number of customers choosing an ICA, with sales of APE £16 million resulting in a 38 per cent increase in with-profits annuity sales.
Onshore bond sales of APE £166 million were up 15 per cent, including with-profits bond sales of APE £146 million which increased 11 per cent with an exceptionally strong fourth quarter. PruFund made up 78 per cent of our total with-profits bond sales. Demand for Prudential UK’s with-profits products remains resilient and the business has continued to innovate to maintain and enhance its position in the market. This includes broadening access to PruFund across its retail savings product range and PruFund now has over £3 billion invested.
Individual pension sales of APE £69 million (including income drawdown) were three per cent up on 2009. Sales of the Flexible Retirement Plan, Prudential UK’s RDRcompliant individual pension and income drawdown product, grew by four per cent to APE £22 million. PruFund Cautious, launched in the fourth quarter of 2009, and the new PruDynamic portfolio funds, launched in January 2010, together made up 34 per cent of individual pension sales.
In August 2010, Prudential UK’s joint venture partner Discovery SA announced the completion of the acquisition of Standard Life Healthcare and its combination with the PruHealth business. As part of the transaction, Prudential UK reduced its shareholding in the combined PruHealth and PruProtect businesses from 50 per cent to 25 per cent of the enlarged Group and sales are included on a proportionate basis from 1 August 2010. PruProtect sales had previously been included at 100 per cent and PruHealth sales at 50 per cent. The effect of this reporting change is that Prudential UK’s share of PruProtect sales is reported at APE £16 million, an increase of 18 per cent. Prudential UK’s share of PruHealth sales of APE £12 million was nine per cent higher than in 2009, and at the end of 2010, the combined health business covered approximately 680,000 lives.
Prudential UK’s focus on delivering improved levels of customer service was recognised again at the 2010 Financial Adviser Service Awards, where it retained its 5-Star rating for excellent service in the Investment category.
Financial performance Retail APE sales of £725 million were up one per cent on 2009, with the new business margin increasing from 31 per cent to 35 per cent. This performance was entirely consistent with Prudential UK’s strategy of not pursuing top-line sales growth but instead deploying capital to opportunities that play to the core strengths of the business and generate the best returns.
IFRS total operating profits before restructuring costs were up nine per cent at £719 million, reflecting increased sales. Commission received on Prudential-branded General Insurance products contributed £46 million to IFRS operating profits in 2010, £5 million lower than 2009 as the book of business originally transferred to Churchill in 2004 is decreasing as expected.
EEV total operating profit of £982 million was up seven per cent mainly due to an increase in new business profits. In-force EEV operating profit included £37 million from renewal expense assumptions and £41 million from the change in the long-term tax rate assumption from 28 per cent to 27 per cent. These positive impacts were offset by a £40 million negative net impact from the strengthening of mortality improvement assumptions, partially offset by the release of excess margins previously held.
Prudential UK continues to manage actively the retention of the in-force book. During 2010, the experience at an aggregate level has been in line with long-term assumptions.
Prudential UK writes with-profits annuity, with-profits bond and with-profits corporate and individual pensions business in its Life Fund, with other products backed by shareholder capital. The weighted average post-tax IRR on the shareholder capital allocated to new business in the UK was in excess of 20 per cent. The average free surplus undiscounted payback period for shareholder backed business written in 2010 was four years.
As announced at the half-year, the business met its cost savings target of £195 million per annum, six months early. Prudential UK has commenced a number of cost saving initiatives to reduce costs by a further £75 million per annum on a consistent basis by the end of 2013. The business has already made good progress towards this objective in 2010.
M&G is the UK and European fund manager of the Prudential Group with responsibility for £198 billion of investments as at 31 December 2010 on behalf of both internal and external clients. M&G is an investment-led business whose aim is to generate superior long-term returns for its third-party investors and the internal funds of the Prudential Group.
In the retail market, M&G’s aim is to operate a single fund range and to diversify the distribution base by accessing a wide variety of channels and geographies. In recent years, key themes have included growing the proportion of business sourced from intermediated channels and the increased sales of UK-based funds in European and other international markets.
Sales performance 2009 was an exceptional year for M&G in terms of net sales. The Retail business experienced unprecedented net purchases of its top-performing bond funds by investors seeking to exploit a near unique opportunity in fixed income markets. On the institutional side, M&G benefited in particular from winning a very substantial single institutional mandate. It was not expected that the business would be able to repeat these levels of net sales in 2010. In the event, the Retail business achieved full year net inflows of £7.4 billion, a decrease of only one per cent compared to the record level of £7.5 billion in 2009. On the institutional side, M&G still achieved very healthy net sales of £1.7 billion.
“ The Retail business achieved full year net inflows of £7.4 billion, a decrease of only one per cent compared to the record level of £7.5 billion in 2009.”
The retail investment market in Europe is substantially larger than the UK market. In further response to this opportunity, M&G’s European Retail business registered its core OEIC fund range for distribution in the Netherlands and Sweden in the fourth quarter of 2010. Registration in both markets has already boosted sales results with M&G being able to leverage off existing client relationships established in other European markets. M&G already has a proven track record of success in distributing into Europe with its registration in France in 2007, for example, having already generated funds under management of £1.3 billion and achieved status as a top ten cross border player in the French market2. Total funds under management sourced outside of the UK amounted to £13.4 billion at the end of 2010, equivalent to 31 per cent of total retail external funds managed by M&G.
In the institutional market, M&G also attracted healthy net new business on the back of outstanding investment performance with inflows of £1.7 billion. This compares with net inflows of almost £6.0 billion in 2009, although this latter figure was dominated by a single £4 billion fixed income mandate. Like M&G’s retail distribution, the institutional business also benefits from an increasingly diverse investor base with distribution activities covering Scandinavia and the Netherlands.
Operating profit from asset management operations 246 177 39 177 39 Operating profit from Prudential Capital 38 61 (38) 61 (38)
Financial performance M&G’s IFRS operating profit rose to £246 million, an increase of 39 per cent compared with the 2009 result of £177 million.
The full year 2010 result was a record profit level for M&G, being eight per cent higher than the previous record achieved in 2008. If performance-related fees and carried interest on private equity investments are excluded, M&G’s operating profit would actually display underlying growth of 24 per cent over 2008. Equity market levels have boosted business results, with the FT All Share averaging three per cent higher over 2010 compared to 2008. It is also the exceptionally strong net inflows over 2009 and 2010, particularly from the Retail business that have contributed to the increased profit levels.
Prudential Capital (PruCap) manages Prudential Group’s balance sheet for profit by leveraging Prudential Group’s market position. This business has three strategic objectives: to provide professional treasury services to the Prudential Group; to operate a first-class wholesale and capital markets interface; and to realise profitable proprietary opportunities within a tightly controlled risk framework. PruCap generates revenue by providing bridging finance, managing investments and operating a securities lending and cash management business for the Prudential Group and its clients.
Note 1 Excluding performance related fees and carried interest on private equity investments.
M&G’s institutional business was also recognised for its investment performance winning the 2010 UK Asset Management Firm of the Year award at Financial News’ Awards for Excellence in Institutional Asset Management.
Prudential’s asset management business in Asia manages investments for UKIO and the Asian life companies and has also successfully leveraged these investment capabilities to build a strategically significant and market leading third party funds management business.
Business overview Under the leadership of a new Chief Executive, the team has driven strong improvements in the business.
The business has been actively implementing its strategy of targeting higher-margin equity and bond asset classes. Third party net inflows of £1.8 billion were driven predominantly by Japan, which saw strong interest for its white-labelled Asia Oceanic High Dividend Equity and its open-ended Indonesian Equity Open funds. In addition, positive bond fund flows resulted from Taiwan and China’s successful new product launches and strong demand for our offshore product range. Money market funds saw net outflows totalling £2.1 billion in 2010, mainly attributed to redemptions in India as a result of tighter liquidity conditions.
Financial performance IFRS operating profit in 2010 was £10 million, compared to £6 million in 2009.
Business overview Curian Capital, Jackson’s registered investment advisor, provides innovative fee-based managed accounts and investment products to advisers through a sophisticated technology platform. Curian expands Jackson’s access to advisers while also complementing Jackson’s core annuity product lines with Curian’s retail asset management products.
Business overview National Planning Holdings, Inc. (NPH) is Jackson’s affiliated independent brokerdealer network. The business is comprised of four broker-dealer firms, including INVEST Financial Corporation, Investment Centers of America, National Planning Corporation, and SII Investments.
Financial performance NPH generated revenues of £449 million in 2010, up from £390 million in 2009, on gross product sales of £9.3 billion. The network continues to achieve profitable results, with 2010 IFRS operating profit of £11 million, a 175 per cent increase from £4 million in 2009. At 31 December 2010, the NPH network had 3,461 registered advisers, down slightly from 3,478 at year-end 2009.
Short-term fluctuations in investment returns on shareholder-backed business (123) (123) Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (10) (74) Costs of terminated AIA transaction (377) – Gain on dilution of holding in PruHealth 30 – Loss on sale and results of Taiwan agency business – (621)
Notes i The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in the supplementary analysis of profit in short-term fluctuations in investment returns. The 2009 amounts have been amended accordingly. As explained below and in Note C to the IFRS financial statements.
ii Operating earnings per share reflects operating profit based on longer-term investment returns after related tax and non-controlling interests but excludes in 2010 an exceptional tax credit of £158 million which primarily relates to the impact of a settlement agreed with the UK tax authorities.
EEV bases, operating earnings per share are calculated using operating profits based on longer-term investment returns, after related tax and non-controlling interests. These profits exclude short-term fluctuations in investment returns and the shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes. The operating profit based on longer-term investment returns for 2010 also excludes the costs associated with the terminated AIA transaction and the gain arising upon the dilution of the Group’s holding in PruHealth. Consistent with the prior year presentation, the effect of disposal and the results of the Taiwan agency business are shown separate from operating profit based on longer-term investment returns for 2009. In 2010 the Company amended its presentation of IFRS operating profit for its US insurance operations to exclude the net equity hedge accounting effect of negative £367 million (2009: negative £159 million) relating principally to its variable annuity business and reclassified it as a short-term fluctuation. Prior year comparatives have been amended accordingly. This is a presentational change and it has no impact on the IFRS profit before tax or the IFRS shareholders’ funds. The change also has no impact on our EEV financial statements. Under the EEV basis, where additional profit and loss effects arise, operating profit based on longer-term investment returns also excludes the mark to market value movements on core borrowings and the effect of changes in economic assumptions. After adjusting for related tax and non-controlling interests, the amounts excluded from operating profit based on longerterm investment returns are included in the calculation of basic earnings per share.
Insurance business Long-term business: Asia 536 416 29 451 19 USnote i 833 618 35 626 33 UK 673 606 11 606 11 Development expenses (4) (6) 33 (6) 33
Group IFRS operating profit before tax based on longer-term investment returns after Solvency II implementation and restructuring costs was £1,941 million, an increase of 24 per cent on 2009.
Note 1 Excluding Japan which ceased writing new business in 2010. IFRS new business strain including Japan was £57 million (2009: £78 million).
The Asian asset management operations reported operating profits of £72 million, up by 31 per cent from £55 million in 2009, driven by increased operating revenues as a result of higher funds under management (FUM). Strong net inflows for retail and institutional business of £1.8 billion together with positive market and currency movements have contributed to a 22 per cent increase in FUM (including internal funds) to £52 billion at the end of 2010.
We incurred £45 million of Solvency II implementation costs in 2010.
Fee income has increased by £230 million to £688 million. This principally reflects improved equity market performance and net cash inflows into unit-linked liabilities of £6.7 billion during 2010, equivalent to an increase on opening liabilities of 13 per cent. The increase in fee margin from 106 bps to 120 bps reflects a richer mix of the higher fee variable annuity business.
Insurance margin has increased £144 million to £592 million in 2010. This increase is driven by growth in the in-force book in Asia which has a relatively high proportion of risk-based products.
Administration expenses have increased by £110 million to £924 million in 2010 reflecting the growth of the business in the year. Overall the margin in 2010 is 83 bps, lower than the prior year margin of 86 bps.The improvement in this margin reflects operational leverage benefits in Asia and UK cost savings which have more than offset the effect of the move towards asset based commission in the US as described above.
IFRS basis results – Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver
Spread income 1,013 53,858 188 753 51,000 148 762 49,735 153 Fee income 688 57,496 120 458 43,373 106 469 43,153 109 With-profits 342 89,693 38 310 84,063 37 311 83,964 37 Insurance margin 592 448 466 Margin on revenues 1,241 1,041 1,112 Expenses Acquisition costs iii (1,674) 3,492 (48)% (1,487) 2,896 (51)% (1,547) 2,947 (52)% Administration expenses (924) 111,354 (83) (814) 94,373 (86) (844) 92,888 (91) DAC adjustments 518 614 628 Expected return on shareholder assets 242 248 250 Non-recurrent release of reserve for Malaysia Life – 63 70
M&G increased its asset management fee margin during the year from 31 bps in 2009 to 34 bps in 2010. This reflects increased sales of higher margin equity funds in the year.
Asia maintained its margin at 40 bps from 2009 to 2010. This is driven by an improvement in the retail margin following positive inflows into higher margin equity and bond funds, offset by a decline in institutional margin caused by net outflows of money market funds.
PruCap’s operating profit fell during 2010, reflecting market conditions and higher funding costs.
Average funds under management (FUM)† £186.5bn £47.2bn Margin based on operating income† 34 bps 40 bps Cost/income ratio‡ 63% 64%
IFRS short-term fluctuations in investment returns Short-term fluctuations in investment returns for our insurance operations of negative £148 million comprise positive £114 million for Asia, negative £378 million for US operations and positive £116 million in the UK.
Tax charge attributable to shareholders’ profit note ii (25) (55) Discontinued operations (net of tax) – (14) Non-controlling interests (5) (1)
PROFIT FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY 1,431 676
ii Tax charge attributable to shareholders’ profit includes a credit of £158 million which primarily relates to the impact of a settlement agreed with the UK tax authorities.
Short-term fluctuations for other operations were positive £25 million and mainly represent unrealised appreciation on Prudential Capital’s debt securities portfolio offset by unrealised value movements on centrally held derivatives. The 2009 result included £235 million costs incurred in respect of the hedge temporarily put in place during the first quarter to protect the IGD capital position in exceptional market conditions.
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes The shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes of negative £10 million reflects the impact of assumption changes, being primarily a lower discount rate applied to the liabilities of the Scottish Amicable and M&G schemes, partially offset by actual asset returns being higher than the long-term rate assumed.
As a result of this dilution in holding and the consequential loss of control, PruHealth has been reclassified from a joint venture to an associate and the entity is no longer proportionally consolidated from the date of the transaction. In accordance with IAS 31 ‘Interests in joint ventures’ a gain of £30 million arises upon the dilution, representing the difference between the fair value of the enlarged 25 per cent investment still held and the IFRS book value of the original 50 per cent investment holding.
