GwIA now operates a rolling six-month approach to audit planning. The Committee approved the plan for the second half of 2019. It also considered and approved the Internal Audit Plan, resource and budget for the first half of 2020.
Effectiveness of Internal Audit The Committee is responsible for approval of the GwIA charter, audit plan, resources, and for monitoring the effectiveness of the function. In addition, the Committee approved the new, post-demerger target operating model for internal audit in Prudential plc.
During 2019, GwIA also continued to develop its practices with enhancements to methodology, approaches to audits and the use of data analytics. In preparation for the demerger, the function successfully completed the creation of two appropriately skilled and sized, independent internal audit functions, where previously there had been a single function.
— Matters requiring prior approval from those parties with delegated authority.
The Committee reviewed the results of the Group Governance Manual annual content review and the results of the year end certification of compliance with Group Governance Manual requirements for the year ended 31 December 2019.
Full biographies of the Committee members including experience and professional qualifications, are set out on pages 94 to 96.
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— Company Secretary — Group Chief Internal Auditor — Chief risk officers of the main subsidiaries and members of the Group Risk Leadership Team are invited to attend each meeting as appropriate.
The Committee received regular reports from the Group Chief Risk and Compliance Officer (CRCO), who is advised by the Group Executive Risk Committee (GERC). I provided feedback on the performance of the CRCO to the Group Chief Executive Officer as part of the annual evaluation of the Board and its members. The Committee also received regular reports from the Group-wide Internal Audit function and updates from other areas of the business as needed.
Transformation risk, including the demerger, and other in-depth reviews During 2019, a key area of consideration for the Committee was the risk associated with the Group’s portfolio of key strategic change initiatives, which included the demerger of M&G plc, as well as, notably, those related to IFRS 17, the Group’s digital transformation, LIBOR transition and further implementation of the Aladdin system. During the year, the Committee considered updates, risk opinions, guidance and assurance on this critical change activity. Ongoing reviews were also performed on the financial and non-financial risks to the execution of the demerger. The Committee considered and recommended for approval the risk disclosures included in the Prudential plc shareholder Circular published on 25 September 2019.
In-depth reviews were performed in existing and emerging high risk areas including the interest rate risk profile and asset liability management of our Asia business; Prudential’s artificial intelligence and digital transformation initiatives and their associated risks, ethical considerations and governance; together with the reinsurance arrangements in place across the Group.
Global Systemically Important Insurer: Liquidity Risk Management Plan, Systemic Risk Management Plan and Recovery Plan l
In August 2018, it was announced that the Hong Kong IA would become the Group-wide supervisor for Prudential plc after the demerger of M&G plc.
Key updates on the discussions with the Hong Kong IA on the regulatory requirements applying immediately following the demerger, and those anticipated in the longer term, were provided to the Committee as part of the CRCO’s regular reporting.
Business Plan As part of its role in overseeing and advising the Board on future risk exposures and strategic risks, the Committee reviewed Group Risk’s assessment of the Business Plan, which included key financial risks (including those associated with the macroeconomic environment, such as prolonged low interest rates) and non-financial risks (including those from the regulatory environment) to the post-demerger Group. The analysis reviewed included sensitivity assessments of the impact of various plausible scenarios.
The ORSA is a key ongoing process for identifying, assessing, controlling, monitoring and reporting the risks to which the Group is exposed and assessing capital adequacy over the business planning horizon.
Stress and scenario testing is a key component of the Group’s ORSA and the risk assessment of the Business Plan, as described above, as well as its Recovery Planning and Reverse Stress Testing (RST).
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In 2019, the Group remained subject to G-SII measures due to its prior designation in 2016. The Committee therefore considered, and recommended for approval by the Board, updated deliverables associated with this designation. These included the Systemic Risk Management Plan, Recovery Plan and Liquidity Risk Management Plan. Many of the G-SII measures have been adopted into the Insurance Core Principles and ComFrame – the common framework for the supervision of Internationally Active Insurance Groups (IAIGs). As Prudential is expected to satisfy the criteria of an IAIG these measures are anticipated to continue for the Group.
Ongoing analyses of the key financial risks to the execution of the demerger under various stress scenarios were provided to the Committee, as well as progress updates on operational separation activity.
In particular, the Committee considered and approved changes to the following items, which were all updated to appropriately reflect the position of the demerged Group: risk assessment of the Group Business Plan; risk framework and policies; risk appetite and associated limits; ORSA report; and G-SII deliverables.
In 2019, these focused on risks embedded within the assets and liabilities and the portfolio of products in our US and Asia businesses and the Group’s digital transformation initiatives.
During 2019, updates were provided to the Committee on progress made in the implementation of the operating model for information security and privacy.
The Committee received regular updates on Group-wide information security and privacy metrics providing a view of security posture across the businesses.
Specifically in the key area of data privacy, the Committee received an update in February on progress on residual Group-wide activity to ensure compliance with General Data Protection Regulations. In November, the Committee was provided with an update on Group-wide privacy activities and emerging privacy regulations in the US and Asia.
Jackson oversight The Committee received regular updates on the Jackson business throughout 2019 including in relation to the financial risk oversight of the business, which remains a key area of focus. Updates were provided to each Committee meeting on the effectiveness of the hedging programme and the impact of market movements on Jackson’s estimated Risk Based Capital ratio.
The Committee received regular reporting on key compliance risks and mitigation activity throughout the year. It also reviewed and approved updates to regulatory compliance risk-related policies including changes to the regulatory communications policy in advance of the transfer of Group-wide supervisory responsibilities from the PRA to the Hong Kong IA in October.
The Committee received updates from Group-wide Internal Audit throughout the year relating to effectiveness of risk management and internal control systems and other matters relating to its responsibilities.
Financial reporting The Directors have a duty to report to shareholders on the performance and financial position of the Group and are responsible for preparing the financial statements on pages 196 to 318 and the supplementary information on pages 330 to 357. It is the responsibility of the auditor to form independent opinions, based on its audit of the financial statements and its audit of the EEV basis supplementary information, and to report its opinions to the Company’s shareholders and to the Company. Its opinions are given on pages 320 to 329 and page 359.
Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the financial affairs of the Company and of the Group. The criteria applied in the preparation of the financial statements are set out in the Statement of Directors’ responsibilities on pages 319 and 358. Company law also requires the Board to approve the Strategic report. In addition, the UK Code requires the Directors’ statement to state that they consider the Annual Report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
The Directors are further required to confirm that the Strategic 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 319.
Going concern In accordance with the guidance issued by the Financial Reporting Council in September 2014, ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’, after making sufficient enquiries the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for a period of at least 12 months from the date that the financial statements are approved. In support of this expectation, the Company’s business activities, together with the factors likely to affect its future development, successful performance and position in the current economic climate, are set out in the Strategic report on pages 10 to 87. The risks facing the Group’s capital and liquidity positions are referred to in the Strategic report on pages 51 to 71 with further information on capital (including sensitivities) set out in note I(i) ‘Group Capital Position’ within Additional unaudited financial information. In addition, the Directors considered the macro-economic environment and geopolitical risks in the markets which the Group operates, as well as the impact of the outbreak of coronavirus (‘COVID-19’). The Group’s IFRS financial statements include the details of the Group’s borrowings in note C6 on pages 280 and 281, the market risks and liquidity analysis associated with the Group’s assets and liabilities can be found in note C3.4(a) on pages 256 to 258, policyholder liability maturity profile by business units in notes C4.2(iii) and C4.3(ii) on pages 266 and 267 respectively, cash flow details in the consolidated statement of cash flows and provisions and contingencies in notes C11 and D3. The Directors therefore consider it appropriate to continue to adopt the going concern basis of accounting in preparing the financial statements for the year ended 31 December 2019.
Qualifying third-party indemnity provisions are also available for the benefit of the Directors of the Company and certain other such persons, including certain directors of other companies within the Group. These indemnities were in force for 2019 and remain so. Prior to the demerger of M&G plc qualifying pension scheme indemnity provisions were in place for the benefit of certain pension trustee directors within the Group.
Securities dealing and inside information Prudential has adopted securities dealing rules relating to transactions by Directors on terms no less exacting than required by Appendix 10 to the HK Listing Rules and by relevant UK regulations. Having made specific enquiry of all Directors, the Directors have complied with these rules throughout the period.
Customers The five largest customers of the Group constituted in aggregate less than 30 per cent of its total revenue from sales for each of 2019 and 2018.
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Financial instruments Strategic report and Additional information 51 to 71 and 388 to 390
Dear shareholder, I am pleased to present the Remuneration Committee’s report for the year to 31 December 2019.
By way of preface, I would like to share the context for the key decisions the Committee took during 2019, in particular, the decisions we took in connection with the demerger, how we rewarded performance achieved during the year, the remuneration arrangements for those stepping down from the Board and the decisions relating to remuneration arrangements in 2020 and the new Directors’ remuneration policy. In line with our approach to shareholder engagement and given the above, I corresponded with and met the majority of our major shareholders, as well as organisations that represent and advise shareholders during late 2019 and early 2020. I am pleased to say that we have had the benefit of substantive feedback from 41 per cent of our shareholder register and that the majority of shareholders and advisory bodies who provided input were content with our proposals and commended the manner in which we conducted the consultation process. On behalf of the Committee, I would like to thank the shareholders and advisory bodies for their engagement to date and look forward to continuing this open dialogue into the future.
Further, I am delighted to welcome Amy Yip, who joined the Committee in September 2019.
These principles were the basis for the decisions taken by the Committee, including the treatment of outstanding share awards which was set out in the Shareholder Circular published on 25 September 2019 and voted upon and approved by shareholders at the October 2019 General Meeting. This treatment, together with adjustments made to the targets of in-flight Prudential Long Term Incentive Plan (PLTIP) awards as a result of the demerger, are detailed in ‘Remuneration decisions taken in relation to the demerger’ section of this report.
In August 2019, Mr Turner relocated to Hong Kong to support our dialogue with the Hong Kong Insurance Authority (Hong Kong IA), our Group-wide supervisor from the date of the demerger. The Company supported Mr Turner’s relocation and, in order to recognise the expansion of his role and his development since joining the Board, he received an uplift in salary of 9 per cent and an increased bonus opportunity from 160 per cent of base salary to 175 per cent from the date of his move. No changes were made to Mr Turner’s long-term incentive award level or to Mr FitzPatrick’s 2019 remuneration arrangements.
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Rewarding 2019 performance Prudential’s executive remuneration arrangements reward the achievement of Group, business, functional and personal targets, provided that this performance is delivered within the Company’s risk framework and appetites, and that the conduct expectations of Prudential, our regulators and other stakeholders are met.
As set out in the ‘Strategic report’ section earlier in this Annual report, the Group delivered results which demonstrate operating earnings growth and the benefits of the diverse portfolio in Asia. These results have been achieved in parallel with the demerger of the M&G plc business. The table below illustrates achievement of KPIs: Performance measures Group performance ($m)4 2018-2019 growth5 2019 bonus achievement6
Prudential’s primary measure of profitability and a key driver of shareholder value.
Group free surplus generation accounted for 30 per cent of Group financial bonus targets.
Cash flows across the Group reflect our aim of achieving a balance between ensuring sufficient net remittances from business units to cover the dividend (after corporate costs) and the use of cash for reinvestment in profitable opportunities.