UK general insurance commission 46 51 (10) 51 (10) Asset management business: M&G 284 238 19 238 19 Asia asset management 72 55 31 58 24 Curian 1 (6) 117 (6) 117 US broker-dealer and asset management 21 10 110 10 110
In 2010, Prudential Group’s total EEV basis operating profit based on longer-term investment returns was £3,696 million, an increase of 20 per cent from the same period in 2009.
Long-term business profits generated by the Group increased by 20 per cent to £3,840 million. These profits comprise: • New business profits1 of £2,028 million (2009: £1,619 million); • In-force profits of £1,817 million (2009: £1,601 million); and • Negative £5 million of other items including development expenses (2009: negative £18 million).
New business profits1 at £2,028 million, were 25 per cent higher than last year, reflecting both a 23 per cent increase in sales volumes as compared to 2009. This represents a one percentage point increase in the average Group new business APE profit margin from 57 per cent in 2009 to 58 per cent in 2010.
The contribution to operating profit from in-force business increased by £216 million to £1,817 million. This includes a £71 million increase in the unwind discount and other expected returns from £1,421 million in 2009 to £1,492 million in 2010, principally reflecting the growing maturity of the Asian in-force book. In-force profit in 2010 also includes the effect of operating assumption changes, experience variances and other items which had an aggregate positive impact of £325 million (2009: positive impact of £180 million). Of this amount, £328 million arises in the US, primarily reflecting positive mortality, persistency, expense and spread experience variances. The most significant of these relates to spread experience, contributing £158 million in 2010, arising principally from transactions undertaken in the year to more closely match the overall asset and liability duration, the effect of which is expected to persist in 2011, but at a reduced level.
Overall the impact of operating assumption changes, experience variances and other items on Asia was negative £24 million, with adverse expense and persistency changes being offset by positive mortality and morbidity amounts.
Operating profit from the asset management business and other non-long term businesses increased to £424 million, up 22 per cent from £348 million in 2009.
Other income and expenditure totalled a net expense of £494 million compared with £433 million in 2009. The £61 million increase principally reflects the higher interest payable on core structural borrowings.
Short-term fluctuations in investment returns for insurance operations of negative £55 million comprise a positive £287 million for Asia, negative £678 million for our US operations and positive £336 million in the UK.
For our Asian business, short-term fluctuations of positive £287 million (2009: positive £437 million) primarily reflected the improvement in equity markets in 2010 and unrealised gains on the bond portfolio.
For our US business, short-term fluctuations in investment returns were negative £678 million (2009: negative £401 million), principally reflecting a reduction in expected yields on assets as a result of derisking activities within the portfolio and higher hedging costs, partially offset by separate account return in 2010 of 14.5 per cent being higher than the long-term expected level of 6.8 per cent.
PROFIT BEFORE TAX FROM CONTINUING OPERATIONS 3,107 1,743 Tax charge attributable to shareholders’ profitnote i (530) (481) Discontinued operations (net of tax) – (14) Non-controlling interests (4) (3)
Note i Tax charge attributable to shareholders’ profit includes a credit of £158 million which primarily relates to the impact of a settlement agreed with the UK tax authorities.
EEV basis profit after tax and non-controlling interests > continued Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes The shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes on the EEV basis comprises the IFRS charge attributable to shareholders, and the shareholders’ share of movements in the scheme assets and liabilities attributable to the PAC with-profits fund. On the EEV basis there was a charge of negative £11 million (2009: negative £84 million) which mainly reflects the impact of assumption changes, being primarily a lower discount rate to the liabilities of the Scottish Amicable and M&G schemes partially offset by actual asset returns being higher than the long-term rate assumed.
Costs of terminated AIA transaction As previously discussed, the Group incurred pre-tax costs of £377 million in 2010 (£284 million post-tax) related to the terminated AIA transaction.
Gain on dilution of holding in PruHealth As previously discussed, the Company’s holding of PruHealth has been reduced from 50 per cent to 25 per cent, following the injection into PruHealth of Standard Life Healthcare by the Group’s joint venture partner, Discovery Holdings of South Africa.
Excluding exceptional tax credit i pence exceptional tax credit pence pence
The scrip dividend is not being offered in respect of this dividend. In its place shareholders will be offered a Dividend Reinvestment Plan (DRIP).
The Board will maintain its focus on delivering a growing dividend from this new higher base, which will continue to be determined after taking into account the Group’s financial flexibility and our assessment of opportunities to generate attractive returns by investing in specific areas of the business. The Board believes that in the medium term a dividend cover of around two times is appropriate.
NET INCREASE IN SHAREHOLDERS’ FUNDS 1,760 1,213 2,934 317 Shareholders’ funds at beginning of year 6,271 5,058 15,273 14,956
d Shareholders’ funds for other than long-term business of negative £7 million (2009: negative £69 million) comprises £1,787 million for asset management operations (2009: £1,659 million), including goodwill of £1,230 million (2009: £1,230 million), holding company net borrowings of £2,212 million (2009: £1,780 million) and net other shareholders’ funds of £418 million (2009: £52 million).
EEV On an EEV basis, which recognises the shareholders’ interest in long-term business, shareholder funds at 31 December 2010 were £18.2 billion, an increase of £2.9 billion from the 2009 level, equivalent to 19 per cent. This increased level of shareholders’ funds primarily reflects the profit after tax of £2.6 billion, the
Free surplus generation Sources and uses of free surplus generation from the Group’s insurance and asset management operations Group free surplus at the end of the period comprises free surplus for the insurance businesses, representing the excess of the net worth over the required capital included in the EEV results, and IFRS net assets for the asset management businesses excluding goodwill. The free surplus generated during the
The total movement in free surplus net of tax in the year can be analysed as follows: AER
Free surplus generation Expected in-force cash flows (including expected return on net assets) 2,139 1,914 Changes in operating assumptions and variances 220 175
UNDERLYING FREE SURPLUS GENERATED IN THE PERIOD FROM IN-FORCE BUSINESS 2,359 2,089 Market related items (94) (198) Investment in new business: Excluding Japan (643) (660)
Note 1 Included within other movements and timing differences is £18 million arising on the acquisition of UOB.
At 31 December 2010, the embedded value for our Asian long-term business operations was £7.4 billion, with £6.0 billion (up 31 per cent from 2009) being in the South East Asia countries of Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam together with Hong Kong. For Prudential’s other Asian markets, the embedded value was £1.4 billion (up 21 per cent from 2009) in aggregate.
Value of in-force created by new business 866 1 867 525 224 1,615 1,616
New business sales (APE) 1,501 1,508 1,164 820 New business margins (% APE) 60% 60% 65% 45% Internal rate of return* >20% >20% >20% >20%
For asset management operations we have defined free surplus generation to be total post-tax IFRS profit for the period. Group free surplus generated also includes the general insurance commission earned during the period and excludes shareholders’ other income and expenditure, and centrally arising restructuring and Solvency II implementation costs.
During 2010 we generated total free surplus from the retained businesses of £1,620 million (2009: £1,216 million). Underlying free surplus generated from the in-force book increased 13 per cent from £2,089 million in 2009 to £2,359 million in 2010, principally reflecting the underlying growth of the portfolio and positive changes in operating assumptions and variances of positive £220 million for our life businesses (2009: positive £175 million). These positive changes include positive £3 million in Asia (2009: negative £98 million), £26 million arising in the UK
(2009: positive £158 million), £191 million in the US, principally reflecting favourable spread experience (2009: positive £115 million).
Underlying free surplus generated has been used by our life businesses to invest in new business. Investment in new business1 has fallen by three per cent to £643 million in 2010. This compares to a 23 per cent increase in sales1 and a 25 per cent increase in new business profits1. The strong improvement in capital efficiency is primarily the result of continuing the active management of the product and geographical mix of the new business sold, in line with the Group’s disciplined approach to capital conservation and cash optimisation.
Market-related movements have improved from negative £198 million in 2009 to negative £94 million in 2010, of which negative £192 million relates to the US, principally reflecting investment returns on variable annuity business and related hedging activity. In addition, negative £74 million relates to the UK and is offset by positive £146 million relating to Asia principally related to favourable equity markets during 2010 and positive £26 million relating to our asset management businesses.
Value created through investment in new business by life operations > continued
Net worth invested in new business (162) (15) (177) (26) (21) (209) (224)
Value of in-force created by new business 707 3 710 458 187 1,352 1,355
Post-tax new business profit for the year 545 (12) 533 432 166 1,143 1,131
New business sales (APE) 1,209 1,261 912 723 New business margins (% APE) 60% 57% 73% 32% Internal rate of return* >20% >20% >20% >15%
Post-tax new business profit for the year 589 (13) 576 438 166 1,193 1,180
Pre-tax new business profit for the year 783 (13) 770 673 230 1,686 1,673
In Asia, investment in new business1 was £278 million, which was up 20 per cent compared to 2009 (£231 million). This compares to a 24 per cent increase in new business sales (APE). For each £1 million of free surplus invested we generated £2.4 million of post-tax new business contribution to embedded value broadly consistent with 2009, excluding Japan (2009: £2.4 million)1. The average free surplus undiscounted payback period for business written in the 12 months to 31 December 2010 was three years (2009: three years).
Expected transfer of value of in-force (VIF) and required capital business to free surplus 2010 £m
The preceding tables focused on actual free surplus in the year from the in-force book of business and the level of investment in new business. The tables below show how the VIF generated by the in-force long-term business and the associated required capital is modelled as emerging into free surplus over future years. The modelled cash flows use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same assumptions and sensitivities.
PRE-TAX EEV NEW BUSINESS PROFIT 901 761 365 2,027 * Includes Japan. † Other items represents the impact of the time value of options and guarantees on new business, foreign exchange effects and other nonmodelled items. Foreign exchange effects arise as EEV new business profit amounts are translated at average exchange rates and expected free surplus generation uses year end closing rates.
Expected period of emergence Asia US UK Total Asia US UK Total
In recent years, our strategic focus on capital conservation and value optimisation has enabled us to transform the free surplus generation profile of the Group. The undiscounted in-force free surplus generation ability of the Group is now significant, with all businesses contributing material amounts.
Total EEV of life operations 18,214 * These relate to items where there is no definitive timeframe for when the payments will be made and are, consequently, excluded from the amounts incorporated into the tables above showing the expected generation of free surplus from in-force business at 31 December 2010. In particular it excludes the value of the shareholders’ interest in the estate.
UK NET 420 434 US paid to Group 80 39 Group invested in US – –
NET REMITTANCES TO GROUP FROM BUSINESS UNITS 935 688 Net interest paid (231) (214) Tax received 185 71 Corporate activities (146) (163) Solvency II costs (34) –
OPERATING HOLDING COMPANY* CASH FLOW AFTER DIVIDEND 260 38 Exceptional Items: Cash flow arising from sale of Taiwan agency business – (125) Acquisition of UOB Life and related distribution agreements (276) – Costs of terminated AIA transaction (377) – IGD hedge costs – (235) Bank loan reorganisation 120 – Other cash movements: Issue of hybrid debt, net of costs – 822 Repayment of maturing debt – (249) Receipts arising from foreign exchange movements on US$ hedging instruments – 60
Total holding company cash flow (273) 311 Cash and short-term investments at beginning of period 1,486 1,165 Foreign exchange movements 19 10
Asia remitted net cash of £233 million in 2010, an increase of £193 million from the net £40 million remitted in 2009. This includes a one-off remittance of £130 million from Malaysia, representing the accumulation of historic distributable reserves. Total injections in 2010 were £130 million; £57 million lower than the £187 million paid in 2009. This primarily reflects the injection made into Taiwan in 2009 to facilitate the required restructuring after the sale of the agency business in that year.
After central costs, there was a net cash inflow before dividend of £709 million in 2010 compared to £382 million for 2009. The dividend paid net of scrip, was £449 million in 2010 compared to £344 million in 2009. The take-up of scrip dividends in 2010 was £62 million compared to £137 million for 2009.
Note i Underlying free surplus generated in the period from in-force business less investment in new business.
Operating holding company cash flow for 2010 before the shareholder dividend was £709 million, £327 million higher than 2009. After deducting the shareholder dividend paid net of scrip, the operating holding company cash flow was positive £260 million (2009: £38 million).
IFRS basis shareholders’ equity 8,031 6,271 Additional EEV basis retained profit 10,176 9,002
Note i Includes £71 million of investments, including PruHealth from 1 August 2010, accounted for using the equity method (2009: £6 million).
Total investments held by the Group at 31 December 2010 were £239 billion, of which £107 billion were held by participating funds, £65 billion by unit-linked funds and £67 billion by shareholder-backed operations. Shareholders are not directly exposed to value movements on assets backing participating or unit-linked operations, with sensitivity mainly related to shareholder-backed operations.
Of the £ 67 billion investments related to shareholder-backed operations, £6 billion was held by Asia long-term business, £32 billion by Jackson and £26 billion by the UK long-term business respectively. In addition £3 billion is held by our asset management and other operations.
At 1 January 13,050 48,311 38,700 100,061 92,189 Premiums 3,270 11,735 4,579 19,584 15,757 Surrenders (1,800) (3,598) (1,326) (6,724) (5,672) Maturities/Deaths (172) (769) (2,224) (3,165) (2,914)
TOTAL POLICYHOLDER LIABILITIES INCLUDING UNALLOCATED SURPLUS AT 31 DECEMBER 224,980 196,417
Policyholder liabilities and unallocated surplus of with-profits funds Policyholder liabilities related to shareholder-backed business grew by £22.1 billion from £100.1 billion at 31 December 2009 to £122.2 billion at 31 December 2010.
Other movements include foreign exchange movements of positive £2.7 billion (2009: negative £6.5 billion) and an increase following the acquisition of UOB Life of £464 million.
Fair valuation of guarantees attaching to Jackson’s variable annuity business The IFRS accounting for guarantees on US variable annuity contracts has a mixed measurement approach. GMWB ‘not for life’ contract features are fair valued under IAS 39 and FAS 157 with a capping feature to prevent early anticipation of expected fees for guarantees. However, the GMDB and GMWB ‘for life’ blocks of business are accounted for under grandfathered US GAAP which does not, and is not intended to, fair value the liabilities.
If we had fair valued the GMDB and GMWB ‘for life’ guarantees as if they were embedded derivatives but restricted or capped the recognition of future fees in line with IFRS, the liabilities at 31 December 2010 would have been higher by some £650 million and £50 million, respectively. After offsetting related adjustments to DAC amortisation and deferred tax, the net effect would have been a reduction in shareholders’ equity of approximately £150 million.
Total 3,676 190 3,866 3,394 30 3,424 Less: Holding company cash and short-term
Shareholders’ net borrowings and ratings The Group’s core structural borrowings at 31 December 2010 totalled £3.7 billion on an IFRS basis, compared with £3.4 billion at 31 December 2009. The movement of £0.3 billion mainly reflects the addition of a £250 million bank funding facility in the period following activities to reorganise certain bank loans in the period.