EEV new business profit A measure of the future profitability of the new business sold during the year and indicates the profitable growth of the Group. 4,4054,707 5,177 -6% reflecting economic conditions, US product mix changes and Hong Kong protest disruption. PCA ex Hong Kong +29%
EEV new business profit accounted for 15 per cent of Group financial bonus targets.
3 Operating free surplus generated before US modelling changes. During 2019, as part of the implementation of the NAIC’s changes to the US statutory reserve and capital framework enhancements were made to the model used to determine the cost of hedging for US statutory reporting which have been incorporated into the EEV model, resulting in a fall in operating free surplus of $(903) million from a lower expected transfer to net worth. After allowing for this, operating free surplus generated is $2,861 million, down 16 per cent on a constant and actual exchange rate basis.
2019 Adjusted operating profit was 20 per cent higher than prior year on a constant exchange rate basis reflecting the performance outlined in the business performance review, which delivered a result approaching the Board approved stretch targets.
Group EEV new business profit was 6 per cent lower than prior year on a constant exchange rate basis. This reflected the significant reduction in interest rates during the year and the challenging trading environment in Hong Kong in the second half of the year as a direct result of political unrest in the region. Excluding Hong Kong, Asia new business profit was 29 per cent above prior year and given the strong performance of NBP absent the Hong Kong protests, the Committee considered it appropriate to adjust the EEV new business profit target to reflect the reduction in Hong Kong sales driven by the protests, which was considered to be outside of management’s control. Allowing for this adjustment, Group EEV new business profit was between target and stretch target.
All of our business units achieved target remittance levels, which were 3 per cent higher than 2018 for our continuing operations, enabling us to maintain significant cash stock at the centre, after dividends, corporate costs, demerger effects and investing in profitable opportunities within the business units. The business unit remittances contributed to Group cashflow, which approached the stretch target level.
The Group achieved these results while maintaining appropriate levels of capital and while operating within the Group’s risk framework and appetites. The Committee believes that the bonuses it awarded to Executive Directors for 2019 (between 93 per cent and 96 per cent of executives’ maximum AIP opportunities) appropriately reflect this performance.
Performance in 2019 has continued to deliver on the momentum achieved in recent years. The Group delivered total adjusted operating profits of $19,021 million in the 2017, 2018 and 2019 financial years. Based on this strong cumulative adjusted operating profit performance over the period and performance against our sustainability scorecard, the Committee determined that between 61.75 and 68.75 per cent of the Prudential Long Term Incentive Plan (PLTIP) awards made to Executive Directors in 2017 would vest (depending on the business unit). These awards will be released to participants from April 2020. The portion of the awards related to Prudential’s total shareholder return (TSR) lapsed as TSR performance was ranked below median of the peer group.
The total 2019 remuneration or ‘single figure’ for the Group Chief Executive, Mike Wells, is 11.25 per cent lower than his total restated 2018 ‘single figure’, notwithstanding his exceptional leadership and personal performance. This chiefly reflects his housing support ending in November 2018 and the impact of the lower value of the 2017 PLTIP vesting compared to the 2016 PLTIP vesting due to lower share price growth over the performance period.
Reviewing the Directors’ remuneration policy Ahead of the renewal of the Directors’ remuneration policy at the AGM in 2020, the Committee carefully considered and debated a range of potential remuneration models, taking into account the demerger of the M&G plc business from the Group, the views of our shareholders, the UK Corporate Governance Code and the broader regulatory and competitive environment. The Committee concluded that the current model continues to connect remuneration with the achievement of the Group’s ambitious goals to build long-term shareholder value by continuing to focus on achieving sustainable, profitable growth and retaining a resilient balance sheet, with a disciplined approach to active capital allocation. In addition, the Committee decided to retain the key features of the current remuneration model since it is appropriate for a growth company, is well understood and drives the right behaviour and outcomes. On this basis, the Committee decided to retain the current remuneration model while making a number of improvements to ensure that it continues to be aligned with the Group’s remuneration principles, business priorities and evolving stakeholder expectations.
The proposed new Directors’ remuneration policy set out on pages 174 to 191 has been designed to: 1 Align reward with the strategic priorities and capital framework of the post-demerger business The Committee intends to align the Prudential Long Term Incentive Plan (PLTIP) performance conditions with the strategic priorities of the post-demerger business by introducing a new a return on equity performance measure, operating return on average shareholders’ funds, for the 2020 PLTIP awards, incentivising the efficient use of capital as well as shareholder returns. Using this metric alongside our established metrics of Total Shareholder Return (TSR) and a sustainability scorecard will ensure that the full value of long-term incentive awards is attained only where capital is effectively deployed in a way which creates shareholder returns superior to those delivered by peers while conduct and diversity expectations are met.
The proposed new Directors’ remuneration policy seeks to reintroduce a financial element to the bonus for the Group Chief Risk and Compliance Officer from 2020, effectively reverting to a similar approach used until 2015. Specifically, it is proposed that the 2020 bonus for this role is based on 40 per cent functional objectives, 40 per cent Group financial measures and 20 per cent personal measures. This is in line with the current draft of the Hong Kong IA’s guideline on the remuneration of key persons in control functions and reflects our view that it is important that this role and other control function staff continue to demonstrate long-term commercial sensitivity and are rewarded in a way which allows the Company to recruit the very best talent to these roles.
Following the Hong Kong IA assuming the role of our Group-wide supervisor, Prudential ceased to be subject to Solvency II capital requirements. It is therefore proposed that the Solvency II underpin under the AIP and the Solvency II capital metric within the PLTIP sustainability scorecard are replaced with measures aligned to the Hong Kong IA capital framework.
2 Strengthen the community of interest between executives and other shareholders The Committee has decided to build on the share ownership guidelines which apply to executives during their employment by introducing a formal, post-employment shareholding guideline. This guideline will require Executive Directors to hold their full in-employment share ownership guideline for a period of two years from the date of their retirement from the Board (or their actual shareholding from this date if lower).
It is imperative that incentive payments are based on performance which is well-founded and sustainable. The Committee currently has the scope to reduce, cancel or recover these payments and intends to build on these discretionary powers in the 2020 policy by formalising and extending the circumstances which might trigger the use of malus and clawback to include non-financial issues and personal conduct which falls short of the Company’s expectations.
3 Foster alignment between the remuneration of executives and the wider workforce The Committee is aware that the greater alignment of reward arrangements of executives with those of the wider workforce is an area of attention for many investors, particularly in light of the expectations set out in the UK Corporate Governance Code. The Committee intends to reflect this focus in a number of ways, including those set out below.
Mike Wells Group Chief Executive £1,149,000 £513,000 £2,197,000 £2,860,000 £6,719,000 £7,571,000
Notes 1 Revised 2018 single figure, in line with the regulations, reflecting the actual value of 2018 LTIP releases and additional dividends paid as set out in the notes to the 2018 single figure table. 2 Mr Turner relocated to Hong Kong on 1 August 2019 and has since been paid in HK dollars. Exchange rate fluctuations will therefore impact the reported sterling value. Actual amounts paid and the rates of exchange used to convert into a single currency are set out in the Notes to the ‘single figure’ table in the Annual report of remuneration.
Aligning 2020 pay to performance The Committee awarded salary increases to the Executive Directors for 2020 of 2 per cent, which was below the lower end of the range of salary increase budgets for the wider workforce.
As discussed in the ‘Annual statement from the Chairman of the Remuneration Committee’ and in the ‘Statement of implementation in 2020’ sections, in the interests of recognising Mr FitzPatrick’s expanded role and responsibilities and to support the promotion of stewardship and long-term focus, the Committee intends to increase the value of 2020 long-term incentive award to be made to the Group Chief Financial Officer and Chief Operating Officer within the limit provided for by the current Directors’ remuneration policy.
Remuneration packages for 2020, effective 1 January 2020, are set out in detail in the Annual report on remuneration and are summarised below: Executive Director Role
James Turner2 Group Chief Risk and Compliance Officer HK$7,480,000 175% 40% 250% Mike Wells Group Chief Executive £1,172,000 200% 40% 400%
Current key elements of remuneration 20 25 Key features of operation of the current policy1 Outline of proposed changes for 2020
Offer new, externally recruited and promoted Executive Directors pension benefits aligned with the UK workforce at 13% of salary and move incumbent Executive Directors towards a contribution rate of 20% of salary by 14 May 2021
Solvency II underpin replaced with a Pillar I capital underpin aligned with the Hong Kong IA3 capital framework
— Total Shareholder Return (TSR) relative to international insurance peers; and
Awards are subject to a three-year vesting period from date of grant and a further two-year holding period from the end of the vesting period
No other changes to the sustainability scorecard metrics and the 20% vesting for threshold performance to be formalised
Formalise and extend the circumstances which might trigger the use of malus and clawback to include non-financial issues and personal conduct which falls short of the Company’s expectations
Significant in-employment share ownership guidelines for all Executive Directors as follows: — 400% of salary for the Group Chief Executive
Executives have five years from the later of the date of their appointment, or the date of an increase these guidelines, to build this level of ownership
2 The Group Chief Risk and Compliance Officer’s maximum bonus opportunity was increased during 2019 to recognise his expanded role and development since joining the Board.
The principal responsibilities of the Committee during 2019 were: — Determining and recommending to the Board for approval, the framework and policy for the remuneration of the Chairman, Executive Directors and other members of the Group Executive Committee; — Approving the design of performance-related pay schemes operated for the Executive Directors and other members of the Group Executive Committee, and determining the targets and individual payouts under such schemes; — Reviewing the design and development of all share plans requiring approval by the Board and/or the Company’s shareholders; — Approving the share ownership guidelines for the Chairman and Executive Directors and other members of the Group Executive Committee, and monitoring compliance; — Reviewing and approving individual packages for the Executive Directors and other members of the Group Executive Committee, and the fees of the Chairman and the Non-executive Directors of the Group’s material subsidiaries; — Reviewing and approving packages to be offered to newly recruited Executive Directors and other members of the Group Executive Committee; — Reviewing and approving the structure and quantum of any severance package for Executive Directors and other members of the Group Executive Committee to ensure they are fair and do not reward failure; — Ensuring the process for establishing remuneration policy is transparent and consistent with the Group’s risk framework and appetites, encouraging strong risk management and solvency management practices; — Reviewing the workforce remuneration practices and related policies across the Group when setting the remuneration policy for Executive Directors, as well as the alignment of incentives and awards with culture; — Monitoring the remuneration and risk management implications of remuneration of senior executives across the Group, other selected roles and those with an opportunity to earn in excess of £1 million in a particular year; and
In 2019, the Committee met eight times. Key activities at each meeting are shown in the table below: Meeting Key activities
Early March 2019 Approve the 2018 Directors’ remuneration report; consider 2018 bonus awards for Executive Directors; consider vesting of long-term incentive awards with a performance period ending on 31 December 2018; approve 2019 long-term incentive awards and performance measures; note an update on regulation affecting remuneration; note an update on the Board’s review of the Committee’s effectiveness; and review the appointment of the Committee’s independent adviser.
Mid-March 2019 Confirm 2018 annual bonuses and the vesting of long-term incentive awards with a performance period ending on 31 December 2018, in light of audited financial results; approve the revised total shareholder return (TSR) peer group for the 2019 PLTIP awards; and approve Executive Directors’ personal objectives for the 2019 annual incentive plan.