In addition to our core structural borrowings set out above, we also have in place an unlimited global commercial paper programme. As at 31 December 2010, we had issued commercial paper under this programme totalling £127 million, US$2,350 million, EUR 743 million and CHF 50 million. The central treasury function also manages our £5,000 million medium-term note (MTN) programme, covering both core and non-core borrowings. During January 2010, we raised non-core borrowings of £250 million from this programme. In April and October 2010 we refinanced an existing internal £200 million issue under the same programme. In total, at 31 December 2010 the outstanding subordinated debt under the programme was £835 million, US$750 million and EUR 520 million, while the senior debt outstanding was £450 million. In addition, our holding company has access to £2.1 billion of syndicated and bilateral committed revolving credit facilities, provided by 17 major international banks, expiring between 2011 and 2015. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 31 December 2010. The commercial paper programme, the MTN programme and the committed revolving credit facilities are all available for general corporate purposes and to support the liquidity needs of our holding company and are intended to maintain a strong and flexible funding capacity.
The financial strength of PAC is rated AA by Standard & Poor’s, Aa2 (negative outlook) by Moody’s and AA by Fitch.
Jackson National Life’s financial strength is rated AA by Standard & Poor’s, A1 (negative outlook) by Moody’s and AA by Fitch.
The actuarial valuation of the M&G pension scheme as at 31 December 2008 demonstrated the scheme to be 76 per cent funded, representing a deficit of £51 million. Based on this valuation, deficit funding amounts designed to eliminate the actuarial deficit over a five year period have been agreed with £14.1 million being paid in each of 2010 and 2011 and £9.3 million per annum for the subsequent three years.
Financial instruments The Group is exposed to financial risk through its financial assets, financial liabilities, and policyholder liabilities. The key financial risk factors that affect the Group include market risk, credit risk and liquidity risk. Information on the Group’s exposure to financial risk factors, and our financial risk management objectives and policies, is provided both in our Risk and Capital Management section of the Business Review and the financial statements. Further information on the sensitivity of the Group’s financial instruments to market risk and its use of derivatives is also provided in the financial statements.
Risk oversight Group risk appetite We define and monitor aggregate risk limits for our earnings volatility and our capital requirements based on financial and non-financial stresses: (a) Earnings volatility: the objectives of the limits are to ensure that, (a) the volatility of our earnings is consistent with our stakeholders’ expectations, (b) the Group has adequate earnings (and cash flows) to service debt, expected dividends and to withstand unexpected shocks, and (c) earnings (and cash flows) are managed properly across geographies and are consistent with our funding strategies. The two measures we apply to monitor the volatility of our earnings are European Embedded Value (EEV) operating profit and International Financial Reporting Standards (IFRS) operating profit, although EEV and IFRS total profits are also considered.
(b) Capital requirements: the limits aim to ensure that, (a) the Group meets its capital requirements at all times including EU Insurance Groups Directive (IGD) capital requirements, (b) the Group achieves its desired target rating to meet its business objectives, and (c) supervisory intervention is avoided. In addition, we also monitor capital requirements on a local statutory basis.
We use a macro approach to hedging that covers the entire risk in the US business. Within this macro approach we make use of the natural offsets that exist between the variable annuity guarantees and the fixed index annuity book, and then use a combination of OTC options and futures to hedge the residual risk, allowing for significant market shocks and limiting the amount of capital we are putting at risk. Internal positions are generally netted before any external hedge positions are considered. The hedging programme also covers the fees on variable annuity guarantees.
FINANCIAL RISKS Market risk • The risk that arises from adverse changes in the value of, or income from, assets and changes in interest rates or exchange rates.
Insurance risk • The inherent uncertainty as to the occurrence, amount and timing of insurance liabilities. This includes adverse mortality, morbidity and persistency experience.
Operational risk • The risk of direct or indirect loss resulting from inadequate or failed internal processes, people or systems, or from external events. This includes legal and regulatory compliance risk.
Strategic risk • Ineffective, inefficient or inadequate senior management processes for the development and implementation of business strategy in relation to the business environment and the Group’s capabilities.
UK The UK’s debt portfolio on an IFRS basis is £74.3 billion as at 31 December 2010, including £46.5 billion within the UK with-profits fund. Shareholders’ risk exposure to the with-profits fund is limited as the solvency is protected by the large inherited estate. Outside the with-profits fund there is £6.0 billion in unit-linked funds where the shareholders’ risk is limited, with the remaining £21.8 billion backing the shareholders’ annuity business and other non-linked business (of which 80 per cent is rated AAA to A, 18 per cent BBB and two per cent noninvestment grade).
On a statutory (Pillar 1) basis at 31 December 2010, we held prudent credit reserves within the UK shareholder annuity funds of £1.8 billion to allow for future credit risk. For Prudential Retirement Income Limited (PRIL) this allowance is set at 68 bps decrease in the valuation discount rate at 31 December 2010 (2009: 71 bps). This now represents 43 per cent of the portfolio spread over swaps compared to 41 per cent as at 31 December 2009. No defaults were reported on the debt portfolio held by the UK shareholder backed annuity business in 2010.
US The most significant area of exposure to credit risk for the shareholders is Jackson in the US. At 31 December 2010 Jackson’s fixed income portfolio totalling £26.4 billion, comprised £20.2 billion corporate and government debt, £2.8 billion of Residential Mortgage-Backed Securities (RMBS), £2.4 billion of Commercial Mortgage-Backed Securities (CMBS) and £1 billion of other instruments.
In 2010, Jackson’s total defaults were £nil (2009: less than £1 million). In addition, as part of our active management of the book, we incurred losses net of recoveries and reversals of £89 million (2009: less than £1 million) on credit-related sales of impaired bonds.
Asset management The debt portfolio of the Group’s asset management operations of £1.6 billion as at 31 December 2010 is principally related to Prudential Capital operations. Of this amount £1.5 billion were rated AAA to A- by S&P or Aaa by Moody’s.
c Insurance risk The processes of determining the price of our products and reporting the results of our long-term business operations require us to make a number of assumptions. In common with other industry players, the profitability of our businesses depends on a mix of factors including mortality and morbidity trends, persistency, investment performance, unit cost of administration and new business acquisition expenses.
Prudential’s persistency assumptions reflect recent experience for each relevant line of business, and any expectations of future persistency. Persistency risk is mitigated by appropriate training and sales processes and managed proactively post sale. Where appropriate, allowance is also made for the relationship – either assumed or historically observed – between persistency and investment returns, and for the resulting additional risk.
d Liquidity risk The holding company has significant internal sources of liquidity which are sufficient to meet all of our expected requirements for the foreseeable future without having to make use of external funding. In aggregate the Group has £2.1 billion of undrawn committed facilities, expiring between 2011 and 2015. In addition, the Group has access to liquidity via the debt capital markets. Recent issues include a £250 million senior three-year MTN in 2010 and the US$550 million perpetual subordinated Tier 1 securities issued in January 2011. Prudential also has in place an unlimited commercial paper programme and has maintained a consistent presence as an issuer in this market for the last 10 years. Liquidity uses and sources have been assessed at a business unit level under base case and stressed assumptions. The liquidity resources available and the subsequent Liquidity Coverage Ratio (LCR) have been assessed to be sufficient under both sets of assumptions.
With regard to operational risk, the Group is dependent on processing a large number of complex transactions across numerous and diverse products, and is subject to a number of different legal and regulatory, including tax, regimes. Prudential also has a significant number of third-party relationships that are important to the distribution and processing of our products, both as market counterparties and as business partners. This results in reliance upon the operational performance of these outsourcing partners.
Prudential’s systems and processes incorporate controls that are designed to manage and mitigate the operational risks associated with its activities. The Prudential Group Governance Manual was developed to make a key contribution to the sound system of internal control that the Group is expected to maintain under the Combined Code of Corporate Governance in the UK and the Hong Kong Code on Corporate Governance Practices. Business units confirm that they have implemented the necessary controls to evidence compliance with the Manual.
Capital management Regulatory capital (IGD) Prudential is subject to the capital adequacy requirements of the European Union (EU) Insurance Groups Directive (IGD) as implemented by the Financial Services Authority (FSA) in the UK. The IGD capital adequacy requirements involve aggregating surplus capital held in our regulated subsidiaries, from which Group borrowings, except those subordinated debt issues that qualify as capital, are deducted. No credit for the benefit of diversification is permitted under this approach.
The movements during 2010 mainly comprise: • Net capital generation mainly through operating earnings (in-force releases less investment in new business) of £1.7 billion; • Release of tax provisions of £0.2 billion; • Foreign exchange movements of positive £0.1 billion; Offset by: • Final 2009 dividend, net of scrip, of £0.3 billion and interim 2010 dividend, net of scrip, of £0.1 billion; • Inadmissible assets arising on the purchase of UOB’s life insurance subsidiary in Singapore of £0.2 billion; • Impact of costs incurred in relation to the terminated AIA acquisition, net of tax, of £0.3 billion; and
• External financing costs and other central costs, net of tax, of £0.2 billion.
In addition to our strong capital position, on a statutory (Pillar 1) basis, the total credit reserve for the UK shareholder annuity funds also protects our capital position in excess of the IGD surplus. This credit reserve as at 31 December 2010 was £1.8 billion. This represents 43 per cent of the portfolio spread over swaps, compared to 41 per cent as at 31 December 2009.
• Credit defaults of ten times the expected level would reduce IGD surplus by £550 million.
The European Commission is in the process of consulting on the detailed rules that complement the high-level principles in the Directive, referred to as ‘implementing measures', which are not expected to be finalised before late 2011.
Many of the issues being actively debated have received considerable focus both within the industry and from national bodies. However, the application of Solvency II to international groups is still unclear and there remains a risk of inconsistent application, which may place Prudential at a competitive disadvantage to other European and non-European financial services groups. There is also a risk that the effect of the measures finally adopted could be adverse for the Group, including potentially a significant increase in capital required to support its business.
Having assessed the high-level requirements of Solvency II, an implementation programme was initiated with dedicated teams to manage the required work across the Group. The activity of the local Solvency II teams is being coordinated centrally to achieve consistency in the understanding and application of the requirements.
Over the coming months we will be progressing our implementation plans further and remaining in regular contact with the FSA as we continue to engage in the ‘pre-application’ stage of the approval process for the internal model.
In 2010, the new business profit mix in our Asian insurance business was derived 59 per cent (2009: 56 per cent) from health and protection products, 32 per cent (2009: 31 per cent) from unit-linked products and nine per cent (2009: 13 per cent) from non-linked products.
Unit-linked products tend to have higher profits on the EEV basis of reporting than traditional non-linked products, as expenses and charges are better matched and solvency capital requirements are lower. At the end of 2010, we were offering unit-linked products in 10 of the 11 countries in Asia in which we operate, with the only exception being Thailand.
United States Jackson’s product offerings include variable, fixed and fixed index annuities, as well as life insurance and institutional products.
Fixed annuity policies are subject to early surrender charges for the first six to nine years of the contract. In addition, the contract may be subject to a market value adjustment at the time of surrender. During the surrender charge period, the contract holder may cancel the contract for the surrender value. Our profits on fixed annuities come primarily from the spread between the return earned on investments and the interest credited to the contract holder’s account, less expenses. Fixed annuities continue to be a profitable book of business, benefiting from favourable spread income in recent years.
Fixed index annuities are similar to fixed annuities, in that the contract holder pays a premium that is credited to the contract holder’s account, and also in that interest is periodically credited to the contract holder’s account. An annual minimum interest rate is guaranteed, although actual interest credited may be higher and is linked to an equity index over the product’s index option period. Profit comes primarily from the spread between the return earned on investments and the amounts credited to the contract holder’s account, less expenses, which include the costs of hedging the equity component of the interest credited to the contract. As previously described, hedge results are reflected in short-term fluctuations. Fixed index annuities are subject to early surrender charges for the first five to twelve years of the contract. During the surrender charge period, the contract holder may cancel the contract for the surrender value. Fixed index annuities continue to be a profitable product, benefiting from favourable spread and the effective management of equity risk. The fixed index book provides natural offsetting equity exposure to the guarantees issued in connection with our variable annuity products, which allows for efficient hedging of the net equity exposure.
The contract holder can allocate the premiums between a variety of variable sub-accounts, with a choice of fund managers and/or guaranteed fixed-rate options. As with a unit-linked fund, the contract holder’s premiums allocated to the variable accounts are held separately from Jackson’s general account assets. The value of the portion of the separate account allocated to variable sub-accounts fluctuates with the underlying investments. Variable annuity policies are subject to early surrender charges for the first four to seven years of the contract. During the surrender charge period, the contract holder may cancel the contract for the surrender value. Jackson offers one variable annuity that has no surrender charges and also offers a choice of guaranteed benefit options within their variable annuity product portfolio, which customers can elect and pay for. These options include the guaranteed minimum death benefit (GMDB), which guarantees that, upon death of the annuitant, the contract holder or beneficiary receives a minimum value regardless of past market performance. These guaranteed death benefits might be expressed as the return of original premium, the highest past anniversary value of the contract, or as the original premium accumulated at a fixed rate of interest. In addition, there are three other types of guarantees: guaranteed minimum withdrawal benefits (GMWB), guaranteed minimum accumulation benefits (GMAB) and guaranteed minimum income benefits (GMIB). Due to the lack of availability to economically reinsure or hedge new issues of GMIB, Jackson discontinued offering it in 2009.
GMWBs provide a guaranteed return of the principal invested by allowing for periodic withdrawals that are limited to a maximum percentage of the initial premium. One version of the GMWBs provides for a minimum annual withdrawal amount that is guaranteed for the contract holder’s life without annuitisation. Variations of the GMWBs are offered whereby the guaranteed base can be increased, either through step-ups to a more recent market value of the account, or through bonuses offered if withdrawals are delayed for a particular number of years. Additional charges are assessed for these features. GMABs generally provide a guarantee for a return of a certain amount of principal after a specified period. GMIBs provide for a minimum level of benefits upon annuitisation regardless of the value of the investments underlying the contract at the time of annuitisation. The GMIB is reinsured.
Life insurance Jackson also sells several types of life insurance including term life, universal life and variable universal life. Term life provides protection for a defined period of time and a benefit that is payable to a designated beneficiary upon the insured’s death. Universal life provides permanent individual life insurance for the life of the insured and includes a savings element. Variable universal life is a life insurance policy that combines death benefit protection and the important tax advantages of life insurance with the long-term growth potential of professionally managed investments. The Jackson life insurance book has also delivered consistent profitability, driven primarily by favourable mortality experience.
There is a substantial volume of in-force non-participating business in PAC’s with-profits sub-fund and that fund’s whollyowned subsidiary Prudential Annuities Limited (PAL), which is closed to new business. Profits from this business accrue to the with-profits sub-fund.
In May 2004 the CFO Forum, representing the Chief Financial Officers of 19 European insurers, published the European Embedded Value Principles (expanded by the Additional Guidance of EEV Disclosures published in October 2005), that provide consistent definitions, a framework for setting actuarial assumptions, and a more explicit approach to the underlying methodology and disclosures. So for example: • The allowance for risk is explicit for EEV through: (i) an allowance for the cost of capital (at the higher of economic capital and the local statutory minimum) (ii) stochastic or other appropriate modelling of financial options and guarantees to ensure that an allowance for their cost is irrespective of their value at the balance sheet date, and (iii) an explicit allowance in the risk discount rate for financial and non-financial risks; • EEV specifically allows for the look-through into profits arising in shareholder service companies, most notably the profit arising in investment management companies from managing the insurance companies funds for covered business; and
• There are extensive disclosures required for EEV on all aspects of the calculations, including the methodology adopted and the analysis of return.
Corporate Responsibility (CR) continues to be guided by Harvey McGrath, Chairman, Prudential plc. Led by the Chairman, the Board regularly discusses the Group’s CR performance and reviews strategy annually.
“Through 163 years of experience looking after our customers’ interests, and supporting wider society, we have established a heritage of responsibility.”
We direct our resources towards the issues that we believe are most relevant to our business and where we can make the most impact through our actions and expertise. As such, we have established four global areas of focus: 1 Fair and transparent products meeting customer needs 2 Best people for the best performing business 3 Protecting the environment 4 Supporting local communities
Fair and transparent products meeting customer needs We are deeply aware of the importance our customers attach to the financial decisions they face in meeting their changing requirements for savings, income and protection.
In 2011 we will be publishing our Customer Charter on the Prudential plc website, which highlights our key commitments to our customers across the Group.
In Asia, we serve more than 15 million customers, with a mix of life insurance, pensions, mutual funds, consumer finance, asset management, health and protection products and services.
Last year, Prudential was the first insurance company in Asia to launch an iPhone app. Our iPhone Retirement Calculator allows customers to model different financial scenarios and lifestyle variables to calculate the savings they would need to fund their retirement. The app is available in Hong Kong, Malaysia, the Philippines and Singapore, with local language versions also launched in Indonesia, Korea, Taiwan, Thailand and Vietnam. We continue to innovate in this field and have a BlackBerry Retirement Calculator in development.
Recognised for its financial strength, in 2010, Jackson increased the number of advisers selling its variable annuity products to more than 130,000. This made these products more widely available as customers continued to seek greater security in times of economic uncertainty. We also introduced further innovations that deliver long-term value to customers. This includes the launch of the LifeGuard Freedom Flex, the Company’s first guaranteed minimum withdrawal benefit, giving investors the ability to build a personalised benefit that meets their retirement planning objectives.
As one of the largest active investors in the UK stock market, M&G takes seriously its responsibilities as a shareholder. Its strategy is to invest in companies, not chase share prices. M&G takes a long-term approach to investment opportunities and, provided the investment case remains intact, maintains its conviction in the companies it holds.
In 2010... • Prudential Corporation Asia achieved: ’Best in Achieving Total Customer Satisfaction’ (Life Insurance) at the 2010 Indonesia Customer Satisfaction Awards, sponsored by SWA Magazine
’Best Fund in Overseas Equity’ in the 2010 Money TodayMorningstar Fund Awards, sponsored by KOFIA (Korea Financial Investment Association)
’Best Performing Fund of its Category’ awarded to PRUAsia Pacific Shariah Equity Fund at the Edge-Lipper Malaysia Fund Awards
• In the US, Jackson achieved: ‘World Class’ status and ‘Highest Customer Satisfaction’ from the Service Quality Measurements Group (SQM). This marked the fifth consecutive year that Jackson has achieved world class status
• M&G was awarded: ‘Global Group of the Year’ at the 2010 Investment Week Fund Manager of the Year Awards
‘Outstanding Investment House Award’ at the OBSR Honours for Excellence Awards
Across the Group, we always try to resolve problems for our customers as quickly and smoothly as possible, and we are committed to handling any customer complaints in a fair and timely manner.
Developing credible successors Strong leadership is critical to the continued success of our business. Every year we conduct a review across the Group to identify, develop and reward people with leadership potential. During 2010, we held four events in each of our Management Development and Leadership Development programmes. These events support the Group’s succession and development strategy and, in 2010, more than 75 individuals were assessed for their long-term leadership potential.
“ In 2010, the website for our flagship development programme, Momentum, received more than 58,000 visits from 142 countries.”
It is important for our employees to have an opportunity to benefit from the Group’s success through share ownership. In the UK, we operate two all-employee share plans: a Share Investment Plan (SIP) and a Save As You Earn (SAYE) scheme. In 2010, more than 14 per cent of eligible employees participated in the SAYE scheme and almost six per cent in the SIP. Through these plans, more than two-thirds of employees in the UK now own, or have an interest in, Prudential shares. In Asia, we operate two SAYE schemes, similar to those in the UK, which are open to both employees and agents. Almost a quarter of eligible employees and more than 37 per cent of eligible agents participated in these schemes in 2010.
Across the Group there are dedicated intranet sites to keep employees up to date, and ‘Town Hall’ events that offer employees the opportunity to ask questions of senior management teams. There are also a number of employee consultation forums in place such as the M&G Staff Consultative Committee and the UK Employee Forum within Prudential UK. Our UK business also has a long-standing relationship with the union Unite.
“We fully recognise the value that a diverse workforce brings to our organisation and believe Prudential should reflect the diversity of the markets in which we operate.”
We are committed to integrating diversity into our business practices. Our policies are guided by the principles of the UN’s Universal Declaration of Human Rights and the International Labour Organisation’s core labour standards. These are also incorporated into our Group Code of Business Conduct which sets individual standards of employee behaviour. The code is made available to all employees on the Group intranet site.
Protecting the environment Our environmental strategy is focused on increasing the efficiency of our business operations by reducing the direct impact of the properties we occupy, and the properties we manage through PRUPIM, our real estate investment manager.
One of the challenges we face in reporting our environmental impacts on a global basis is the collection of robust data for our operations in Asia. Across the region we are often an occupier of multi-tenanted properties and environmental data collection is not the norm. Nonetheless, we are developing processes, and identifying technologies, by which we can accurately begin to measure our impact.
PRUPIM was recertified during 2010 to ISO 14001 for the management of its real estate investment portfolio. PRUPIM also maintained ISO 14001 certification at 26 managed office investment properties and PAS99, the world’s first integrated management system which includes ISO 14001, at 10 managed shopping centres.
In 2010, the business developed a Sustainability Education Programme for its employees. This included more than 22 hours of workshops, seminars and discussion groups, enabling colleagues to improve their understanding of sustainability issues.
Part of PRUPIM’s strategy is to incorporate sustainability considerations into its investment appraisal and decision-making process. This includes a sustainability questionnaire as part of the appraisal system which determines the value of the assets.
PRUPIM is a signatory of the UN’s Principles for Responsible Investment and continues to lead the property industry’s developments in sustainability through its active involvement in the British Property Federation, British Council of Shopping Centres, UK Green Building Council, Green Property Alliance, UN Environment Programme Finance Initiative, Institutional Investors Group on Climate Change and Better Buildings Partnership.
PRUPIM’s approach and progress can be found in its annual Sustainability Report. For more details please visit www. PRUPIM.com
Supporting local communities Prudential has a long history of supporting the community, from our earliest days of Victorian philanthropy. All our businesses implement community investment programmes and we encourage our operations to establish partnerships focused on education (particularly financial education) and social welfare.
Our approach to community investment is to support charitable organisations and appropriate NGOs, not only through funding, but also through the experience and expertise of our employees.
“Over the last five years, since the Chairman’s Challenge was launched, 108 annual projects have been supported.”
Many of our employees volunteer through our Group-wide flagship programme, the Chairman’s Challenge.
Over the last five years, since the Chairman’s Challenge was launched, 108 annual projects have been supported by our employees in partnership with charities including Help Age International, Plan International and Junior Achievement.
All of the projects included in the Chairman’s Challenge receive a financial donation from the Group for each employee who signs up as a volunteer, and the five short-listed projects receive additional funding. Each year, employees across the Group are invited to vote for the shortlisted project they believe has made the greatest impact.
Shortlisted projects included: • Prestasi Junior Indonesia working with more than 120 Prudential volunteers, who gave up four weekends to run a variety of educational projects for children at a safe house in Jakarta
• Junior Achievement in the US, where 163 Jackson employees dedicated 463 hours to teaching young people financial skills in 105 classrooms, benefiting 2,500 students
• Prudential UK employees dedicated 660 hours to Age UK’s Call in Time programme, helping 370 isolated older people re-engage with the community.
Financial education As a provider of financial services we believe that encouraging and supporting financial literacy helps to underpin overall economic development and success.
In 2010, our financial capability strategy in Asia continued to gain strength. This year more than 4,400 women in China, Indonesia and Vietnam, participated in our financial training seminars – ‘Investing in Your Future’. These events, first launched in China in 2004, directly support women who, while often responsible for planning the family’s financial needs, have traditionally had limited financial training. In the past six years, more than 27,500 women have attended our financial training seminars in Asia.
Since 2007, Prudential has partnered with the Chinese Ministry of Education, the Chinese Academy of Social Sciences (CASS) and the Chinese Insurance Regulatory Commission (CIRC), to develop and introduce an insurance education curriculum in schools. The programme has reached more than 6,000 students from 26 schools in seven provinces.
In the UK, we partner with a range of organisations such as Citizens Advice, the Personal Finance Education Group (pfeg), and the Specialist Schools and Academies Trust. As a result of these partnerships, thousands of adults and children are learning essential financial literacy skills. Our partnership with Citizens Advice is also helping people to make decisions that will have a profound effect on their financial welfare.
Disaster relief The Group maintains a fund which can be activated to support relief efforts following disasters in the countries where we operate.
Our commitment to disaster relief often goes beyond financial aid, providing on-the-ground support to address the most critical needs. Following the earthquake that struck Western Sumatra in Indonesia, near the city of Padang, at the end of 2009, we contributed approximately £1 million, and many of our employees worked as volunteers. Funding was used to support initial emergency relief efforts and subsequent reconstruction work. We have continued to monitor progress and, during 2010, Prudential leaders in Asia attended a ceremony in Padang, celebrating the completion of 220 new houses, a children's library and a play centre. These buildings were constructed by Padang Kapas villagers and our charity partner, Posko Jenggala.
Donations In 2010, the Group spent £7.5 million supporting community activities. Direct donations to charitable organisations amounted to £5.7 million, of which approximately £3.5 million came from EU operations.
This is broken down as follows: education £862,000; social and welfare £1,804,000; environment and regeneration £19,000; cultural £61,000 and staff volunteering £727,000. The aggregate figure for direct charitable donations from Prudential's non-EU subsidiaries (Jackson National Life Insurance Company and Prudential Corporation Asia) amounted to £2.2 million.
In the UK, we have signed up to the Prompt Payment Code, launched in December 2008 by the UK Department for Business, Enterprise and Regulatory Reform. In 2010, our trade creditor days, based on the ratio of amounts that were owed to trade creditors at the year-end to the aggregate of the amounts invoiced by trade creditors during the year, were 23 days. The Prompt Payment Code and its signatories can be found at www.promptpaymentcode.org.uk
Supply chain management Prudential recognises that its own social, environmental and economic impacts go beyond the products and services it supplies to include the performance of its suppliers and contractors.
“ In 2010, Save the Children became a new charity partner through the Group's support for its Children's Emergency Fund.”
Harvey is also Chairman of the London Development Agency which works for the Mayor of London coordinating economic development and regeneration across London and is Vice Chairman of the London Skills and Employment Board which is tasked with developing a strategy for adult skills in London. He is the former Chairman of both London First and the East London Business Alliance.
Harvey is a trustee of a number of charities including New Philanthropy Capital, a research based charity which gives advice and guidance to donors and charities; the Royal Anniversary Trust which operates the Queen’s Anniversary Prizes for Higher and Further Education; Children and Families Across Borders (CFAB), which protects the rights and welfare of children and vulnerable adults across borders; icould, an online careers resource; and the Prince’s Teaching Institute, which promotes subject based professional development for teachers. Age 59.
Tidjane Thiam has been an executive director of Prudential since March 2008. He was the Chief Financial Officer until September 2009 and became Group Chief Executive in October 2009. Tidjane was previously Chief Executive Officer, Europe at Aviva where he worked from 2002 to 2008 and held successively the positions of Group Strategy and Development Director and Managing
Robert Devey (Rob) has been an executive director of Prudential and Chief Executive, Prudential UK and Europe since November 2009. Rob joined Prudential from Lloyds Banking Group where he worked since 2002 in a number of senior leadership roles across insurance and retail banking including Managing Director, Direct Channels UK Retail Banking, Managing Director of HBOS
Financial Services and Managing Director of HBOS General Insurance. Prior to joining HBOS, Rob was a consultant with the Boston Consulting Group (BCG) in the UK, US and Europe working in financial services. Age 42.
John Foley was appointed an executive director of Prudential and Group Chief Risk Officer in January 2011. He joined Prudential as Deputy Group Treasurer in 2000 before being appointed Managing Director, Prudential Capital (formerly Prudential Finance (UK)) and Group Treasurer in 2001. He was appointed Chief Executive of Prudential Capital and to the Group Executive Committee in 2007. Prior to joining Prudential, John spent three years with National Australia Bank as General Manager, Global Capital Markets. John began his career at Hill Samuel & Co Limited where, over a 20 year period, he worked in every division of the bank, culminating in senior roles in risk, capital markets and treasury of the combined TSB and Hill Samuel Bank. Age 54.
Prudential plc Annual Report 2010 and CEO of Nisus, a subsidiary of Pan-American Life, from 1992 to 1995. Before joining Nisus, Barry spent 12 years at Willis Corroon in the US. Age 53.
KEKI DADISETH FCA INDEPENDENT NON-EXECUTIVE DIRECTOR AND MEMBER OF THE REMUNERATION COMMITTEE
Keki Dadiseth has been an independent non-executive director of Prudential since April 2005. Keki is a member of the Remuneration Committee and was a member of the Audit Committee from 2005 to 2007. During 2006 he was appointed as a non-executive director of ICICI Prudential Life Assurance Company Limited and ICICI Prudential Trust Limited. Keki is also a director of Britannia Industries Limited, Piramal Healthcare Limited, Siemens Limited, The Indian Hotels Company Limited and Godrej Properties Limited, all of which are quoted on the Bombay Stock Exchange. In addition, he acts as advisor to Goldman Sachs, Fleishman-Hillard Inc and Oliver Wyman Limited, and as a trustee for a number of Indian charities. Keki is the non-executive Chairman of Omnicom India Marketing Advisory Services Private Limited, an unquoted Indian company and is also a board member of various other unquoted Indian companies. He serves as Chairman of Sony India Pvt Ltd and is a Senior Advisor to Sony Group in India.