July 2019 Review an initial draft of the 2020 Directors’ remuneration policy; approve the Solvency II Remuneration Policy Statement for the 2018 performance year; and discuss the methodology for converting the dividend-in-specie (the ‘demerger dividend’) into additional Prudential plc shares for Prudential plc share plan participants.
Additionally, a number of resolutions in writing were approved by the Committee between these meetings relating to the remuneration sections of the Circular and Demerger Agreement, the draft 2020 Directors’ remuneration policy, and matters relating to the demerger.
In line with our approach to shareholder engagement and given the additional context of the demerger and the review of the Directors’ remuneration policy, the Chairman of the Committee held meetings with shareholders and the principle advisory bodies (the Investment Association, Institutional Shareholder Services and Glass Lewis) to discuss decisions taken in respect of the demerger; the principle changes proposed as part of the renewal of the Directors’ remuneration policy; and Executive Directors’ remuneration arrangements for 2020. We have had the benefit of substantive feedback from 41 per cent of our shareholder register and are pleased that the majority of shareholders and advisory bodies who provided input were content with our proposals and commended the manner in which we conducted the consultation process.
During 2019, Deloitte LLP was the independent adviser to the Committee. Deloitte was appointed by the Committee in 2011 following a competitive tender process. As part of this process, the Committee considered the services that Deloitte provided to Prudential and its competitors, as well as other potential conflicts of interest. Deloitte is a member of the Remuneration Consultants’ Group and voluntarily operates under their code of conduct when providing advice on executive remuneration in the UK. Deloitte regularly meets with the Chair of the Committee without management present. The Committee is comfortable that the Deloitte engagement partner and team providing remuneration advice to the Committee do not have connections with Prudential that may impair their independence and objectivity. The total fees paid to Deloitte for the provision of independent advice to the Committee in 2019 were £73,250 charged on a time and materials basis. During 2019, Deloitte gave Prudential management advice on remuneration, including advice on the new Directors’ remuneration policy, as well as providing guidance on the demerger, the deployment of Workday, capital optimisation, digital and technology, taxation, internal audit, real estate, global mobility and other financial, risk and regulatory matters. Remuneration advice is provided by an entirely separate team within Deloitte. As set out in the table above, the Committee reviewed Deloitte’s appointment in March 2019 and considered Deloitte to be independent. The Committee will conduct a competitive tender process for this appointment during 2020.
The effectiveness of the Committee was reviewed as part of the annual Board evaluation, which confirmed that the Committee continued to operate effectively during the year and no major areas requiring improvement or action points were highlighted. During the year, the Company has acted in a manner that is consistent with the appropriate provisions of the UK Corporate Governance Code regarding Directors’ remuneration.
Remuneration decisions taken in relation to the demerger The M&G plc business demerged from the Group with effect from 21 October 2019. As disclosed last year, the Committee established a set of principles to underpin decisions on remuneration relating to the demerger, including: — Executives should not be advantaged or disadvantaged by the demerger; the value of outstanding awards and their key terms (release dates, holding periods, malus and clawback provisions) should be unaffected; — Where performance conditions need to be revised, the new conditions should be no more or less stretching than those originally attached to the awards; and
— Where the Committee has applied discretion, this will be disclosed clearly.
Adjusting in-flight PLTIP performance conditions The Committee decided that the financial targets for the 2017 and in-flight 2018 PLTIP awards should be adjusted to exclude the M&G plc components of the Plan on which the targets were based, with effect from the date of the demerger, in order to appropriately account for the period they are not part of the Group. The revised targets will be disclosed in the remuneration report for the year in which the awards vest. The 2019 PLTIP award targets exclude M&G plc performance from the point of demerger.
As set out in the announcement of Prudential’s 2019 half-year results, post-demerger, the Hong Kong IA assumed the role of the Group-wide supervisor for Prudential plc from the PRA. Prudential therefore ceased to be subject to Solvency II capital requirements and will no longer calculate or disclose a Solvency II position after 30 June 2019. The Group will ultimately be subject to the Group-wide Supervisory framework, which is currently under development by the Hong Kong IA. In the meantime, Prudential will apply and report the Hong Kong IA’s local capital summation method (LCSM), which was calculated and reported for the first time at Half Year 2019. LCSM was not calculated in previous Plans and therefore is not available to replace the Solvency II operating capital generation. As an alternative, operating free surplus generation (OFSG) will replace Solvency II operating capital generation for in-flight awards. While there are methodological differences between those two measures, OFSG is the closest proxy to LCSM that is available in the Board approved 2018 – 2020 and 2019 – 2021 Plans and OFSG and LCSM are both prepared using the same underlying local statutory capital positions.
The Committee considered a number of approaches for converting the demerger dividend into additional Prudential plc shares/ ADRs. It decided to determine the number of additional Prudential plc shares/ADRs to be awarded as a dividend by dividing the average value of M&G plc shares during the five trading days immediately after the demerger by the Prudential plc share price/ADR price over a five-day period starting on the date on which the Prudential plc share and ADR prices reflected the removal of the M&G business. For share plan participants with ADR denominated awards, the sterling to US dollar conversion was based on an exchange rate averaged over five trading days immediately following the demerger.
† The total value of the bonus, comprising both the 60 per cent delivered in cash and 40 per cent bonus deferred into Prudential plc shares or ADRs for three years. The deferred part of the bonus is subject to malus and clawback in accordance with the malus and clawback policies but no further conditions.
‡ In line with the regulations, the estimated value of the 2019 PLTIP releases for all Executive Directors excluding John Foley has been calculated based on the average share/ADR price over the last three months of 2019 (£13.85/US$36.37) and includes the accumulated dividends delivered in the form of shares/ADRs. The Committee’s approach to determining the level of vesting for this award is set out in the ‘Remuneration in respect of performance periods ending in 2019’ section. The number of Prudential plc shares/ADRs under award have been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’. The actual value of vesting PLTIP awards, based on the share price on the date awards are released, will be shown in the 2020 report. In line with the requirements under the UK Companies (Miscellaneous Reporting) Regulations 2018, it is estimated that 6.2 per cent of the value of the 2019 LTIP releases is attributable to share price growth over the vesting period as awards were granted using a share/ADR price of £16.75/US$42.12 for all Executive Directors other than Mark FitzPatrick and £18.005 for Mark FitzPatrick in 2017. The Committee concluded that no discretion will be applied in determining the remuneration resulting from the 2019 LTIP releases as a result of share price appreciation.
§ 2019 pension benefits include cash supplements for pension purposes and contributions into defined contribution schemes as outlined on page 151. ¶ The value of Mr Falcon’s buy-out award has been included in its entirety as it was granted without performance conditions during his period of Board service. The award vests in line with the original vesting schedule with the final tranche vesting 30 days commencing on the date of release of Prudential plc’s results for 2020.
While salary and certain monthly paid benefits reflect what was actually delivered during the period, other benefits, bonus, LTIP releases and pension benefits are pro-rata for the period. The 2019 LTIP release for Mr Nic Nicandrou has been pro-rated for 28.5 months of the LTIP’s 36 month performance period to reflect his time as an Executive Director during the LTIP’s performance period.
Director of Prudential plc during 2019 Mr Foley was eligible to receive a 2019 bonus award of up to 180% of salary. Since transferring to M&G plc it was agreed with M&G plc that his 2019 bonus will be assessed and determined by the M&G plc Remuneration Committee and will be paid by M&G plc. No 2019 bonus award has been paid to Mr Foley by Prudential plc.
Mr Foley’s 2017-2019 PLTIP award has been exchanged for an equivalent award over M&G plc shares. Under the terms of the Demerger Agreement this replacement award should be of an equivalent value; with the same release schedule; subject to equivalent malus and clawback provisions and subject to performance conditions which are relevant to M&G plc and which are no more or less onerous than those which originally applied.
§ 2018 pension benefits include cash supplements for pension purposes and contributions into Defined Contribution (DC) schemes. ¶ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of Statutory Instrument 2013 No. 1981 - The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. ^ Total 2018 remuneration has been converted to US dollars using the exchange rate of 1 GBP to USD 1.3352.
Notes 1 To facilitate Nic Nicandrou’s relocation to Hong Kong, Nic’s benefits include £267,000 to cover accommodation. 2 Anne Richards stepped down from the Board on 10 August 2018. The remuneration above was paid in respect of her service as an Executive Director. 3 Barry Stowe retired from the Board on 31 December 2018. 4 James Turner was appointed to the Board on 1 March 2018. 5 To facilitate his appointment as Group Chief Executive and move to the UK in 2015, Mike Wells’s benefits include £311,000 to cover mortgage interest, which ceased effective 30 November 2018. 6 Barry Stowe and Nic Nicandrou are paid in their local currency and exchange rate fluctuations will therefore impact the reported sterling value.
John Foley2 Chief Executive, M&GPrudential — FTSE 40 — International insurance companies
James Turner3 Group Chief Risk and Compliance Officer — FTSE 40 — FTSE 50 insurers
As a result, Executive Directors received the following salary increases: Executive Director 2018 salary 2019 salary
Michael Falcon Pension supplement of 25 per cent of salary, part of which is paid as a contribution to an approved US retirement plan.
Nic Nicandrou Pension supplement in lieu of pension of 25 per cent of salary and a HK$18,000 employer payment to the Hong Kong Mandatory Provident Fund.
James Turner For the period 1 January 2019 to 31 July 2019: pension contribution to defined contribution plan and/or pension supplement in lieu of pension of 25 per cent of salary.
For the period 1 August 2019 to 31 December 2019: eight times salary
Annual bonus outcomes for 2019 Target setting For the financial AIP metrics which comprise 80 per cent of the bonus opportunity for all Executive Directors apart from the Group Chief Risk and Compliance Officer, the performance ranges are set by the Committee prior to, or at the beginning of, the performance period. These ranges are based on the annual business plans approved by the Board and reflect the ambitions of the Group and business units, in the context of anticipated market conditions. The financial element of Executive Directors’ 2019 bonuses was determined by the achievement of four Group measures, namely adjusted operating profit, operating free surplus generation, EEV new business profit and cash flow, which are aligned to the Group’s growth and cash generation focus. The financial element of 2019 bonus award for the Chief Executive, Prudential Corporation Asia is similarly determined by business unit measures in addition to Group measures. The targets set assumed 10 months of M&G plc performance up to the date of demerger.
AIP payments are subject to meeting minimum capital thresholds which are aligned to the Group and business unit risk framework and appetites (as adjusted for any Group Risk Committee and/or business unit risk committees approved counter-cyclical buffers).
Performance assessment The Committee determines the overall value of the bonus, taking account of the inputs described above and any other factors which it considers relevant. The table below illustrates the weighting of performance measures for 2019 and the level of achievement under the AIP: Executive Director
Director of Prudential plc during 2019, Mr Foley was eligible to receive a 2019 bonus award of up to 180 per cent of salary. Since transferring to M&G plc it was agreed with M&G plc that his 2019 bonus will be assessed and determined by the M&G plc Remuneration Committee and will be paid by M&G plc. No 2019 bonus award has been paid to Mr Foley by Prudential plc.