SIR HOWARD DAVIES INDEPENDENT NON-EXECUTIVE DIRECTOR, CHAIRMAN OF THE RISK COMMITTEE AND MEMBER OF THE AUDIT COMMITTEE
MICHAEL GARRETT INDEPENDENT NON-EXECUTIVE DIRECTOR AND MEMBER OF THE REMUNERATION COMMITTEE
Michael Garrett has been an independent non-executive director of Prudential and a member of the Remuneration Committee since September 2004. He worked for Nestlé from 1961 becoming Head of Japan from 1990 to 1993 and then Zone Director and Member of the Executive Board, responsible for Asia and Oceania. In 1996 his responsibilities were expanded to include Africa and the Middle East. Michael retired as Executive Vice President of Nestlé in 2005. He served the Government of Australia as Chairman of the Food Industry Council and as a Member of the Industry Council of Australia, and was also a member of the Advisory Committee for an APEC (Asia-Pacific Economic Cooperation) Food System, a Member of The Turkish Prime Minister's Advisory Group and the WTO (World Trade Organization) Business Advisory Council in Switzerland.
Switzerland, Hasbro Inc. in the USA, and Gottex Fund Management Holdings Limited in Guernsey. In addition, he is a member of the Development Committee of the International Business Leaders Forum (IBLF), as well as a Member of the Swaziland International Business Advisory Panel under the auspices of the Global Leadership Foundation (GLF) London. Age 68.
ANN GODBEHERE FCGA INDEPENDENT NON-EXECUTIVE DIRECTOR, CHAIRMAN OF THE AUDIT COMMITTEE AND MEMBER OF THE RISK COMMITTEE
Ann Godbehere has been an independent non-executive director of Prudential since August 2007. She has been a member of the Audit Committee since October 2007 becoming its Chairman in October 2009 and joined the Risk Committee in November 2010. Ann began her career in 1976 with Sun Life of Canada, joining Mercantile & General Reinsurance Group in 1981, where she held a number of management roles rising to Senior Vice President and Controller for life and health and property/casualty businesses in North America in 1995. In 1996 Swiss Re acquired Mercantile & General Reinsurance Group and Ann became Chief Financial Officer of Swiss Re Life & Health, North America. In 1997 she was made Chief Executive Officer of Swiss Re Life & Health, Canada. She moved to London as Chief Financial Officer of Swiss Re Life & Health Division in 1998 and joined the Property & Casualty Business Group, based out of Zurich, as Chief Financial Officer on its establishment in 2001. From 2003 until February 2007, Ann was Chief Financial Officer of the Swiss Re Group.
BRIDGET MACASKILL INDEPENDENT NON-EXECUTIVE DIRECTOR, CHAIRMAN OF THE REMUNERATION COMMITTEE AND MEMBER OF THE NOMINATION COMMITTEE
rejoined the Board of Prudential having resigned in 2001 as a result of a potential conflict of interest. She has been a member of the Remuneration Committee since 2003 and became its Chairman in May 2006. Bridget has also been a member of the Nomination Committee since March 2004.
PAUL MANDUCA SENIOR INDEPENDENT DIRECTOR AND MEMBER OF THE AUDIT, REMUNERATION AND NOMINATION COMMITTEES
Bridgewell Group plc until 2007 and a director of Henderson Smaller Companies Investment Trust plc until 2006. Paul was European CEO of Deutsche Asset Management from 2002 to 2005, global CEO of Rothschild Asset Management from 1999 to 2002 and founding CEO of Threadneedle Asset Management Limited from 1994 to 1999 when he was also a director of Eagle Star and Allied Dunbar. Paul is a member of the Securities Institute. Age 59.
KATHLEEN O’DONOVAN ACA INDEPENDENT NON-EXECUTIVE DIRECTOR AND MEMBER OF THE AUDIT AND NOMINATION COMMITTEES
JAMES ROSS OBE INDEPENDENT NON-EXECUTIVE DIRECTOR AND MEMBER OF THE RISK AND NOMINATION COMMITTEES
James Ross has been an independent non-executive director of Prudential since May 2004 and the Senior Independent Director from May 2006 to December 2010. He was succeeded by Paul Manduca as Senior Independent Director in January 2011 and will retire from the Board at the conclusion of the AGM on 19 May 2011. He became a member of the Risk Committee in November 2010 and was a member of the Remuneration Committee from 2004 to 2006 and from 2008 to November 2010. He was also a member of the Audit Committee from 2005 to 2007.
Lord Turnbull has been an independent non-executive director of Prudential since May 2006. He joined the Risk Committee and the Remuneration Committee in November 2010. From January 2007 to November 2010 he was a member of the Audit Committee. He entered the House of Lords as a Life Peer in 2005. In 2002 he became Secretary of the Cabinet and Head of the Home Civil Service until he retired in 2005. Prior to that he held a number of positions in the Civil Service, including Permanent Secretary at HM Treasury; Permanent Secretary at the Department of the Environment (later Environment, Transport and the Regions); Private Secretary (Economics) to the Prime Minister; and Principal Private Secretary to Margaret Thatcher and then John Major. He joined HM Treasury in 1970.
The directors believe that good corporate governance is central to achieving the Group’s objectives and maximising shareholder value, and are committed to high standards of governance.
The directors are responsible for setting strategic objectives and for ensuring the Group is adequately placed and resourced to achieve those objectives and for ensuring obligations to its shareholders, and wider stakeholders, are met in a manner consistent with their statutory duties.
The Board has approved a governance framework which maps out the internal approvals processes and those matters which may be delegated. These principally relate to the operational management of the Group’s businesses and include predetermined authority limits delegated by the Board to the Group Chief Executive for further delegation by him in respect of matters which are necessary for the effective day-to-day running and management of the businesses. The chief executive of each business unit has authority for the management of that business unit and has established a management board comprising its most senior executives.
Composition At 31 December 2010 the Board comprised the Chairman, six executive directors and nine independent non-executive directors. From 1 January 2011 the number of executive directors increased to seven with the appointment of John Foley, Group Chief Risk Officer, becoming effective. The biographies of all current directors are set out on pages 100 to 103.
Throughout the year the non-executive directors were considered by the Board to be independent in character and judgement and met the provisions for independence as set out in the Corporate Governance Codes. The Company has received confirmation of independence from each of the non-executive directors as required by the Hong Kong Listing Rules. As the test of independence is not appropriate in relation to the Chairman under the Combined Code 2008, and to ensure a consistent approach in how the Chairman is described in all corporate communications, the Chairman has not been asked to provide confirmation of his independence for the purposes of the Hong Kong Listing Rules and will not be asked to do so in future. Accordingly, the Chairman will no longer be listed as an independent non-executive director in Hong Kong corporate communications.
Paul Manduca is the Senior Independent Director and concerns may be conveyed to him by shareholders if they are unable to resolve them through the existing mechanisms for investor communications or where such channels are inappropriate.
Induction and Development The Company Secretary supports the Chairman in providing tailored induction programmes for new directors and on-going development for all directors. On appointment all directors embark upon a wide-ranging induction programme covering, amongst other things, the principal bases of accounting for the Group’s results, the role of the Board and its key committees and the ambit of the internal audit and risk management functions. In addition, they receive detailed briefings on the Group’s principal businesses, its product range, the markets in which it operates and the overall competitive environment. Other areas addressed include the directors’ obligations under the different listing regimes, legal issues affecting directors of financial services companies, the Group’s governance arrangements, its investor relations programme as well as its remuneration policies.
A programme of on-going professional development was undertaken by all directors during 2010 which included a number of sector-specific and business issues as well as legal, accounting and regulatory changes and developments. A number of business unit chief executive officers, together with relevant senior executives, gave presentations to the Board during the course of the year on the challenges and opportunities currently faced by their business unit. In addition, senior managers within certain head office functions presented to the Board on the key issues currently facing their function and directors received regular briefings on Solvency II. In addition, members of the Audit Committee have the option to attend meetings of the business unit audit committees to aid their understanding of topical matters of interest to them and how they are handled by the Group.
Meetings During 2010 the Board held ten scheduled meetings and met on a further fifteen occasions to discuss extraordinary business. One separate strategy event was held during the year. A detailed forward agenda has been in operation for a number of years. This is kept updated to reflect not only scheduled regular items of business but also any topical matters arising during the year.
The Chairman met with the non-executive directors without the executive directors being present seven times during the year.
7 Ceased to be a member of the Audit Committee and joined the Remuneration Committee on 9 November 2010. 8 Were unable to attend certain of the scheduled meetings due to pre-existing commitments at the time of appointment to the Board.
Directors’ interests Individual directors’ interests are set out on page 135 of the Directors’ Remuneration Report.
External appointments The Board was satisfied that during 2010 the Chairman’s other commitments did not hinder the day-to-day performance of his duties for the Group and that he had the commitment and capability to make himself available under unforeseen circumstances. The major commitments of the Chairman, including changes during the year where applicable, are detailed in his biography on page 101.
Directors’ indemnities and protections The Company has arranged appropriate insurance cover in respect of legal action against directors and senior managers of companies within the Prudential Group. In addition, the Articles of Association of the Company permit the directors and officers of the Company to be indemnified in respect of liabilities incurred as a result of their office. Prudential also provides protections for directors and senior managers of companies within the Group against personal financial exposure they may incur in their capacity as such. These include qualifying third-party indemnity provisions (as defined where relevant by the Companies Act 2006) for the benefit of directors of Prudential plc and other such persons including, where applicable, in their capacity as directors of other companies within the Group. These indemnities were in force during 2010 and remain in force.
• Six executive directors at 31 December 2010 (seven from 1 January 2011)
In performing its duties, the Audit Committee has access to employees and their financial or other relevant expertise across the Group and to the services of the Group-wide Internal Audit Director and the Company Secretary. The Committee may also seek external professional advice at the Group’s expense.
Membership The Committee is comprised exclusively of independent non-executive directors of the Company as set out below: Ann Godbehere (Chairman) Kathleen O’Donovan Lord Turnbull (to 9 November 2010) Paul Manduca (from 9 November 2010) Howard Davies (from 9 November 2010)
The Board has determined that both Ann Godbehere and Kathleen O’Donovan have recent and relevant financial experience for the purposes of the Combined Code 2008 and the Hong Kong Listing Rules. In June 2010 the Board designated Ann Godbehere as its Audit Committee financial expert for Sarbanes-Oxley Act purposes. This will be reviewed during 2011 in conjunction with the publication of Form 20-F.
Meetings The Committee held eight scheduled meetings during the year and met on a further nine occasions to discuss extraordinary business. Individual attendance for the meetings is given in the table on page 107. By invitation, the Chairman of the Board, the Group Chief Executive, the Chief Financial Officer, the Group General Counsel and Company Secretary, the Group-wide Internal Audit Director, the Group Chief Risk Officer and other senior staff from the Group finance, internal audit, risk, compliance and security functions as well as the lead partner of the external auditor, attended meetings. Other partners and staff of the external auditor also attended some of the meetings to contribute to the discussions relating to their area of expertise.
Financial reporting As part of its review of financial statements prior to recommending their publication to the Board, the Committee focused on: critical accounting policies and practices and any changes, decisions requiring a major element of judgement, unusual transactions, clarity of disclosures, significant audit adjustments, the going concern assumption, compliance with accounting standards, and compliance with obligations under applicable laws, regulations and governance codes.
Internal control and risk management The Committee reviewed the Group’s statement on internal control systems prior to its endorsement by the Board. It also reviewed the policies and processes for identifying, assessing and managing business risks.
Internal audit The Committee regards its relationship with the internal audit function as pivotal to the effectiveness of its own activities. Group-wide Internal Audit plays an important role in supporting the Committee to fulfil its responsibilities under the Corporate Governance Codes and the Sarbanes-Oxley Act and provides independent assurance on the Company’s processes of identification and control of risk. The Committee agreed the work programme of the internal audit function to be undertaken during 2010. Each of the Group’s business units has an internal audit team, the heads of which report to the Group-wide Internal Audit Director. Internal audit resources, plans and work are overseen by the Committee and by the business unit audit committees. Total internal audit headcount across the Group stands at 108. The Group-wide Internal Audit Director reports functionally to the Committee and for management purposes to the Chief Financial Officer.
Formal reports are submitted to Committee meetings, with interim updates where appropriate, and views are also sought at the private meetings between the Committee and the internal auditors as well as during regular private meetings between the Chairman of the Committee and the Group-wide Internal Audit Director.
The Committee assesses the effectiveness of the internal audit function by means of regular reviews, some of which are carried out by external advisers, and through ongoing dialogue with the Group-wide Internal Audit Director. External reviews of Group-wide internal audit arrangements and standards were last conducted in 2006 and 2007 to ensure that the activities and resources of internal audit are most effectively organised to support the oversight responsibilities of the Committee. These reviews, performed by Deloitte, confirmed that the internal audit function complies with the Institute of Internal Auditors' international standards for the professional practice of internal auditing and concluded that the function was operating effectively. An internal assessment of the internal audit function was performed by the Group-wide Internal Audit Director in
subsequent years based on internal audit’s ongoing selfassessment processes and using a maturity model derived from the review criteria used by Deloitte. The assessment confirmed that the internal audit function conforms to the Institute of Internal Auditors' international standards and continues to operate effectively in all areas of professional practice. The results of the last assessment were reported in detail to the Committee in February 2011. An external review of internal audit arrangements and standards in UKIO was conducted in 2010 to ensure that the activities and resources of internal audit were effectively organised to support the oversight responsibilities of the Business Unit Audit Committee in the UK. This review, performed by PwC, confirmed that the internal audit function for UKIO complies with the Institute of Internal Auditors' international standards for the professional practice of internal auditing and was operating effectively. The next external review of Group-wide internal audit arrangements and standards is scheduled for 2011.
Auditor performance and independence As part of its work during 2010, the Committee assessed the performance of the external auditor, its independence and objectivity, and the effectiveness of the audit process. In addition to questioning the external auditor, which is a regular feature of meetings, the review of the effectiveness of the external audit process was conducted through a questionnairebased exercise administered by Group-wide Internal Audit. The Committee reviewed the external audit strategy and received reports from the auditor on its own policies and procedures regarding independence and quality control, including an annual confirmation of its independence in line with industry standards.
Following its review of the external auditor’s effectiveness and independence, the Committee has recommended to the Board that KPMG Audit Plc be re-appointed as auditor of the Company and a resolution for the re-appointment of KPMG Audit Plc as auditor of the Company will be put to a shareholder vote at the Annual General Meeting on 19 May 2011.
Except in relation to the remuneration of the Group Chief Executive, when only the Chairman is consulted, the Committee consults the Chairman and the Group Chief Executive about the Committee's proposals relating to the remuneration of all executive directors. The Committee has access to professional advice inside and outside the Company.
The terms of reference comply with all significant aspects of relevant investor guidelines and require the Committee to ensure that the Company adopts a remuneration policy which rewards executive directors for their contribution to sustainably and responsibly enhancing shareholder value.
Bridget Macaskill (Chairman) Keki Dadiseth Michael Garrett James Ross (to 9 November 2010) Lord Turnbull (from 9 November 2010) Paul Manduca (from 9 November 2010)
The Committee’s terms of reference, which are set by the Board and kept under regular review, are available on our website at: www.prudential.co.uk/prudential-plc/aboutpru/corporate governance/ Alternatively, copies may be obtained upon request from the Company Secretary at the Company’s registered office.