The Committee considered a report from the Group Chief Risk and Compliance Officer which had been approved by the Group Risk Committee. This report confirmed that the 2019 results were achieved within the Group’s and business units’ risk framework and appetite. The Group Chief Risk and Compliance Officer also considered the effectiveness of risk management and internal controls, and specific actions taken to mitigate risks, particularly where these may be at the expense of profits or sales. The report also confirmed that the Group met minimum capital thresholds which were aligned to the Group and business unit risk framework and appetites. The Committee took into account this advice when determining AIP outcomes for Executive Directors.
The Committee had regard to the achievement against the performance measures and the Group Chief Risk and Compliance Officer’s report and decided to apply a discretionary adjustment to the arithmetic outcome under the financial element of the 2019 bonus as discussed above. The impact of this adjustment was an increase in bonus awards of approximately 9.8 per cent for the Group Chief Executive and Group Chief Financial Officer and Chief Operating Officer. The Board believes that, due to the commercial sensitivity of the business unit targets, disclosing further details of these targets may damage the competitive position of the Group.
— Specific goals related to the function for which they are responsible and progress on major projects including the demerger.
For 2019, the Committee decided that, in addition to personal objectives for which they were each accountable, the Executive Directors should be given shared objectives relating to the demerger in light of the importance this had for the Group.
The below summarises performance against the shared and individual personal objectives for the current Executive Directors: Key shared 2019 objectives for Executive Directors Achievement
— Successfully managed the Group’s credit rating agency relationship through the demerger with unchanged ratings, maintaining a resilient balance sheet with a robust shareholder LCSM ratio over Group minimum capital requirement of 309 per cent at 31 December 2019 supported by our conservative approach to risk management and, in particular, to credit risk, through the transition from the PRA to the Hong Kong IA.
Proactively engage with the Hong Kong IA to embed the new risk and capital frameworks, supporting the Hong Kong IA in assuming the role of Group-wide supervisor.
— Significant personal and team engagement in ascertaining, embedding and activating the new risk and capital framework.
— Announced and executed on a clear allocation of future capital resources towards Asia. Made a decision to require Jackson to explore reinsurance and third-party financing for the execution of its future bolt on acquisitions above its internal capacity for capital generation; — Maintained a financial strength rating in the AA- range. This rating derives, in part, from the high level of financial flexibility that we have to issue debt and equity instruments; and
— Determined and communicated high and resilient RoE and cash generation from the Asian business model.
— Took day-to-day execution and management responsibility for the management of the demerger process, in particular designing and executing the process to achieve the required approvals of bond holders, shareholders and regulators.
Build and development of a new Group Treasury function and the material progression of IFRS 17 implementation in a way that aligns to the broader Group strategy and operating model.
— Recruited a new Group Treasurer and the established an effective Treasury team; — Integrated the Treasury team in the existing Group Finance structures; and
— Directed the implementation of IFRS 17, overseeing the design, resourcing of central functions and business unit specifications for consistent implementation into the Group’s accounting functions groupwide. Sponsored the team to select and manage mobilisation of global implementation partner and system vendors.
— Initiated significant operational and structural changes to align the newly formed Group-wide function more closely with the lead regulator and operational businesses in Asia and US; and
— Actively engaged with the Hong Kong IA and the Inaugural Regulatory College in October 2019, providing insight into the Prudential Group strategy, operations and risk and compliance frameworks to support the successful and complete transition of Group Regulator responsibilities by 21 October 2019.
Recognising Mr Turner’s very strong performance against both his individual and shared personal objectives during 2019, the Committee judged that 47 per cent of a maximum of 50 per cent attributable to personal objectives was appropriate.
Demonstrate personal leadership which effectively mobilises, secures and directs the team delivering the demerger of M&G plc from Prudential plc.
— Committed significant time and leadership resource to the extensive roadshow marketing of the demerger process; and
— Engaged employees through personal appearances and through the use of video and social media to support the demerger, communicating changes and addressing employees’ questions and concerns.
— Enhanced membership of the Environmental, Social and Governance (ESG) Executive Committee to increase business unit representation; — Created a roadmap for the implementation of the recommendations of the Task Force on Climate-Related Financial Disclosures; and
Functional performance The Group Chief Executive and the Chair of the Group Risk Committee undertakes the assessment of performance against functional objectives for the Group Chief Risk and Compliance Officer. 2019 achievement is summarised below: Summary of 2019 functional objectives Achievement
Establish strong Risk and Compliance capabilities across both in co-ordination with the M&G CRO and the M&G Compliance Director.
— Led discussions resulting in Board approval of revised Group Risk Appetite Framework, including incorporating revisions to regulatory capital requirements and a clear focus on non-financial risks; — Successfully revised the defined system of policies, risk appetite and limits to reflect the new regulatory environment of the Group from the point of demerger and led the embedding of this across the Group; — Provided key insights and analysis of emerging issues both in relation to the demerger and to broader business operations; — Ensured two strong Risk and Compliance functions within Prudential and M&G in advance of demerger by overseeing the reallocation of resources, including people and technology and the build and revision of key risk framework elements for both businesses in advance of demerger; and
— Delivered an extensive set of regulatory requirements under Solvency II until the point of demerger and under the Hong Kong IA regulatory letter from 21 October 2019 with increased frequency (for example to the Group’s Own Risk and Solvency Assessment) and significant changes (for example in terms of capital disclosures) as a result of the demerger.
In recognition of James Turner’s very strong performance against his functional objectives during 2019, the Committee judged that 46 per cent of a maximum of 50 per cent attributable to functional objectives was appropriate.
— Refreshed leadership of Jackson in distribution and commercial areas to position for the retirement markets. Enhanced quality and frequency of Group-wide co-ordination for example, with Group Strategy and IT outsourcing; — Delivered organic diversification by driving product and additional distribution initiatives to support Jackson’s intent to better balance the overall risk profile, and to provide a higher absolute level of capital thereby optimising Jackson’s capital deployment; — Determined and commenced programme from August 2019 of seeking inorganic opportunities with reinsurance and third-party financing, to deliver enhanced value to shareholders, taking into account the interests of customers, regulators, rating agencies and capital providers; — Expanded advisory distribution footprint with Morgan Stanley, DPL Financial Partners, TD Ameritrade and RetireOne; — Awarded ‘Contact Center World Class CX Certification’ and ‘Highest Customer Service for the Financial Industry’ awards by The Service Quality Measurement Group, Inc.; and
— Actively engaged with FinTech partners including Envestnet, MoneyGuidePro and eMoney.
Recognising Mr Falcon’s very strong performance against both his individual and shared personal objectives during the year to 16 May 2019, the Committee judged that 18 per cent of a maximum of 20 per cent attributable to personal objectives was appropriate.
Prioritise the success of the demerger of M&G plc from Prudential plc and support Group activities and synergy actions for the post-demerger environment.
Build, deploy and leverage digital enablers for customer proposition, operational efficiency and distribution and evolve the business operating model, improve ways of working and deepen capabilities of strategic importance.
40 per cent of all awards are deferred into shares for three years: Executive Director Role 2019 salary1
Notes 1 Salary paid in respect of services as an Executive Director. 2 Michael Falcon and Nic Nicandrou stepped down from the Board on 16 May 2019. The maximum bonus opportunities shown represent their annual opportunity as an Executive
Director. The 2019 bonus awards shown are in respect of their service as Executive Directors. 3 In addition to the AIP, Michael Falcon also participates in the Jackson bonus pool. The figure reflects both payments. 40 per cent of both the AIP and Jackson bonus award pool amounts is deferred. 4 The salary amounts shown above were actually delivered to Mr Turner for the portion of the year he was in the UK and the portion of the year he was in Hong Kong. Mr Turner’s maximum bonus opportunity increased from 160 per cent of salary to 175 per cent of salary on 1 August 2019 on his relocation to Hong Kong. The 2019 bonus award was pro-rated to reflect the portion of the year he was in the UK and the portion of the year he was in Hong Kong.
5 John Foley stepped down from the Board on 16 May 2019. He subsequently left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. As an Executive Director of Prudential plc during 2019, Mr Foley was eligible to receive a 2019 bonus award of up to 180 per cent of salary. Since transferring to M&G plc it was agreed with M&G plc that Mr Foley’s 2019 bonus will be assessed and determined by the M&G plc Remuneration Committee and will be paid by M&G plc. No 2019 bonus award has been paid to Mr Foley by Prudential plc.
Remuneration in respect of performance periods ending in 2019 Prudential Long Term Incentive Plan (PLTIP) Target setting Our long-term incentive plans have stretching performance conditions that are aligned to the strategic priorities of the Group. In 2017, all Executive Directors were granted awards under the PLTIP. In determining the financial targets the Committee had regard to the stretching nature of the three-year Business Plan for adjusted operating profit and capital positions as set by the Board. Further, in setting the conduct and diversity targets under the sustainability scorecard, the Committee considered input from Group-wide Internal Audit and the Group Chief Risk and Compliance Officer on conduct risk for the conduct measure and had regard to the Company’s commitment under the Women in Finance Charter for the diversity measure.
The weightings of the measures are detailed in the table below: Executive Director1
Notes 1 This table includes Executive Directors who served on the Board during 2019 with 2017 PLTIP awards. Nic Nicandrou and John Foley stepped down from the Board on 16 May 2019 and John Foley subsequently left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. Mr Foley’s 2017 PLTIP award was exchanged for an equivalent award of M&G plc shares. The M&G plc Remuneration Committee is responsible for determining, approving and settling the release of the 2017 long-term incentive award to Mr Foley.
2 Group TSR is measured on a ranked basis over three years relative to peers. 3 Adjusted operating profit is measured on a cumulative basis over three years. 4 Solvency II operating capital generation is cumulative three-year Solvency II Group operating capital generation. As set out in the ‘Remuneration decisions taken in relation to the demerger’ section, Solvency II operating capital generation was replaced with Group free surplus generation from 1 July 2019.
5 This is cumulative three-year ECap Group operating capital generation, less cost of capital (based on the capital position at the start of the performance period). 6 Conduct is assessed through appropriate management action, ensuring there are no significant conduct/culture/governance issues that could result in significant capital add-ons or material fines.
Company set when it signed the Women in Finance Charter, where 30 per cent of our Leadership Team should be female by the end of 2021. 8 Nic Nicandrou was granted this award when he was in the role of Chief Financial Officer. The performance measures attached to his PLTIP award did not change following his appointment to the role of Chief Executive, Prudential Corporation Asia in 2017. 9 James Turner was granted this award when he was in his previous role of Director of Group Finance.
Under the Group TSR measure used for 2017 PLTIP awards, 25 per cent of the award vests for TSR at the median of the peer group increasing to full vesting for performance within the upper quartile. TSR is measured on a local currency basis since this has the benefit of simplicity and directness of comparison. No adjustments to the peer group has been made for the demerger. The peer group for the 2017 awards is set out below: Aegon AIA AIG Allianz Aviva AXA Generali Legal & General Manulife MetLife Old Mutual Prudential Financial Standard Life Sun Life Financial Zurich Insurance Group
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 159
Group adjusted operating profit performance Under the adjusted operating profit measure, 25 per cent of the 2017 awards vest for meeting the threshold adjusted operating profit target set at the start of the performance period, increasing to full vesting for performance at or above the stretch level. The table below illustrates the cumulative performance achieved over 2017 to 2019 compared to the adjusted Group targets which exclude M&G plc from the point of demerger: Group 2017-19 adjusted cumulative targets cumulative achievement
Details of cumulative achievement under the capital measures have not been disclosed as the Committee considers that these are commercially sensitive and would put the Company at a disadvantage compared to its competitors. The Committee will keep this disclosure policy under review based on whether, in its view, disclosure would compromise the Company’s competitive position.
PLTIP vesting The Committee considered a report from the Group Chief Risk and Compliance Officer which had been approved by the Group Risk Committee. This report confirmed that the financial results were achieved within the Group’s and business units’ risk framework and appetite. On the basis of this report and the performance of the Group and its business units described above, the Committee decided not to apply a discretionary adjustment to the arithmetic vesting outcome under the 2017 PLTIP awards and determined the vesting of each Executive Director’s PLTIP awards as set out below: Executive Director
2 The number of shares vesting includes accrued dividends. 3 The vesting of Nic Nicandrou’s 2017 PLTIP award is in relation to his service as an Executive Director. 4 John Foley stepped down from the Board on 16 May 2019. He subsequently left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. Mr Foley’s 2017-2019 PLTIP award has been exchanged for an equivalent award over M&G plc shares. Under the terms of the Demerger Agreement this replacement award should be of an equivalent value; with the same release schedule; subject to equivalent malus and clawback provisions and subject to performance conditions which are relevant to M&G plc and which are no more or less onerous than those which originally applied. The vesting of Mr Foley’s replacement 2017-2019 long-term incentive award is due to be disclosed by M&G plc and described in the M&G plc Directors’ remuneration report as set out in the M&G plc 2019 Annual report. These details were not known by Prudential plc prior to the finalisation of this report.
Long-term incentives awarded in 2019 2019 share-based long-term incentive awards The table below shows the awards of conditional shares made to Executive Directors who served on the Board in 2019 under the PLTIP and the performance conditions attached to these awards. Further details on the performance measures were disclosed on page 164 of the 2018 Annual Report.
Michael Falcon1 Chairman and Chief Executive Officer, Jackson 78,856 $3,199,976 20%
Sustainability scorecard of strategic measures Between 1 January 2018 and 31 December 2019, the Group also made good progress towards meeting the measures under the sustainability scorecard used for the 2018 and 2019 PLTIP awards: — Capital measure – Group Solvency II operating capital generation/Group operating free surplus generation For the elapsed portions of the 2018 and 2019 PLTIP performance periods, the Group’s Solvency II operating capital generation and the Group’s operating free surplus generation was above the established Plan levels for both awards.
— Capital measure – Group ECap operating capital generation For the elapsed portions of the 2018 and 2019 PLTIP performance periods, the Group’s ECap operating capital generation was below the Plan levels established for the both awards.
— Conduct measure During 2018 and 2019, there were no significant conduct/culture/governance issues that resulted in significant capital add-ons or material fines. This assessment is unaffected by the FCA fine since the issues identified relate to a period which ended in 2017.
— Diversity measure As at 31 December 2019, 28 per cent of our Leadership Team was female. This represented strong progress against the threshold level that at least 27 per cent of the Leadership Team be female by the end of 2020 for the 2018 PLTIP award, and the threshold level that at least 28 per cent of the Leadership Team be female by the end of 2021 for the 2019 PLTIP award.
Pay comparisons Performance graph and table The chart below illustrates the TSR performance of Prudential, the FTSE 100 (as the Company has a premium listing on the London Stock Exchange) and the peer group of international insurers used to benchmark the Company’s performance for the purposes of the 2019 PLTIP awards. The chart illustrates the performance of a hypothetical investment of £100 in ordinary shares of Prudential plc over the 10-year period 1 January 2010 to 31 December 2019 compared to a similar investment in the FTSE 100 or an index of the Company’s peers. Total shareholder return is based on Returns Index data calculated on a daily share price growth plus re-invested dividends (as measured at the ex-dividend dates).
The information in the table below shows the total remuneration for the Group Chief Executive over the same period: Group Chief Executive T Thiam T Thiam T Thiam T Thiam T Thiam T Thiam1 M Wells M Wells M Wells M Wells M Wells
Percentage change in remuneration The table below sets out how the change in remuneration for the Group Chief Executive between 2018 and 2019 compared to a wider employee comparator group: Salary Benefits Bonus
The employee comparator group used for the purpose of this analysis is all UK employees. This is considered to be an appropriate comparator group as the Group Chief Executive’s remuneration arrangements are similar in structure to the majority of these employees and it reflects the economic environment where the Group Chief Executive is employed. For 2018 this group included employees in M&GPrudential and Group Head Office. For 2019, this group included UK-based Group Head Office employees only. Employees in M&G plc have been excluded from the calculation of average pay in 2019 as M&G plc demerged from Prudential plc on 21 October 2019. M&G plc employees are no longer within the Group and Prudential plc does not have any influence over or knowledge of pay decisions, including 2019 bonus awards, for employees within M&G plc. The salary increase includes uplifts made through the annual salary review, as well as any additional changes in the year; for example to reflect promotions or role changes. The decrease in benefits paid to the Group Chief Executive is driven by the cessation of the payment of mortgage interest on 30 November 2018. The decrease in benefits paid to all UK employees is due to the reduction in the cost to the Company of providing certain benefits. There has been no change to the level of taxable benefit coverage received by employees.
Year Method 25th percentile pay ratio Median pay ratio 75th percentile pay ratio
The Committee believes the median pay ratio is consistent with the pay, reward and progression policies for our UK-based Group Head Office employees. The base salary and total remuneration levels for the Group Chief Executive and the median representative employee are competitively positioned within the relevant markets and reflect the operation of our remuneration structures which are effective in appropriately incentivising staff, having regard to our risk framework, risk appetites and to rewarding the ‘how’ as well as the ‘what’ of performance.
Gender pay gap Our UK business, Prudential Services Limited, is the employing entity for almost all of our London Head Office staff including the UK-based Group Chief Executive and his direct reports. Prudential Services Limited has recently reported its 2019 UK gender pay gap data and details can be found on the Group’s website. There has been a further narrowing of most of the pay gap figures. Where men and women perform similar roles, they are paid equally but the gender pay gap reflects that men and women are doing different roles. We remain focused on closing the remaining pay gap as soon as possible and on ensuring that we attract applicants from all backgrounds and create opportunities for all our employees to develop and progress in order to ensure that we have the diverse talent needed by the Group to better reflecting the communities we serve. However, the gender pay gap demonstrated the demographic profile of the business (and the financial services sector more widely): there is a greater proportion of males in more senior and front-office roles and a greater proportion of females in more junior, support and back-office non-finance roles. All the Group’s businesses are continuing to work on initiatives to increase the proportion of women in senior management and operating roles as part of the Group’s strategic focus on diversity and inclusion as described in the diversity and inclusion statement on our website. This important priority is reflected in the Group’s reward structure through the diversity measure attached to PLTIP awards granted from 2017 onwards.
Consideration of workforce pay and approach to engagement During the year, the Committee considered workforce remuneration and related policies in the business units across the Group. Information presented to the Committee, by way of a dashboard, included how the Company’s incentive arrangements are aligned with the culture and informed the Committee’s decision-making on executive pay and policy. By way of example, business unit salary increase budgets are considered as part of the year-end review of Executive Director compensation and salary increases.
Chairman and Non-executive Director remuneration in 2019 Chairman’s fees The Chairman’s fee was reviewed by the Committee during 2019 and increased by 2 per cent to £765,000 with effect from 1 July 2019 in order to reflect inflation.
Basic fee 97,000 99,000 Additional fees: Audit Committee Chair 75,000 75,000 Audit Committee member 30,000 30,000 Remuneration Committee Chair 60,000 65,000 Remuneration Committee member 30,000 30,000 Risk Committee Chair 75,000 75,000 Risk Committee member 30,000 30,000 Nomination & Governance Committee Chair1 – – Nomination & Governance Committee member 12,500 15,000 Senior Independent Director 50,000 50,000 Workforce engagement role N/A 30,000
Note 1 There is no fee paid for the role of Nomination & Governance Committee Chair. If, in a particular year, the number of meetings is materially greater than usual, the Company may determine that the provision of additional fees is fair and reasonable.
Notes 1 In 2019 Kai Nargolwala also received an annual fee of £250,000 in respect of his non-executive chairmanship of Prudential Corporation Asia Limited. 2 Lord Turner stepped down from the Board on 16 May 2019. 3 Amy Yip joined the Board and the Remuneration Committee on 2 September 2019.
* There were no changes of Directors’ interests in ordinary shares between 31 December 2019 and 10 March 2020 with the exception of the UK based Executive Directors due to their participation in the monthly Share Incentive Plan (SIP). Mark FitzPatrick acquired a further 42 shares in the SIP and Mike Wells acquired a further 43 shares in the SIP during this period.
† Further information on share awards subject to performance conditions are detailed in the ‘Share-based long-term incentive awards’ section of the Supplementary information. ‡ Holding requirement of the Articles of Association (2,500 ordinary shares) must be obtained within one year of appointment to the Board. The increased guidelines for Executive
§ Based on the average closing price for the six months to 31 December 2019 £14.68.
Notes 1 Michael Falcon was appointed to the Board on 7 January 2019. He stepped down from the Board on 16 May 2019. Total interest in shares is shown at the date he stepped down from the Board. For the 16 May 2019 figure, Michael Falcon’s beneficial interest in shares is made up of 25,994 ADRs (representing 51,988 ordinary shares). 2 John Foley stepped down from the Board on 16 May 2019. Total interest in shares is shown at this date. 3 Nic Nicandrou stepped down from the Board on 16 May 2019. Total interest in shares is shown at this date. 4 For the 1 January 2019 figure, Mike Wells’s beneficial interest in shares is made up of 297,320 ADRs (representing 594,640 ordinary shares) and 217,612 ordinary shares.
For the 31 December 2019 figure, his beneficial interest in shares is made up of 297,320 ADRs (representing 594,640 ordinary shares) and 381,632 ordinary shares. 5 For the 1 January 2019 figure, Alice Schroeder’s beneficial interest in shares is made up of 7,250 ADRs (representing 14,500 ordinary shares). For the 31 December 2019 figure, the beneficial interest in shares is made up of 7,250 ADRs (representing 14,500 ordinary shares).
8 Amy Yip was appointed to the Board on 2 September 2019.
Share ownership guidelines as % of salary Beneficial interest as at 31 December 2019, as % of salary
Outstanding share options The following table sets out the share options held by the Executive Directors in the UK Savings-Related Share Option Scheme (SAYE) as at the end of the period. No other directors participated in any other option scheme.
Notes 1 No Directors exercised SAYE options in 2019. 2 No price was paid for the award of any option. 3 The highest and lowest closing share prices during 2019 were £17.90 and £12.80 respectively. 4 All exercise prices are shown to the nearest pence.
Directors’ terms of employment and external appointments Details of the service contracts of each Executive Director are outlined in the table below. The Directors’ remuneration policy contains further details of the terms included in Executive Director service contracts. Subject to the Group Chief Executive’s or the Chairman’s approval, Executive Directors are able to accept external appointments as non-executive directors of other organisations. Fees payable are retained by the Executive Directors.