Membership The Committee is comprised of independent non-executive directors and the Chairman, as set out below: Harvey McGrath (Chairman) Bridget Macaskill James Ross Kathleen O’Donovan (from 9 November 2010) Paul Manduca (from 1 January 2011)
Meetings The Committee meets as required to consider candidates for appointment to the Board and to make recommendations to the Board in respect of those candidates. The Group Chief Executive is closely involved in the work of the Committee and is invited to attend and contribute to meetings.
Meetings The Committee expects to hold at least four scheduled meetings a year. The Committee will report on its activities in the Annual Report 2011 after it has completed its first year of business.
The system is regularly reviewed and complies with the Corporate Governance Codes. In complying with the Combined Code 2008, the Group follows the 2005 Turnbull Guidance relating to the sections of the Code dealing with risk management and internal control. The Board reviewed the effectiveness of the system of internal control in February 2011, covering all material controls, including financial, operational and compliance controls, risk management systems and the adequacy of the resources, qualifications and experience of staff of the issuer’s accounting and financial reporting function. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period and up to the date of this report.
Organisation Prudential’s risk governance framework requires that all of the Group’s businesses and functions establish processes for identifying, evaluating and managing the key risks faced by the Group. The framework is based on the concept of ‘three lines of defence’ (LoD): risk management, risk oversight and independent assurance.
Risk management (1st LoD): As described in the corporate governance report, primary responsibility for strategy, performance management and risk control lies with the Board, which has established the Risk Committee to assist in providing leadership, direction and oversight, and with the Group Chief Executive and the chief executives of each business unit.
Balance Sheet and Capital Management Committee: Meets monthly to monitor the Group’s liquidity and oversee the activities of Prudential Capital.
Solvency II Technical Oversight Committee: Will be created when the Solvency II programme is complete, to provide ongoing technical oversight and advice to the executive and the Board in carrying out their duties with regard to the Group’s Internal Model.
Independent assurance: As described in the Corporate Governance Report, the Group Audit Committee, supported by Group-wide Internal Audit, provides independent assurance and oversight of the effectiveness of the Group’s system of internal control and risk management.
The Group has five objectives for risk and capital management: Framework: Design, implement and maintain a capital management and risk oversight framework consistent with the Group’s risk appetite and Risk-Adjusted Profitability (RAP) model.
Reporting The Group's economic capital position and overall position against risk limits is reviewed regularly by the Group Executive Risk Committee. Key economic capital metrics, as well as RAP information, are included in business plans, which are reviewed by the Group Executive Committee and approved by the Board.
Group Head Office oversight functions have clear escalation criteria and processes for the timely reporting of risks and incidents by business units. As appropriate, these risks and incidents are escalated to the various Group-level risk committees and the Board.
Business units review their risks as part of the annual preparation of their business plans, and review opportunities and risks against business objectives regularly with Group Head Office. Group Risk reviews and reports to Group Head Office on the impact of large transactions or divergences from business plan.
Communication with shareholders As a major institutional investor, the Company is very aware of the importance of maintaining good relations with its shareholders. Discussions are held regularly with major shareholders and a programme of meetings took place during 2010. In addition, Prudential also held an investor day in December 2010 and plans to make this an annual event. A perception survey into the views of the Company’s major investors is undertaken regularly by an independent firm and the results of this survey are presented to the Board. Board members also regularly receive copies of the latest analysts’ and brokers’ reports on the Company and the sector to further develop their knowledge and understanding of external views about the Company. The Chairman and the non-executive directors provided feedback to the Board on topics raised with them by major shareholders. Should major shareholders wish to meet newly appointed directors, or any of the directors generally, they are welcome to do so.
At the 2010 Annual General Meeting, the Company continued its practice of calling a poll on all resolutions. The voting results and all proxies lodged prior to the meeting were displayed at the meeting and published on the Company's website. This practice provides shareholders present with sufficient information regarding the level of support and opposition to each resolution and ensures that all votes cast, either at the meeting or through proxies, are included in the result.
Company constitution The Company is governed by the Companies Act 2006, other applicable legislation and regulation as well as by provisions of its Articles of Association. The Articles of Association are available on our website at www.prudential.co.uk/ prudential-plc/aboutpru/memorandum
Any change to the Articles must be approved by special resolution of the shareholders in accordance with the provisions of the Companies Act 2006.
Share capital On 31 December 2010, the Company’s issued share capital, which is set out in Note H11 on page 321, consisted of 2,545,594,506 (2009: 2,532,227,471) ordinary shares of 5 pence each, all fully paid up and listed on the London Stock Exchange and the Stock Exchange of Hong Kong. The number of accounts on the share register at 31 December 2010 was 66,048 (2009: 71,700). The Company maintains secondary listings on the New York Stock Exchange in the form of American Depositary Shares which are referenced to its ordinary shares, under a depositary agreement with J.P. Morgan, and on the Singapore Stock Exchange.
In compliance with the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong, the Company has maintained a public float of at least 25 per cent of the issued share capital from the date of listing on 25 May 2010 to the date of this report.
A number of dividend waivers are in place and these relate to shares issued, but not allocated, under the Group’s employee share plan. These shares are held by the Trustees and will, in due course, be used to satisfy requirements under the Group’s employee share plans.
As at 8 March 2011, Trustees held 0.19 per cent of the issued share capital of the Company under the various plans in operation.
Rights to dividends under the various schemes are set out in Note I4 on page 345.
Authority to purchase own shares The directors also require authority from shareholders in relation to the purchase of own shares by the Company. The Company seeks authority by special resolution on an annual basis for the buyback of its own shares in accordance with the relevant provisions of the Companies Act 2006 and other related guidance. The Company has not made use of that authority since it was last granted at its Annual General Meeting in 2010. This existing authority is due to expire at the end of this year’s Annual General Meeting. A special resolution to approve the renewal of this authority will be put to shareholders at the Annual General Meeting on 19 May 2011.
Following specific enquiry, the directors have confirmed their compliance with these rules.
The provisions of Section 404 of the Act require the Company's management to report on the effectiveness of internal controls over financial reporting in its annual report on Form 20-F, which is filed with the US Securities and Exchange Commission. To comply with this requirement to report on the effectiveness of internal control, the Group has documented and tested its internal controls over financial reporting in the format required by the Act. The annual assessment and related report from the external auditor will be included in the Group's annual report on Form 20-F, which will be published in the coming months.
In addition, the Disclosure Committee evaluates whether or not a particular matter requires disclosure to the market, taking into account relevant regulations.
The Board is committed to achieving the highest standards of corporate responsibility in directing and controlling the business. In terms of the governance of our corporate responsibility strategy, Harvey McGrath, the Chairman, has Board level responsibility for social, environmental and ethical risk management. The Board discusses Prudential’s performance in these areas at least once a year and also reviews and approves Prudential’s corporate responsibility report and strategy on an annual basis.
Below Board level, the Responsibility Committee is a specialist Group-wide committee. This committee is responsible for reviewing Prudential’s business conduct and social and environmental policy and ensures consistency of approach across the Group’s international businesses. Consideration of environmental, social and community matters is embedded in our Code of Business Conduct and supported by our corporate responsibility philosophy and programme, which takes into account local cultures and requirements across our businesses.
The following additional disclosures are made in compliance with the Companies Act 2006, the Disclosure and Transparency Rules and the Corporate Governance Codes.
The directors are further required to confirm that the directors’ report includes a fair review of the development and performance of the business, with a description of the principal risks and uncertainties. Such confirmation is included in the statement of directors' responsibilities on page 387.
The Chief Financial Officer's Review includes, on pages 80 to 86, a description of the Group's risk and capital management, which includes a description of the Group's liquidity position. These risks are also discussed in Note C to the financial statements on page 203. The Group has considerable internal and external financial resources and the directors believe that the Group is well placed to manage its business risks successfully.
Going concern After making enquiries the directors have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for the foreseeable future. In support of this expectation, the Company’s business activities, together with the factors likely to affect its future development, successful performance and position in the current economic climate are set out in the Business Review on pages 17 to 98. The risks facing the Group’s capital and liquidity positions and their sensitivities are referred to in the Chief Financial Officer’s Review. Specifically, the Group’s borrowings are detailed in Note H13 on pages 324 to 326, the market risk and liquidity analysis associated with the Group’s assets and liabilities can be found in Note G2 on pages 300 to 304, policyholder liability maturity profile by business units in Notes D2, D3, D4 on pages 232, 253 and 261 respectively, cash flow details in the consolidated statement of cash flows and provisions and contingencies in Note H14. The directors therefore have continued to adopt the going concern basis of accounting in preparing the financial statements.
Post-balance sheet events Important events affecting the Company after the end of the financial year are detailed in Note I12 on page 352.
Compensation for loss of office None of the terms of employment of the Company's directors includes provisions for payment of compensation for loss of office or employment that occurs because of a takeover bid. Terms applying on a termination of their office are set out in the Directors' Remuneration Report. In the US, senior executives participate on a discretionary basis in a plan which entitles them to compensation, in the event that their employment is terminated or adversely affected as a result of a takeover.
For the year ended 31 December 2010, none of the directors of the Company, their associates or any shareholders of the Company (which have, to the knowledge of the directors of the Company, owned more than 5 per cent of the Company’s issued share capital) had any interest in the Group's major customers.
Post-balance sheet events Note I12 of the Notes on the Group Financial Statements and Additional disclosures
Future developments of the business of the Company Group Chief Executive's report 14
Rules governing changes to the articles of association Corporate governance 117
Significant agreements impacted by a change of control Additional disclosures 121
The Directors’ Remuneration Report has been prepared by the Remuneration Committee (the ‘Committee’) and has been approved by the Board. Shareholders will be given the opportunity to approve the report at the Annual General Meeting on 19 May 2011.
The primary objective of our remuneration policy remains unchanged: to attract high calibre executives, to encourage them to contribute to the success of Prudential by achieving our business plans, generating returns for shareholders, and to reward them based on the Company’s success and their individual contributions. The policy supports the Company’s strategy and goals, and aims to comply with good practice in the markets where the Group operates.
In considering the 2010 Annual Bonus payments for executive directors, the Committee sought to balance the appropriate level of reward for the achievement of results which exceeded all performance targets with the costs associated with the proposed AIA transaction. After careful consideration, the Committee used its discretion to take the cost of the AIA transaction (which is excluded from the Group’s reported IFRS and EEV operating profit) fully into account in determining the results to be used for bonus purposes. Bonuses for all executive directors were therefore based on the results after all AIA transaction costs. For 2010, it was agreed with the Group Chief Executive that the portion of his bonus (50%) which would normally be payable immediately in cash would be converted into shares and deferred for three years.
Proactive risk management Effectively managing risk across our operations is essential if the growth which we create is to provide shareholders with lasting value. The Remuneration Committee is therefore mindful of the need for pay to reward the delivery of strong business results without encouraging inappropriate risk taking. Given the longevity of the products which we offer, an important aspect of our remuneration policy has always been a focus on sustainable long-term performance. We continue to achieve this in a number of ways including an emphasis on cash generation and preservation of capital in our annual bonus plan performance measures, the deferral of a proportion of the annual bonus into Company shares for three years and substantial shareholding guidelines for executives.
The Committee has and will continue to review the implications of emerging guidelines and regulations on our remuneration governance structures, policies and practices, and will implement any changes where appropriate.
The Remuneration Committee The Committee is responsible for: • Determining the remuneration policy for the Chairman and the executive directors of the Company; • Monitoring the remuneration of a defined leadership population and for individuals earning over £1 million per annum.
Each Business Unit also has its own remuneration committee, with similar terms of reference, to ensure effective remuneration governance in all our businesses.
In 2010, the Committee met seven times. Some key activities during the year included: • Reviewing the requirements of the latest governance guidelines and consultations, including the FSA’s revised Remuneration Code; • Considering how remuneration arrangements should support the implementation of the Solvency II framework, due to be implemented in 2012; • Considering the package to be offered to Mike Wells upon his appointment as President and CEO of Jackson and the payments to be made to Clark Manning as he transitioned out of this role; • Agreeing the package to be offered to John Foley as he joined the Board as Group Chief Risk Officer; • Establishing the performance measures and targets for the annual and long-term incentive plans, and considering the appropriate level of payments to be made; and
• Reward arrangements are designed to minimise regulatory and operational risk.
Base salary Along with benefits, provides the guaranteed element of remuneration necessary to recruit and retain the best people to lead our business.
Based on scope of role and market position, as well as the individual’s contribution and experience, taking into account total remuneration, market movement of salaries in comparator organisations and salary increases for employees generally.
The structure of plans is determined by market practice and local legislation. Executive directors are eligible to participate in all-employee plans on the same basis as other employees in their location.
Executive directors are also entitled to participate in M&G investment products on the same terms as other employees.
Pension and long-term savings Provide opportunities for executive directors to save for an income in retirement in a cost efficient manner.
It is the Company’s policy to provide efficient pension and other long-term savings vehicles to allow executive directors to save for their retirement. The Company’s policy for all external appointments since June 2003 has been to provide a pension contribution as a fixed percentage of salary.
Shareholding guidelines Encourage executives to build an interest in the Company’s shares and support alignment with shareholder interests.
The Group Chief Executive and Chief Executive of M&G are required to hold shares equal to 200 per cent of base salary. A policy of 100 per cent of base salary applies for other executive director roles. Executive directors have five years in which to build their shareholding.
On a policy basis, the package for 2011 will offer the following proportions of fixed and variable and short- and long-term reward for our executive directors: Performance
In this chart, ‘Good’ performance results in the payment of plan annual bonuses and threshold vesting of long-term incentive awards while ‘Superior’ performance generates maximum payment of annual bonuses and maximum vesting of long-term incentive awards.
These performance measures have been selected because they recognise the importance of generating profit while maintaining cash flow and capital coverage. Please see the Financial Statements and the Risk and Capital Management section of the Business Review for full definitions of these measures. Michael McLintock’s annual bonus plan incorporated Business Unit measures including growth in third party funds, M&G investment performance and M&G IFRS operating profit (excluding PruCap). The performance measures for Jackson are IFRS pre-tax operating income (with the target and result adjusted to reflect the revised presentation of operating profit) and EEV new business profit.
A portion of the annual bonus for each executive director is based on the achievement of personal objectives. These include the executive’s contribution to Group strategy as a member of the Board and specific goals related to their functional and/or business unit role (for instance, project measures relating to the implementation of the Solvency II requirement). In addition, all employees are required to comply with the regulatory, governance and risk management practices and policies as these relate to their role and business area. Specifically, all business units must act within the Group’s risk appetite.
Executive directors’ bonus opportunities, the weighting of performance measures for 2010 and the proportion of annual bonuses deferred are set out opposite.
Despite continued turbulence in the financial markets, Prudential’s leadership team has remained focused on delivery. The Group achieved exceptional results against all of the financial annual incentive plan measures leading to attainment of bonus payments at close to the maximum level, even after offsetting all of the costs associated with the proposed AIA transaction. This was reflected in the value delivered to shareholders by the rising share price and the dividends paid. On the basis of this performance, the Committee approved the 2010 bonus payments set out on page 138.