Executive Directors Michael Falcon 11 October 2018 12 months 12 months – – Mark FitzPatrick 17 May 2017 12 months 12 months – – John Foley 8 December 2010 12 months 12 months – – Nic Nicandrou 27 April 2009 12 months 12 months – – James Turner 1 March 2018 12 months 12 months Yes £60,000 Mike Wells 21 May 2015 12 months 12 months – –
Details of changes to the Board of Directors during the year are set out in the ‘Governance’ report.
Note On 10 December 2019 and 30 January 2020 the Company announced the appointment of Non-executive Directors, Jeremy Anderson and Shriti Vadera, to the Board effective 1 January 2020 and 1 May 2020 respectively.
Recruitment and relocation arrangements In making decisions about the remuneration arrangements for those joining the Board, the Committee worked within the current Directors’ remuneration policy approved by shareholders and was mindful of: — The skills, knowledge and experience that each new Executive Director brought to the Board; — The need to support the relocation of executives to enable them to assume their roles; and
Appointing high-calibre executives to the Board and to different roles on the Board is necessary to ensure the Company is well positioned to develop and implement its strategy and deliver long-term value. As the Company operates in an international market place for talent, the best internal and external candidates are sometimes asked to move location to assume their new roles. Where this happens, the Company will offer relocation support. The support offered will depend on the circumstances of each move but may include paying for travel, shipping services, the provision of temporary accommodation and other housing benefits. Executives may receive support with the preparation of tax returns, but no current Executive Director is tax equalised.
Details of the remuneration he received during 2019 in his role as Executive Director of Prudential plc, including his buy-out award, are set out in the 2019 ‘single figure’ table.
James Turner James Turner relocated to Hong Kong in August 2019 in order to support our dialogue with the Hong Kong IA. Relocation support was provided in line with the current Directors’ remuneration policy and included shipping of personal effects from the UK, temporary accommodation, a housing allowance for his permanent Hong Kong residence and support for visa applications and the preparation of necessary Hong Kong tax returns. Ongoing benefits will be provided in line with the local Prudential Corporation Asia policies. Since Mr Turner has moved with his school-aged child, he received education support on the same basis as other executives based in Hong Kong.
Details of the remuneration he received during 2019 in his role as Group Chief Risk and Compliance Officer, including this relocation support are set out in the 2019 ‘single figure’ table.
Payments to past Directors and payments for loss of office The Committee’s approach when exercising its discretion under the policy is to be mindful of the particular circumstance of the departure and the contribution the individual made to the Group.
Michael Falcon An annual incentive award has been paid to Michael Falcon for the whole of 2019 as he remained a member of the Group Executive Committee after leaving the Board. This award was determined on performance achieved when the 2019 results were known. Sixty per cent of it was paid in cash in the usual way, and 40 per cent was deferred into Prudential ADRs (to be released in the Spring of 2023). In addition, he was eligible to receive a 10 per cent share of the Jackson bonus pool of which 40 per cent is similarly deferred. These awards continue to be subject to malus and clawback provisions.
Mr Falcon’s 2019 PLTIP award will vest in line with the original vesting date, subject to the satisfaction of the original performance conditions. These awards will also continue to be subject to the original malus and clawback provisions, and awards will remain subject to a two-year holding period following the end of the three-year performance period. The terms of Mr Falcon’s buy-out awards as disclosed in the 2018 Directors’ remuneration report have not been changed and awards will vest in line with the original vesting schedule. The number of Prudential ADRs over which options have been granted has been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’. In November 2019, Mr Falcon exercised the first tranche of this replacement award. The gross value of the award exercised (which included dividend equivalents) was $464,198. Mr Falcon is the sole participant in this arrangement and no further awards will be made to Mr Falcon under this plan.
Details of the remuneration received during 2019 in respect of his role as an Executive Director are set out in the 2019 single figure table.
Notes 1 The number of ADRs vesting include accrued dividends. 2 The ADR price used to calculate the value was the average ADR price for the three months up to 31 December 2019, being US$36.37.
Tony Wilkey Tony Wilkey stepped down from the Board on 17 July 2017 and his employment ended with the Group on 17 July 2018. As disclosed in the 2017 Directors’ remuneration report, the Committee exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that Mr Wilkey should be allowed to keep his unvested PLTIP awards granted in 2017. This award will vest in accordance with the original timetable, subject to the original performance conditions, remain subject to malus and clawback provisions, and will be pro-rated for service. This is the last PLTIP award that will vest to Mr Wilkey.
As set out in the section ‘Remuneration in respect of performance in 2019’ the performance conditions attached to Mr Wilkey’s 2017 PLTIP awards were partially met and 61.75 per cent will be released in 2020. The number of Prudential plc shares under award have been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’. The details of Mr Wilkey’s award are set out below: Award Number of shares vesting1 Value of shares vesting2
Other Directors A number of former Directors receive retiree medical benefits for themselves and their partner (where applicable). This is consistent with other senior members of staff employed at the same time. A de minimis threshold of £10,000 has been set by the Committee; any payments or benefits provided to a past Director above this amount will be reported.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 171
To this end, the Committee will introduce a new return on equity performance measure, operating return on average shareholders’ funds, for the 2020 PLTIP awards, incentivising the efficient use of capital as well as shareholder returns. Using this metric alongside TSR and a sustainability scorecard will ensure that the full value of long-term incentive awards is attained only where capital is effectively deployed in a way that creates shareholder returns superior to those delivered by peers while conduct and diversity expectations are met. The weighting of measures for the 2020 PLTIP awards will be as follows: — Relative TSR (50 per cent of award); — A return on equity measure (30 per cent of award); and
Relative TSR Under the Group TSR measure, 20 per cent of the award will vest for TSR at the median of the peer group, increasing to full vesting for performance within the upper quartile. TSR is measured on a local currency basis since this has the benefit of simplicity and directness of comparison. A comprehensive review of the TSR peer group which anticipated the Group’s post-demerger footprint was undertaken for the 2019 PLTIP awards. The companies were selected based on organisational size, product mix and geographical footprint. The peer group for 2020 PLTIP awards is the same as that used for 2019 and is set out below: Aegon AIA AXA Equitable China Taiping Insurance Great Eastern Lincoln National Manulife MetLife Ping An Insurance Principal Financial Prudential Financial Sun Life Financial
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 173
Conduct measure: Through strong risk management action, ensure there are no significant conduct/culture/governance issues that result in significant capital add-ons or material fines.
Vesting basis: 20 per cent vesting for partial achievement of the Group’s expectations, increasing to full vesting for achieving the Group’s expectations.
Changes in line with the 2020 Directors’ remuneration policy Post-directorship share ownership The Committee is building on the share ownership guidelines which apply to executives during their employment by introducing a formal, post-employment shareholding guideline. Executive Directors will, on leaving the Board, be required to maintain their in-employment share ownership guideline for a period of two years or their actual shareholding on the date of their retirement from the Board if lower. This obligation will be implemented by requiring retiring Executive Directors to obtain clearance to deal in the Company’s shares during the two years following their retirement in the same way as they must during the time on the Board. No changes have been made to Executive Directors’ in-employment share ownership guidelines.
This section sets out the revised Directors’ remuneration policy which will be put forward to shareholders for a binding vote at the 2020 AGM on 14 May 2020. If approved this policy will apply immediately for three years following the AGM. This policy has evolved from the current policy which was approved at the AGM held on 18 May 2017 and has applied from that date.
In reviewing the policy, alternative remuneration structures were considered. Following careful consideration, the Committee decided to retain the key features of the current remuneration model since it is appropriate for a growth company, is well understood and drives the right behaviour and outcomes. However, as described in the Chairman’s letter, the Committee felt that it was important to make changes to specific components in order to: — Align reward with the strategic priorities and capital framework of the post-demerger business; — Strengthen the community of interest between executives and other shareholders; and
The Committee reviews salaries annually with changes normally effective from 1 January. In determining base salary for each executive, the Committee considers factors such as: — Salary increases for other employees across the Group; — The performance and experience of the executive; — The size and scope of the role; — Group financial performance; — Internal relativities; and
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 175
Benefits Provided to executives to assist them in carrying out their duties efficiently.
Expatriate and relocation benefits allow Prudential to attract high calibre executives in the international talent market and to deploy them appropriately within the Group.
The maximum paid will be the cost to the Company of providing these benefits. The cost of these benefits may vary from year to year but the Committee is mindful of achieving the best value from providers.
Prudential’s policy is to offer all Executive Directors a pension provision that is competitive and appropriate in the context of pension benefits for the wider workforce.
New Executive Directors, either externally recruited or promoted from within the Company, will be entitled to receive pension contributions or a cash supplement (or a combination of the two) of 13 per cent of base salary.
Current Executive Directors are entitled to receive pension contributions or a cash supplement (or combination of the two) of 22.5 per cent of base salary from the date of this Policy (a reduction from 25 per cent of base salary in the previous Policy) and 20 per cent of base salary from 14 May 2021.
Annual bonus Payments under the Annual Incentive Plan (AIP) incentivise the delivery of stretching financial, functional and/or personal objectives which are drawn from the annual business plan.
The AIP payments for all Executive Directors are subject to the achievement of financial, functional and/or personal objectives.
All Executive Directors are required to defer a percentage of their total annual bonus into Prudential shares. Currently all Executive Directors defer 40 per cent of their bonus for three years, with the remaining proportion of their bonus paid in cash following the end of the performance year.
The release of deferred bonus awards is not subject to any further performance conditions. Deferred bonus awards carry the right to accumulate an amount to reflect the dividends paid on the released shares during the deferral period. These dividend equivalents will normally be settled in shares, but there is the flexibility to deliver them in cash.
The Committee may adjust the formulaic outcome based on the performance targets to reflect the underlying performance of the Company by applying discretion within the limits of the Policy. The Committee will disclose in the next Directors’ Remuneration Report where discretion is used.
No bonus is payable under the AIP for performance at or below the threshold level, increasing to 100 per cent for achieving or exceeding the maximum level.
The Committee retains the discretion to adjust and/or set different performance measures and/or targets if events occur (such as a change in strategy, a material acquisition and/or divestment of a Group business, a change in share capital of the Company, a change in the capital framework, or the requirements of the Company’s regulators or a change in prevailing market conditions) which cause the Committee to determine that the measures and/or targets are no longer appropriate and that amendment is required so that they achieve their original purpose (or comply with such regulatory requirements).
The rules of the PLTIP were approved by shareholders in 2013. Subsequent to this, minor amendments have been made to the rules to incorporate clawback provisions, provide for a holding period and to ensure participants were no better or no worse off as a result of the demerger of M&G plc from Prudential plc.
Granting awards The PLTIP is a conditional share plan: the shares which are awarded will ordinarily vest after three years to the extent that performance conditions have been met. If performance conditions are not achieved, the unvested portion of any award lapses and performance cannot be retested.
The PLTIP has a three-year performance period (although the Committee has the discretion to apply shorter or longer performance periods when the PLTIP is used for buy-out awards on recruitment – see the ‘Approach to recruitment remuneration’ section).
The Committee has the authority to apply clawback and/or a malus adjustment to all, or a portion of, a PLTIP award. More details about clawback and malus are set out below.
Awards carry the right to accumulate an amount to reflect the dividends paid on the released shares, during the period between the awards being granted and the award vesting. Dividend equivalents will normally be settled in shares, but there is the flexibility to deliver them in cash.
The maximum vesting under the PLTIP is 100 per cent of the original share award plus accrued dividend equivalents.
The performance conditions attached to PLTIP 2020 awards for all Executive Directors are: — Relative TSR (50 per cent of award); — A Return on Equity measure (30 per cent of award); and
Using a Return on Equity metric alongside TSR and a sustainability scorecard will ensure that the full value of long-term incentive awards is attained only where capital is effectively created and deployed in a way which creates shareholder returns superior to those delivered by peers while conduct and diversity expectations are met.
Performance against the measures in the scorecard of sustainability measures is assessed at the end of the three-year performance period. For the 2020 awards these measures will be equally weighted. 20 per cent of this portion of the award will vest for achieving threshold performance increasing to full vesting for meeting stretch targets. The scorecard measures for each award are disclosed in the relevant Annual report on remuneration for the year of grant.
The Committee retains the ability to amend the performance conditions and/or targets attached to an award and/ or set different performance measures (or to revise the weighting of measures) which apply to new or outstanding long-term incentive awards if: — events occur which cause the Committee to determine that circumstances relevant to the performance conditions have changed such that the measures described in this section are no longer appropriate; and
— that amendment is required so that they achieve their original purpose, provided the Committee is satisfied that the amended measure and/or target range will be a fairer measure of performance and no more or less demanding than the original condition.
Amendments The Committee may make amendments to the rules of the Plan which are minor and benefit the administration of the Plan, which take account of any changes in legislation, and/or which obtain or maintain favourable tax, exchange control or regulatory treatment. Otherwise no amendments may be made to certain key provisions of the PLTIP to the advantage of participants without prior shareholder approval.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 179
Share ownership guidelines for Executive Directors It is imperative that the Company’s remuneration arrangements align the interests of executives and other shareholders. The following reinforces this alignment.
The share ownership guidelines for the Executive Directors during their employment are: — 400 per cent of salary for the Group Chief Executive; — 250 per cent of salary for the Group Chief Financial Officer and Chief Operating Officer; and
— 250 per cent of salary for the Group Chief Risk and Compliance Officer.
Malus and clawback policy As detailed in the policy table, the Committee may apply clawback and/or a malus adjustment to variable pay in certain circumstances as set out below. The Committee can delay the release of awards pending the completion of an investigation which could lead to the application of malus or clawback.
Allows unvested shares awarded under deferred bonus and LTIP plans to be forfeited or reduced in certain circumstances.
Where there is a materially adverse restatement of the accounts for any year during the performance period of (i) the business unit in which the participant worked at any time in that year; and/or (ii) any member of the Group which is attributable to incorrect information about the affairs of that business unit; or (iii) for awards made in 2020 or later, it becomes apparent that the calculation of payments was based on erroneous or misleading data or otherwise incorrect.
Clawback may be applied: — For the PLTIP, where at any time before the fifth anniversary of the award date, and
— For the AIP, where at any time before the fifth anniversary of the end of the bonus performance period where either (i) there is a materially adverse restatement of the Company’s published accounts in respect of any financial year which (in whole or part) comprised part of the performance period; or (ii) it becomes apparent that a material breach of a law or regulation took place during the performance period which resulted in significant harm to the Company or its reputation, and the Committee considers it appropriate, taking account of the extent of the participants’ responsibility for the relevant restatement or breach, that clawback be applied to the relevant participant; or (iii) for awards made in 2020 or later, it becomes apparent that the calculation of payments was based on erroneous or misleading data or otherwise incorrect.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 181
PLTIP Awards made under the PLTIP in 2020 are subject to the achievement of Return on Equity, relative TSR and a sustainability scorecard : — Return on Equity was selected as a performance measure for the PLTIP because it is a familiar measure for investors, is comparable across the market and also aligns performance incentives to the generation of long-term shareholder value.
Targets used to determine annual bonus outcomes will be disclosed in the Directors’ remuneration report for the year for which the bonus is paid.
Key differences between Directors’ remuneration and the remuneration of the wider workforce Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their local market and given their individual skills, experience and performance. The Committee regularly receives information on workforce remuneration and related policies and takes this into account when determining Executive Director remuneration, for example it considers salary increase budgets for the workforce when determining the salaries of Executive Directors.
The remuneration principles that apply to Executive Directors are cascaded to employees as appropriate. Employees are regularly provided with an explanation of how decisions on executive pay are made and how they reflect the wider Company remuneration policy.
Pension allowance for the year has been calculated at 22.5% of salary in line with this policy
James Turner is paid in HK$ and figures have been converted to GBP for the purposes of this chart.
Annual bonus No bonus paid. 50% of maximum AIP. 100% of maximum AIP.
The approach to recruiting a Non-executive Director or a Chairman is outlined on page 188.
The use of Listing Rule 9.4.2 to facilitate the recruitment of an Executive Director is now only relevant in ‘unusual circumstances’. The Committee does not anticipate using this rule on a routine basis but reserves the right to do so in an exceptional circumstance. For example, this rule may be required if, for any reason, like-for-like replacement awards on recruitment could not be made under existing plans.
Notice periods The Company’s policy is that Executive Directors’ service contracts will not require the Company to give an executive more than 12 months’ notice without prior shareholder approval. A shorter notice period may be offered where this is in line with market practice in an executive’s location.
Deferred bonus awards are normally retained by participants leaving the Company. Awards will vest on the original timetable and will not normally be released early on termination.
Prior to release, awards remain subject to the malus terms originally applied to them. The clawback provisions will continue to apply.
Good leavers are defined as injury or disability, retirement with the approval of the employing company, the employing company ceasing to be a member of the Group, the business in which the individual is employed being transferred to a transferee that is not a member of the Group, or any other circumstances at the discretion of the Committee. Individuals who die in service will also be treated as good leavers.
Any Executive Director dismissed for cause would forfeit all unvested long-term incentive awards.
Should an Executive Director step down from the Board but remain employed by the Group, they would retain any vested long-term incentive awards that remain subject to the holding period. These awards would remain subject to the original rules and release schedule applied to them when they were awarded (ie the holding period will continue to apply).
The payment of a bonus for the final year of service will be decided by the Committee giving full consideration to the circumstances of the departure including the performance of the Executive Director.
The Committee may decide to award an executive stepping down from the Board but remaining with the Group a bonus pro-rated to reflect the portion of the financial year which had elapsed on the date of their change of role. This would be calculated with reference to financial, functional and/or personal performance measures in the usual way. The Committee may determine that a portion of such a bonus must be deferred.
Prudential Long Term Incentive Plan In the case of a corporate transaction (eg takeover, material merger, winding up etc), the Committee will determine whether awards will: — Be exchanged for replacement awards (either in cash or shares) of equal value unless the Committee and successor company agree that the original award will continue; or
Copies of the service contract between the Prudential Group and each of the Executive Directors are available for inspection at Prudential’s registered office during normal hours of business and will also be available at any General Meeting of the Company. Details of the duration of the Executive Directors’ service contracts are set out in the ‘Directors’ terms of employment and external appointments’ section of the Annual report on remuneration.
Prudential does not specifically consult with employees when setting the Directors’ remuneration policy: Prudential is a global organisation with employees and agents in multiple business units and geographies. We do have a mechanism for designated Non-executive Directors to gather employees’ views on a range of topics and for these views to be represented to the Board. As many employees are also shareholders, they are able to participate in binding votes on the Directors’ remuneration policy and annual votes on the Annual report on remuneration.
All Non-executive Directors receive a basic fee for their duties as a Board member. Additional fees are paid for added responsibilities such as chairmanship and membership of committees, acting as the Senior Independent Director or designation to carry out the workforce engagement role. Fees are paid to Non-executive Directors, subject to the appropriate deductions.
The basic and additional fees are reviewed annually by the Board with any changes effective from 1 July. In determining the level of fees the Board considers: — The time commitment and other requirements of the role; — Group financial performance; — Salary increases for all employees; and
If, in a particular year, the number of meetings is materially greater than usual, the Company may determine that the provision of additional fees in respect of that year is fair and reasonable.
Non-executive Directors are not eligible to participate in annual bonus plans or long-term incentive plans.
Under the Articles of Association, all Non-executive Directors are required to hold at least 2,500 shares and have one year, from their date of appointment to the Board, to acquire these.
It is further expected that Non-executive Directors will hold shares with a value equivalent to one times the annual basic fee (excluding additional fees for chairmanship and membership of any committees).
Chairman The Chairman receives an annual fee for the performance of their role. This fee is agreed by the Committee and is paid to the Chairman in cash, subject to the appropriate deductions. On appointment, the fee may be fixed for a specified period of time. Following the fixed period (if applicable) this fee will be reviewed annually. Changes in the fee are effective from 1 July.
Under the Articles of Association, the Chairman is required to hold at least 2,500 shares and has one year, from their date of appointment to the Board, to acquire these.
The Chairman has a share ownership guideline. This is currently one times the annual fee and it is normally expected that this level of share ownership would be attained within five years of the date of appointment.
The fee for a new Chairman will be set with reference to the time commitment and other requirements of the role, the experience of the candidate, as well as internal relativities among the other Executive and Non-executive Directors. To provide context for this decision, data would be sought for suitable market reference point(s).
Notice periods – Non-executive Directors and Chairman Non-executive Directors are appointed pursuant to letters of appointment with notice periods of six months without liability for compensation. A contractual notice period of 12 months by either party applies for the Non-executive Chairman. The Chairman would not be entitled to any payments for loss of office. Details of the individual appointments of the Chairman and Non-executive Directors are set out in the ‘Letters of appointment of the Chairman and Non-executive Directors’ section of the Annual report on remuneration.
For information on the terms of appointment for the Chairman and Non-executive Directors please see page 168.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 189
— The Solvency II capital metric in the AIP and PLTIP scorecard is to be replaced with a Pillar I capital metric; — The weightings of the AIP performance measures for the Group Chief Risk and Compliance Officer are 40 per cent Group financial measures, 40 per cent functional objectives and 20 per cent personal measures. In the 2017 policy, the measures were entirely based on a combination of personal and functional measures; — A Return on Equity measure replaces the operating profit measure in the PLTIP; — Under the PLTIP, 20 per cent of each portion of the award will vest for achieving threshold performance. This change was implemented for 2019 PLTIP awards and it is now reflected in this policy. For prior awards, threshold performance resulted in 25 per cent of awards vesting; — The Committee intends to make a 2020 PLTIP award of 300 per cent of salary to the Group Chief Financial Officer and Chief Operating Officer (increased from 250 per cent of salary); — From the date of this policy, current Executive Directors will receive pension contributions of 22.5 per cent of base salary, reducing to 20 per cent of base salary from 14 May 2021. New Executive Directors, either externally recruited or promoted from within the Company, will be entitled to receive pension contributions or a cash supplement (or a combination of the two) of 13 per cent of base salary. In addition, statutory contributions will continue to be made to mandatory pension arrangements in the country in which the Executive Directors are based in line with the local requirements. The 2017 policy offered all Executive Directors pension benefits of 25 per cent of salary; and
— Executive Directors will, on leaving the Board, be required to hold the lower of their actual shareholding on the date of their retirement from the Board and their in-employment share ownership guideline for a period of two years.