During the first quarter of 2010, the vesting of deferred share awards for UK employees (including UK-based executive directors) was accelerated in light of the impending changes to UK taxation. Some of the shares were sold to meet the resulting tax liabilities while the remaining shares were immediately converted into restricted share awards. These will vest on the same terms and timescale as the original deferred share awards. The Committee believed that it was appropriate for executive directors to pay tax on these awards at the rate in force when the annual bonuses were originally calculated and when the deferral was made. Please see the Other Share Awards table on page 144 for details.
Details of the awards made under these plans in 2010 can be found on pages 142 and 143.
Group Performance Share Plan (GPSP) All executive directors participate in the GPSP. This plan delivers shares to participants subject to Prudential’s Total Shareholder Return (TSR) performance over a three year period.
Rob Devey 160% 40% of total bonus 20% 60% 20% Clark Manning c 320% (note 1) 30% of total bonus 25% 65% 10% Michael McLintock (note 2) 50% of bonus above £500,000 10% 75% 15% Nic Nicandrou 160% 40% of total bonus 80% – 20% Barry Stowe 160% 40% of total bonus 20% 60% 20% Tidjane Thiam 180% 50% of total bonus3 80% – 20%
Jackson senior management bonus pool based on the performance of Jackson. 2 Michael McLintock’s annual bonus and long-term incentive opportunities are based on M&G’s performance both in absolute terms and relative to its peers. His bonus and long-term incentive opportunities are determined by an assessment of market competitive rewards for median and superior performance. In line with practice in the asset management sector, there is no specified maximum incentive award. Michael’s total remuneration is subject to an overriding cap which requires that his total remuneration must not be greater than 3 per cent of M&G’s annual IFRS profit.
For any GPSP award to vest, the Committee must be satisfied that the quality of the Company’s underlying financial performance justifies the level of reward delivered at the end of the performance period. To ensure close alignment with our shareholders’ long-term interests, participants receive the value of reinvested dividends over the performance period for those shares that ultimately vest. If performance measures are not achieved in full, the unvested portion of any award lapses and is not available for retesting.
Prudential TSR v FTSE 100 and peer group total returns index %
TSR represents the growth in the value of a share plus the value of dividends paid, assuming that the dividends are reinvested in the Company’s shares on the ex-divided date.
Vesting occurs between these performance levels on a straight line basis.
In the past, BUPP awards for executives in the UK business unit were also assessed on the basis of SCV growth. During 2009, the Committee decided that future BUPP awards for the UK Business Unit would be based on the same relative TSR measure applied to GPSP awards. As a result, 2010 awards made under the UK BUPP reflect those TSR conditions applied to 2010 GPSP awards.
On his appointment in November 2009, Rob Devey was granted a 2009 BUPP award with a performance measure of growth in Shareholder Capital Value (SCV) of Prudential UK. Shortly after his appointment the strategy for the UK business was redefined and the Committee concluded that the TSR performance target used for the GPSP in 2009 provided a better alignment with the cash-generative priorities of the UK Business Unit than SCV, and therefore the target was amended accordingly.
Profit growth The value of phantom shares vesting will be adjusted by a profit measure as follows: • No adjustment will be made if profits in the third year of the performance period are at least equal to the average annual profit generated over the performance period; • A loss or zero profit will result in the value of the award being reduced to zero, irrespective of fund performance; • Between these points, the value of phantom shares will be reduced on a straight line basis from no reduction to the complete elimination of the value of the award.
The number of phantom shares awarded depends on the performance of M&G and Michael McLintock’s individual contribution in the financial year prior to the year in which the award is made. Therefore, the number of phantom shares to be awarded in 2011 relates to M&G’s performance in 2010 and is calculated on the basis of its expected value. The expected value of the award is determined by a third party (PricewaterhouseCoopers LLP). Based on 2010 performance, an award of 1,318,148 phantom shares with an anticipated value of £1,779,500 will be made in 2011. The ultimate value of the award will be determined with reference to the profit and investment performance of M&G over the three years from 1 January 2011 to 31 December 2013. Based on 2009 performance, an award of 987,179 phantom shares with an anticipated value of £1,925,000 was made in 2010.
Save As You Earn (SAYE) schemes UK-based executive directors are eligible to participate in the Prudential HM Revenue and Customs (HMRC) approved UK SAYE scheme and Barry Stowe is invited to participate in the equivalent International SAYE scheme. These schemes allow employees to save towards the exercise of options over Prudential plc shares with the option price set at the beginning of the savings period at a discount of up to 20 per cent of the market price.
Share Incentive Plan (SIP) UK-based executive directors are also eligible to participate in the Company’s HMRC approved Share Incentive Plan (SIP). This allows all UK based employees to purchase Prudential plc shares up to a value of £125 per month from their gross salary (partnership shares). For every four partnership shares bought, an additional matching share is awarded which is purchased by Prudential on the open market. Dividend shares accumulate while the employee participates in the plan. Partnership shares may be withdrawn from the scheme at any time. If the employee withdraws from the plan within five years, the matching shares are forfeited.
Michael McLintock participates in a contributory defined benefit scheme that provides a target pension of two thirds of final pensionable earnings on retirement at age 60 for an employee with 30 years or more potential service, for which his contribution is four per cent of basic salary. Michael McLintock participates on the same basis as other employees who joined M&G at the same date. Benefits under the plan are subject to a notional scheme earnings cap (set at £123,600 for both the 2009/10 and 2010/11 tax years) which replicates the HMRC earnings cap in force before A-Day (6 April 2006). Michael McLintock is entitled to supplements based on his salary above the notional earnings cap and he is provided with life assurance cover of four times salary.
Chairman’s letter of appointment and benefits Harvey McGrath was appointed as a non-executive director on 1 September 2008 and became Chairman on 1 January 2009. He is paid an annual fee of £500,000 which is fixed for three years. A contractual notice period of 12 months by either party applies. Harvey McGrath is provided with life assurance cover of four times his annual fees and the use of a car and driver. No pension allowance is paid and he is not a member of any Group pension scheme. Harvey McGrath is also entitled to medical insurance coverage but he has not taken up this benefit.
Policy on external appointments Subject to the Group Chief Executive’s or Chairman’s approval, executive directors are able to accept external appointments as non-executive directors of other organisations. Any fees paid may be retained by the executive director. During 2010, Michael McLintock earned £42,500 as a trustee of another organisation. Other directors served as non-executive directors on the boards of educational and cultural organisations without receiving a fee for such services.
Non-executive directors are usually appointed for an initial three year term commencing with their election by shareholders at the first Annual General Meeting following their appointment. They are typically expected to serve for two terms of three years from their initial election by shareholders although the Board may invite them to serve for an additional period. Their appointment is subject to continued performance and re-election by shareholders.
Non-executive directors’ fees Non-executive directors are not eligible to participate in annual bonus plans, long-term incentive plans or pension arrangements. Their fees are determined by the Board and reflect their individual responsibilities, including chairmanship and membership of any committees. The Board reviews fees annually and the last fees changes were effective on 1 July 2008.
The structure of the annual fees paid is detailed below: Basic fee 66,500 Audit Committee Chairman – additional fee 50,000 Audit Committee member – additional fee 20,000 Remuneration Committee Chairman
Notes 1 Or date on which the Committee was established, if later. 2 The Risk Committee was established on 9 November 2010.
Please see the table on page 138 for details of the fees received by individual non-executive directors during 2010.
Keki Dadiseth 1 April 2005 AGM 2005 6 months AGM 2011 Howard Davies 15 October 2010 AGM 2011 6 months AGM 2014 Michael Garrett 1 September 2004 AGM 2005 6 months AGM 2011 Ann Godbehere 2 August 2007 AGM 2008 6 months AGM 2011 Bridget Macaskill 1 September 2003 AGM 2004 6 months AGM 2013 Paul Manduca 15 October 2010 AGM 2011 6 months AGM 2014 Kathleen O’Donovan 8 May 2003 AGM 2004 6 months AGM 2013 James Ross2 6 May 2004 AGM 2005 6 months AGM 2011 Lord Turnbull 18 May 2006 AGM 2006 6 months AGM 2012
Executive directors should have a substantial shareholding to maximise the community of interest between them and other shareholders. This may be built up over a period of five years. Shares earned and deferred under the annual incentive plan are included in calculating the executive director’s shareholding. Until the guideline is met, at least half of the shares released from the long-term incentive plans (after tax) should be retained by the executive director.
Directors’ shareholdings The interests of directors in ordinary shares of the Company are set out opposite. This includes shares acquired under the Share Incentive Plan (detailed in the table on page 147), deferred annual incentive awards and interests in shares awarded on appointment (detailed in the ‘Other Share Awards’ table on page 144). All interests are beneficial.
Notes 1 Howard Davies and Paul Manduca were appointed on 2 John Foley became an executive director on 1 January 2011. 3 Part of Clark Manning’s interest in shares is made up of 30,935
ADRs (representing 61,870 ordinary shares). Clark ceased to be an executive director on 31 December 2011.
4 Nic Nicandrou’s interest in shares on 8 March 2011 includes his monthly purchases made under the SIP plan in January, February and March 2011.
5 Part of Barry Stowe’s interest in shares is made up of 48,847 ADRs (representing 97,694 ordinary shares. 8,513.73 of these ADRs are held within an investment account which secures premium financing for a life assurance policy).
TOTAL NON-EXECUTIVE DIRECTORS 700 700 649 * Benefits include (where provided) the use of a car and driver, medical insurance, security arrangements and expatriate benefits. † Pension supplements that are paid in cash and contributions to the LTSP and/or the ARBS are included in the table. The policy on pensions is described in the section on ‘Pensions and long-term savings’ on page 134. ‡ Value of anticipated long-term incentive plan releases is the total of cash paid plus, for shares released, the value of the released shares based on the share price at 31 December 2010. All executive directors participate in long-term incentive plans and the details of share releases from awards with a performance period ending 31 December 2010 are provided in the footnote to the tables on share awards on pages 142 to 146. Executive directors’ participation in all-employee plans are detailed on page 147.
2 Clark Manning's bonus figure excludes a contribution of $12,250 from a profit sharing plan which has been made into a 401(k) retirement plan. This is included in the table on pension contributions on page 147.
4 Barry Stowe's benefits relate primarily to his expatriate status, including costs of £153,384 for housing, £47,639 for children’s education and £42,509 for home leave.
5 Keki Dadiseth was paid allowances totalling £10,083 in respect of his accommodation expenses in London whilst on the Company's business as is the usual practice for directors who are not resident in the UK.
Summary of remuneration provided for 2010 This chart summarises the remuneration received by executive directors in 2010. This includes actual base salary paid during the year, total annual bonus awards for 2010 performance (including deferrals into shares) and the long-term incentives plan releases in respect of awards made in 2008. Since Rob Devey and Nic Nicandrou joined the Group in 2009, they did not have long-term incentive awards for 2008.
Base salary 2010 cash bonus 2010 deferred bonus Value of 2008 long-term incentive plan release
TOTAL NON-EXECUTIVE DIRECTORS 649 649 770 * Benefits include (where provided) the use of a car and driver, medical insurance, security arrangements and expatriate benefits. † Pension supplements that are paid in cash are included in the table. The policy on pensions is described in the section on ‘Pensions and long-term savings’ on page 134. ‡ Value of anticipated long-term incentive plan releases is the total of cash paid plus, for shares released, the value of the released shares based on the share price at 31 December 2009. All executive directors participate in long-term incentive plans and the details of share releases from awards with a performance period ending 31 December 2009 are provided in the tables on share awards on pages 142 to 146. Executive directors’ participation in all-employee plans are detailed on page 147.
Notes 1 As part of Rob Devey's appointment terms, it was agreed that any bonus award would be assessed as if he had been in employment for the whole of 2009. Rob Devey elected not to receive his cash supplement for pension purposes in full during 2009. In March 2010, the Company made a request to the Trustees of the Alternative Retirement Benefit Scheme to accept a contribution equivalent to this supplement. This amount is included in the remuneration table for 2010.
4 Barry Stowe's benefits relate primarily to his expatriate status, including costs of £148,051 for housing, £41,528 for children’s education and £32,607 for home leave.
5 Tidjane Thiam's 2009 annual bonus outcome was determined taking into account the period of time he was remunerated as Chief Financial Officer and Group Chief Executive.
Payments in 2010 to past and newly appointed executive directors Mark Tucker The 2008 Directors’ Remuneration Report provided details of the remuneration arrangements which applied to Mark Tucker following his resignation as Group Chief Executive. These arrangements were implemented as intended by the Committee. In January 2010, a final payment in respect of salary and benefits (£307,938) was made to Mark Tucker relating to restrictions on his employment. Outstanding deferred share awards were released during the year in accordance with the scheme rules.
Nick Prettejohn The 2009 Directors’ Remuneration Report provided details of the remuneration arrangements that would apply to Nick Prettejohn after he resigned from the position of Chief Executive UK & Europe. These arrangements were implemented as intended by the Committee. As a result, Nick Prettejohn received: • A final payment in respect of salary and benefits (£303,375) in January 2010, relating to restrictions on his employment up to 1 April 2010; • Prorated 2009 annual bonus (9/12ths) based on his length of service during the year and paid in cash in March 2010 (£505,271); • Outstanding deferred share awards were released in accordance with the scheme rules; and
No other amounts were paid during the financial year or were receivable by directors (or past directors) in connection with leaving the organisation. No amounts were paid to Mike Wells, John Foley or to any other executive directors in connection with their appointment.
3 At 31 December 2010 Prudential’s TSR performance was 133.7 per cent of the TSR performance of the index. Hence it is anticipated that awards granted under this scheme in 2008 will vest in full. This will result in 182,262 shares vesting for Clark Manning; 48,330 shares for Michael McLintock; 107,988 shares for Barry Stowe and 314,147 shares for Tidjane Thiam plus, in each case, scrip dividend equivalents on these vested shares.
Jackson 3.9% Nil Nil 5 Scrip dividend equivalents will be released on these vested shares.
Note Michael McLintock’s 2007 long-term incentive awards were under the M&G Chief Executive Long-Term Incentive Plan. The phantom share price at the beginning of the performance period was £1. The change in the phantom share price equals the change in M&G profit, modified up or down by the investment performance of M&G over the performance period. For the 2007 award of 1,333,000 units, the option price at the end of the performance period was £1.68. This resulted in a payment of £2,239,440 to Michael McLintock. For the 2008 award of 1,141,176 units, the option price at the end of the performance period was £2.62. This will result in a payment of £2,989,881 to Michael McLintock.
Restricted share award based on deferred 2009 annual incentive award(note 2) 2010 45,375 953 18,642 27,686 31 Dec 12 18,642 12 Mar 10 552.5 552.5
Deferred 2007 annual incentive award 2008 17,825 635 18,460 31 Dec 10 635
Deferred 2009 annual incentive award 2010 59,792 2,078 61,870 31 Dec 12 552.5
Deferred 2009 annual incentive award 2010 36,386 1,264 37,650 31 Dec 12 552.5
Restricted share award based on deferred 2008 annual incentive award(note 1) 2010 65,046 2,321 67,367 31 Dec 11 552.5
The figures in the table are represented in terms of Prudential shares.
Note 1 Nic Nicandrou participated in the Share Incentive Plan (SIP) for the first time in 2010. The table above provides information about shares purchased under the SIP together with Matching Shares (awarded on a 1:4 basis) and dividend shares. The total number of shares will only be released if Nic Nicandrou remains in employment for five years.
Directors’ pensions and life assurance The Company’s pension policy is set out on page 134. Details of directors’ pension entitlements under HMRC approved defined benefit schemes and supplements in the form of contributions to pension arrangements paid by the Company are set out in the following table.
Additional pension earned during year ended 31 December 2010 Amount of (B – A) less contributions
Notes 1 As required by the Companies Act remuneration regulations. 2 As required by Stock Exchange Listing rules. 3 The transfer value equivalent has been calculated in accordance with the M&G Group Pension Scheme’s transfer basis. 4 Supplements in the form of cash are included in the table on page 138.
Market price at 31 December 2010 (p) Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of periodStart End
TIDJANE THIAM 25 Apr 08 1 Jun 11 30 Nov 11 1,705 – – – – – 1,705 551 668
Notes 1 No gains were made by directors in 2010 on the exercise of share options (2009: £0). 2 No price was paid for the award of any option. 3 The highest and lowest share prices during 2010 were 681 pence and 487.5 pence respectively.
Total contributions to directors’ pension arrangements in 2010, including cash supplements for pension purposes, were £624,921 (2009: £876,466) of which £44,608 (2009: £298,586) related to money purchase schemes.
Share based payments and other cash payments 2 4 6 * Pension contributions payable in the period were less than £150,000 in each period.
FINANCIAL STATEMENTS AND EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION 150 Summary of statutory and supplementary IFRS
The following tables and referenced disclosure notes show the results reported in the statutory financial statements on pages 153 to 352 and 375 to 386 and supplementary EEV basis results on pages 389 to 433. This page does not form part of the statutory financial statements.
Operating profit based on longer-term investment returns 182 £1,941m £1,564m Short-term fluctuations in investment returns 182 £(123)m £(123)m Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes IFRS note B1 182 £(10)m £(74)m Costs of terminated AIA transaction 182 £(377)m – Gain on dilution of holding in PruHealth 182 £30m – Loss on sale and results for Taiwan agency business 182 – £(621)m
Profit from continuing operations before tax attributable to shareholders (including actual investment returns) IFRS note B1 182 £1,461m £746m Operating earnings per share after related tax and noncontrolling interests (excluding exceptional tax credit) IFRS note B2 186 62.0p 47.5p Operating earnings per share after related tax and noncontrolling interests (including exceptional tax credit) IFRS note B2 186 68.3p 47.5p
Dividends per share in respect of the reporting period (including interim dividend of 6.61p (2009: 6.29p) and final dividend of 17.24p (2009: second interim dividend of 13.56p) declared after the end of the reporting period) IFRS note B3 188 23.85p 19.85p
Operating earnings per share after related tax and noncontrolling interests (excluding exceptional tax credit) EEV note 12 417 106.9p 88.8p
Operating earnings per share after related tax and non-controlling interests (including exceptional tax credit) EEV note 12 417 113.2p 88.8p Basic earnings per share EEV earnings per share 392 101.9p 49.8p Shareholders’ equity, excluding non-controlling interests EEV statement of financial position 394 £18,207m £15,273m
Note i The Company has amended the presentation of IFRS operating profit for its US operations to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in the supplementary analysis of profit in short-term fluctuations in investment returns. The 2009 amounts have been amended accordingly.
SUMMARY OF STATUTORY AND SUPPLEMENTARY IFRS AND EEV BASIS RESULTS YEAR ENDED 31 DECEMBER 2010
Operating profit based on longer-term investment returns Consistent with previous reporting practice, the Group provides supplementary analysis of IFRS profit before tax attributable to shareholders and analyses its EEV basis results, so as to distinguish operating profit based on longer-term investment returns from other elements of total profit. On both the IFRS and EEV bases, operating earnings per share are calculated using operating profits based on longer-term investment returns, after related tax and non-controlling interests. These profits exclude short-term fluctuations in investment returns and the shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes. The operating profit based on longer-term investment returns for 2010 also excludes the costs associated with the terminated AIA transaction and the gain arising upon the dilution of the Group’s holding in PruHealth. Consistent with prior presentation, the effect of disposal and the results of the Taiwan agency business are shown separately from operating profit based on longer-term investment returns for 2009. In 2010 the Company amended its presentation of IFRS operating profit for its US insurance operations to exclude the net equity hedge accounting effect of negative £367 million (2009: negative £159 million) relating principally to its variable annuity business and reclassified it in the supplementary analysis of profit as a short-term fluctuation in investment returns. Prior year comparatives have been amended accordingly. This is a presentational change and it has no impact on the IFRS profit before tax or the IFRS shareholders’ funds. The change also has no impact on the Group’s EEV financial statements. Under the EEV basis, where additional profit and loss effects arise, operating profit based on longer-term investment returns also excludes the mark to market value movements on core borrowings and the effect of changes in economic assumptions. After adjusting for related tax and non-controlling interests, the amounts excluded from operating profit based on longer-term investment returns are included in the calculation of basic earnings per share.
Section A: Background and accounting policies 160 A1: Nature of operations 160 A2: Basis of preparation 160 A3: Critical accounting policies, estimates and judgements 166 A4: Significant accounting policies 179 A5: New accounting pronouncements
Section D: Life assurance businesses 208 D1: Group overview 215 D2: UK insurance operations 234 D3: US insurance operations 254 D4: Asian insurance operations 262 D5: Capital position statement for life assurance businesses
Section H: Other information on statement of financial position items 308 H1: Intangible assets attributable to shareholders 312 H2: Intangible assets attributable to with-profits funds 313 H3: Reinsurers’ share of insurance contract liabilities 314 H4: Tax assets and liabilities 315 H5: Accrued investment income and other debtors 316 H6: Property, plant and equipment 317 H7: Investment properties 318 H8: Investments in associates and joint ventures 320 H9: Properties held for sale 321 H10: Cash and cash equivalents 321 H11: Shareholders’ equity: Share capital, share premium and reserves 323 H12: Insurance contract liabilities and unallocated surplus of with-profits funds 324 H13: Borrowings 326 H14: Provisions and contingencies 330 H15: Other liabilities
Parent company financial statements 375 Balance sheet of the parent company 376 Notes on the parent company financial statements
Statement of directors’ responsibilities and independent auditor’s report 387 Statement of directors’ responsibilities in respect of the Annual Report and the financial statements 388 Independent auditor’s report to the members of Prudential plc
European Embedded Value (EEV) basis supplementary information 389 Operating profit based on longer-term investment returns 391 Summarised consolidated income statement – EEV basis 392 Earnings per share – EEV basis 392 Dividends per share 392 Movement in shareholders’ equity (excluding non-controlling interests) – EEV basis 394 Net asset value per share 394 Summary statement of financial position – EEV basis 395 Notes on the EEV basis supplementary information 434 Statement of directors’ responsibilities in respect of the European Embedded Value (EEV) basis supplementary information 435 Independent auditor’s report to Prudential plc on the European Embedded Value (EEV) basis supplementary information
Benefits and claims (40,608) (39,901) Outward reinsurers’ share of benefits and claims 335 265 Movement in unallocated surplus of with-profits funds H12 (245) (1,559)
Benefits and claims and movements in unallocated surplus of with-profits funds, net of reinsurance (40,518) (41,195)
Profit before tax attributable to shareholders B1 1,461 746 Tax charge F5 (636) (873) Less: tax attributable to policyholders’ returns 611 818 Tax charge attributable to shareholders’ returns‡ F5 (25) (55)
Profit from continuing operations after tax 1,436 691 Discontinued operations (net of tax)† I10 – (14)
Attributable to: Equity holders of the Company 1,431 676 Non-controlling interests 5 1
EARNINGS PER SHARE (IN PENCE) Basic: Based on profit from continuing operations attributable to the equity holders of the Company B2 56.7p 27.6p Based on loss from discontinued operations attributable to the equity holders of the Company B2 – (0.6)p
Diluted: Based on profit from continuing operations attributable to the equity holders of the Company B2 56.6p 27.6p Based on loss from discontinued operations attributable to the equity holders of the Company B2 – (0.6)p * This measure is the formal profit before tax measure under IFRS but is not the result attributable to shareholders and is stated after £377 million of pre-tax costs of the terminated AIA transaction. See note B1.
†The 2009 charge of £14 million which was net of £nil tax, reflected completion adjustments for a previously disposed business. ‡ The 2010 tax charge attributable to shareholders’ return includes an exceptional tax credit of £158 million which primarily relates to the impact of a settlement agreed with the UK tax authorities.
Other comprehensive income: Exchange movements on foreign operations and net investment hedges: Exchange movements arising during the year B4 217 (206) Related tax 34 11
SHARE CAPITAL AND SHARE PREMIUM New share capital subscribed (including shares issued in lieu of cash dividends) H11 – 75 – – – 75 – 75 Reserve movements in respect of shares issued in lieu of cash dividends H11 – (62) 62 – – – – –
Total comprehensive income for the year – – 676 (195) 1,043 1,524 1 1,525
SHARE CAPITAL AND SHARE PREMIUM New share capital subscribed (including shares issued in lieu of cash dividends) H11 2 139 – – – 141 – 141 Reserve movements in respect of shares issued in lieu of cash dividends H11 – (136) 136 – – – – –
Net increase (decrease) in equity 2 3 360 (195) 1,043 1,213 (23) 1,190
Intangible assets attributable to shareholders: Deferred acquisition costs and other intangible assets H1(b) 4,609 4,049
Investments of long-term business and other operations: Investment properties H7 11,247 10,905 Investments accounted for using the equity method H8 71 6 Financial investments*: G1 Loans 9,261 8,754 Equity securities and portfolio holdings in unit trusts 86,635 69,354 Debt securities 116,352 101,751 Other investments 5,779 5,132
Properties held for sale H9 257 3 Cash and cash equivalents G1,H10 6,631 5,307
Core structural borrowings of shareholder-financed operations: Subordinated debt H13 2,718 2,691
Other borrowings: Operational borrowings attributable to shareholder-financed operations G1,H13 3,004 2,751 Borrowings attributable to with-profits funds G1,H13 1,522 1,284 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements G1 4,199 3,482 Net asset value attributable to unit holders of consolidated unit trusts and similar funds G1 3,372 3,809 Deferred tax liabilities H4 4,224 3,872 Current tax liabilities H4 831 1,215 Accruals and deferred income 707 594 Other creditors G1 2,321 1,612
The consolidated financial statements on pages 153 to 352 were approved by the Board of directors on 8 March 2011 and signed on its behalf.
HARVEY MCGRATH TIDJANE THIAM NIC NICANDROU CHAIRMAN GROUP CHIEF EXECUTIVE CHIEF FINANCIAL OFFICER
Notes (i) This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. (ii) The acquisition of United Overseas Bank Life Assurance Limited (UOB) resulted in an outflow of cash for investing activities of £133 million.
The remaining outflow of £12 million relates to the PAC with-profits fund purchase of Meterserve. (iii) Cash movements in respect of equity capital exclude scrip dividends.
The consolidated financial statements consolidate the Group and the Group’s interest in associates and jointly-controlled entities. The parent company financial statements present information about the Company as a separate entity and not about the Group. The consolidated financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU) as required by EU law (IAS regulation EC 1606/2032). The Company has elected to prepare its parent company financial statements in accordance with UK Generally Accepted Accounting Practice (GAAP). These are presented on pages 375 to 386. A reconciliation to IFRS has also been provided for shareholders’ equity and profit for the year of the parent company. The Group has applied all IFRS standards and interpretations adopted by the EU that are effective for financial years commencing on or before 1 January 2010. Further details on the new accounting pronouncements and accounting policy changes are provided in note A5. The Group has applied the same accounting policies in preparing the 2010 results as for 2009 except for the adoption of IFRS 3 (Revised) on business combinations and associated amendments to other standards. However, as discussed in note A4 (d)(ii), the measurement of the segment measure of IFRS operating profit based on longer-term investment returns for US insurance operations has altered. Comparative segment results have been adjusted accordingly.
The results included in the financial statements for 2010 and 2009 reflect this basis. Unallocated surplus represents the excess of assets over policyholder liabilities for the Group’s with-profits funds that have yet to be appropriated between policyholders and shareholders. The Group has opted to account for unallocated surplus wholly as a liability with no allocation to equity. This treatment reflects the fact that shareholders’ participation in the cost of bonuses arises only on distribution. Shareholder profits on with-profits business reflect one-ninth of the cost of declared bonus. For Jackson, applying the MSB as applicable to overseas operations which permits the application of local GAAP in some circumstances, the assets and liabilities of insurance contracts are accounted for under insurance accounting prescribed by US GAAP. For the assets and liabilities of insurance contracts of Asian operations, the local GAAP is applied with adjustments, where necessary, to comply with UK GAAP. For the operations in Taiwan, Vietnam and Japan, countries where local GAAP is not appropriate in the context of the previously applied MSB, accounting for insurance contracts is based on US GAAP. For participating business the liabilities include provisions for the policyholders’ interest in realised investment gains and other surpluses that, where appropriate, and in particular for Vietnam, have yet to be declared as bonuses. The usage of these bases of accounting has varying effects on the way in which product options and guarantees are measured. For UK regulated with-profits funds, options and guarantees are valued on a market consistent basis. The basis is described in note D2(g)(ii). For other operations a market consistent basis is not applied under the accounting basis described in note A4. Details of the guarantees, basis of setting assumptions, and sensitivity to altered assumptions are described in notes D3 and D4.
Taking account of these considerations the Group has decided that, except for certain minor categories of derivatives, it is not appropriate to seek to achieve hedge accounting under IAS 39. As a result of this decision the total income statement results are more volatile as the movements in the value of Jackson’s derivatives are reflected within it. Under IAS 39, unless carried at amortised cost (subject to impairment provisions where appropriate) under the held-to-maturity category, debt securities are also carried at fair value. The Group has chosen not to classify any financial assets as held-to-maturity. Debt securities of Jackson are designated as available-for-sale with value movements, unless impaired, being recorded as movements within other comprehensive income. Impairments are recorded in the income statement.
• The financial condition and prospects of the issuer or other observable conditions that indicate the investment may be impaired. If a loss event that will have a detrimental effect on cash flows is identified an impairment loss in the income statement is recognised. The loss recognised is determined as the difference between the book cost and the fair value of the relevant impaired securities. This loss comprises the effect of the expected loss of contractual cash flows and any additional market-price-driven temporary reductions in values.