Principles underlying the policy In particular, when determining the new Directors’ remuneration policy the Committee had regard to a number of key principles as illustrated below and opposite: Simplicity The Committee has decided to retain the key features of the current policy. It continues to consist of fixed remuneration, annual and long-term incentives only.
Stakeholders are familiar with the operation of current reward arrangements and there is a demonstrable link between performance and reward outcome.
The current policy provides the Committee with substantial flexibility to adjust incentive outcomes, to reduce or cancel unvested awards and to reclaim both bonus and long-term incentive payments. The Committee’s discretionary powers have been formalised and additional malus and clawback triggers for personal conduct introduced in relation to the AIP and PLTIP to take into account non-financial and individual factors.
The time horizon for our long-term incentives extends for five years, including the holding period on awards.
There are currently significant in-employment share ownership guidelines for all Executive Directors providing a material connection to the sustained success of the Company. Executives have five years from the later of the date of their appointment, or the date of an increase these guidelines, to build this level of ownership.
A post-employment shareholding requirement has been introduced for Executive Directors leaving the Board to maintain their in-employment share ownership guideline for a period of two years or their actual shareholding on the date of their retirement from the Board if lower, subject to Committee discretion. This obligation will be implemented by requiring Executive Directors retiring from the Board to obtain clearance to deal in the Company’s shares during the two years following their retirement.
The pay arrangements for Executive Directors are aligned with that of the senior leadership team.
The vesting period attached to the long-term incentives reflects the time horizon of the business plan. The additional post-vesting holding period and post-employment shareholding requirement strengthens the community of interests between Executives and other stakeholders.
Anthony Nightingale, CMG SBS JP Paul Manduca Chair of the Remuneration Committee Chairman
Details on Executive Director pay are clearly set out in the Annual report on remuneration.
The Committee approves the termination arrangements of Executive Directors to ensure that there is no reward for failure.
The PLTIP leaver rules are another safeguard that there is no reward for failure under this plan.
The Committee’s discretionary powers have been formalised and additional malus and clawback triggers for personal conduct introduced in relation to the AIP and PLTIP to take into account non-financial and individual factors.
Predictability The level of awards under incentive awards to Executive Directors at threshold, on-target and maximum levels are defined and have been outlined in the scenarios of total remuneration charts for the new policy.
Notes 1 The table above reflects the adjustments made to outstanding awards at the time of the demerger. 2 A dividend equivalent was accumulated on these awards.
Deferred 2018 annual incentive award 2019 32,223 1,040 5,148 38,411 31 Dec 21 1605.5
Mike Wells Deferred 2015 annual incentive award 2016 112,720 112,720 – 31 Dec 18 01 Apr 19 1279 1557
Deferred 2018 annual incentive award 2019 55,394 1,787 8,849 66,030 31 Dec 21 1605.5
Save As You Earn (SAYE) schemes UK-based Executive Directors are normally eligible to participate in the HM Revenue and Customs (HMRC) approved Prudential Savings-Related Share Option Scheme. This scheme allows all eligible 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 Share Incentive Plan (SIP). Since April 2014, all UK-based employees have been able to purchase Prudential plc shares up to a value of £150 per month from their gross salary (partnership shares) through the SIP. For every four partnership shares bought, an additional matching share is awarded which is purchased by Prudential plc on the open market. Dividend shares accumulate while the employee participates in the plan. If the employee withdraws from the plan, or leaves the Group, matching shares may be forfeited.
The table below provides information about shares purchased under the SIP together with matching shares (awarded on a 1:4 basis) and dividend shares: Year of initial grant
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 195
Remuneration of the five highest-paid individuals and the remuneration of senior management In line with the requirements of the Stock Exchange of Hong Kong Limited, the following table sets out, on an aggregate basis, the annual remuneration of i) the five highest-paid employees, and ii) senior management for the year ended 31 December 2019.
Base salaries, allowances and benefits in kind 28,727 2,872 63,251 6,324
Their emoluments for 2019 were within the following bands: Remuneration band HKD Remuneration band GBP equivalent
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B1.1 Segment results 219 B1.2 Short-term fluctuations in investment returns on shareholder-backed business
C Financial position notes C1 Analysis of Group statement of financial position by segment
C4 Policyholder liabilities and unallocated surplus 262 C4.1 Group overview 262 C4.2 Asia insurance operations 265 C4.3 US insurance operations 267 C4.4 Products and determining contract liabilities 268
C5 Intangible assets C5.1 Goodwill 276 C5.2 Deferred acquisition costs and other intangible assets 277
C8 Tax assets and liabilities 289 C8.1 Current tax 289 C8.2 Deferred tax 289
D1.1 Gain (loss) on disposal of business 296 D1.2 Other corporate transactions 296
D2 Discontinued UK and Europe operations 297 D3 Contingencies and related obligations 298 D4 Post balance sheet events 298 D5 Related party transactions 298 D6 Commitments 299 D7 Investments in subsidiary undertakings, joint ventures and associates
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 199
Earned premiums, net of reinsurance B1.4 43,481 44,431 Investment return B1.4 49,555 (9,117) Other income B1.4 700 531
Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance B1.4 (83,905) (23,426)
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) note 2,287 3,557 Remove tax charge attributable to policyholders’ returns (365) (107)
Profit from continuing operations 1,953 2,881 Discontinued UK and Europe operations’ profit after tax D2 1,319 1,142 Re-measurement of discontinued operations on demerger D2 188 – Cumulative exchange loss recycled from other comprehensive income D2 (2,668) – (Loss) profit from discontinued operations (1,161) 1,142
* The 2018 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars (as described in note A1) and the reclassification of the Group’s UK and Europe operations as discontinued operations in 2019 (as described in note A2).
Profit for the year from continuing operations 1,953 2,881 Other comprehensive income (loss) from continuing operations: Items that may be reclassified subsequently to profit or loss Exchange movements on foreign operations and net investment hedges: Exchange movements arising during the year 152 (39) Related tax (15) 7
Related change in amortisation of deferred acquisition costs C5.2 (631) 328 Related tax (713) 385
Total items that may be reclassified subsequently to profit or loss 2,816 (1,478) Items that will not be reclassified to profit or loss Shareholders’ share of actuarial gains and losses on defined benefit pension schemes: Net actuarial (losses) gains on defined benefit pension schemes (108) 26 Related tax 19 (5)
(Loss) profit from discontinued operations D2 (1,161) 1,142 Cumulative exchange loss recycled through profit or loss D2 2,668 – Other items, net of related tax D2 203 (605) Total comprehensive income from discontinued operations 1,710 537
Reserves Profit from continuing operations – – 1,944 – – 1,944 9 1,953 Other comprehensive income (loss) from continuing operations: Exchange movements on foreign operations and net investment hedges net of related tax – – – 135 – 135 2 137
Net unrealised valuation movements net of related change in amortisation of deferred acquisition costs and related tax – – – – 2,679 2,679 – 2,679
Total comprehensive income (loss) from discontinued operations – – (1,098) 2,808 – 1,710 – 1,710
Total comprehensive income for the year – – 757 2,943 2,679 6,379 11 6,390
Share capital and share premium New share capital subscribed C10 – 22 – – – 22 – 22 Impact of change in presentation currency in relation to share capital and share premium C10 6 101 – – – 107 – 107
Balance at end of year 172 2,625 13,575 893 2,212 19,477 192 19,669 * The $2,808 million movement in translation reserve from discontinued operations is recognised in other comprehensive income and represents an exchange gain of $140 million on translating the results from discontinued operations during the period of ownership and the recycling of the cumulative exchange loss of $2,668 million through the profit or loss upon the demerger. The Group’s accounting principles on foreign exchange translation are described in note A1.
Total comprehensive income from discontinued operations – – 1,218 (681) – 537 – 537
Treasury shares Movement in own shares in respect of share-based payment plans – – 39 – – 39 – 39 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS – – 69 – – 69 – 69
Investments in joint ventures and associates accounted for using the equity method 1,500 2,207 1,916
Equity securities and holdings in collective investment schemes note (ii) 247,281 273,484 302,203 Debt securities note (ii) C3.2 134,570 223,333 231,835
Notes (i) As at 1 January 2019, the Group applied IFRS 16 ‘Leases’, using the modified retrospective approach. Under this approach, comparative information is not restated. The application of the standard has resulted in the recognition of an additional lease liability and a corresponding ‘right-of-use’ asset of a similar amount as at 1 January 2019. See note A3 and note C13 for further details.
(ii) Included within equity securities and holdings in collective investment schemes, debt securities and other investments are $90 million of lent securities as at 31 December 2019 (31 December 2018: $10,543 million, of which $107 million were from continuing operations).
The consolidated financial statements on pages 199 to 309 were approved by the Board of Directors on 10 March 2020. They were signed on its behalf: Paul Manduca Mike Wells Mark FitzPatrick Chairman Group Chief Executive Group Chief Financial Officer and Chief Operating Officer
Continuing operations: Cash flows from operating activities Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) 2,287 3,557 Adjustments to profit before tax for non-cash movements in operating assets and liabilities: Other non-investment and non-cash assets (2,487) (1,996) Policyholder liabilities (including unallocated surplus) 56,067 (1,641) Other liabilities (including operational borrowings) 5,097 860
Net (decrease) increase in cash and cash equivalents from continuing operations note (iii) (2,990) 2,120 Net cash flows from discontinued operations note (iii) D2 (5,690) (610) Cash and cash equivalents at beginning of year 15,442 14,461 Effect of exchange rate changes on cash and cash equivalents 203 (529)
The�exchange�rates�applied�for�balances�and�transactions�in�the�presentation�currency�of�the�Group,�US�dollars�($),�and�other� currencies�were: $ : local currency Closing rate at 31 Dec 2019 Average rate for 2019 Closing rate at
Reconciliation of IFRS 16 lease liability and IAS 17 lease commitments
IFRS 16 operating lease liability shown in the table above 955 Add�back�impact�of�discounting 210
Other new accounting pronouncements In�addition�to�the�above,�the�following�new�accounting�pronouncements�were�also�effective�from�1�January�2019: �— IFRIC�Interpretation�23�‘Uncertainty�over�Income�Tax�Treatments’; �— Amendments�to�IAS�28�‘Long-term�Interests�in�Associates�and�Joint�Ventures’; �— Amendments�to�IFRS�9�‘Prepayment�Features�with�Negative�Compensation’; �— Annual�Improvements�to�IFRSs�2015-2017�cycle;�and �— Amendments�to�IAS�19�‘Plan�Amendment,�Curtailment�or�Settlement’.
(b) Further critical accounting policies affecting the presentation of the Group’s results
If�the�market�for�a�financial�investment�of�the�Group�is�not�active,�the�Group�establishes�fair� value�by�using�quotations�from�independent�third�parties,�such�as�brokers�or�pricing� services,�or�by�using�internally�developed�pricing�models.�Priority�is�given�to�publicly� available�prices�from�independent�sources�when�available,�but�overall�the�source�of� pricing�and/or�the�valuation�technique�is�chosen�with�the�objective�of�arriving�at�a�fair� value�measurement�which�reflects�the�price�at�which�an�orderly�transaction�would�take� place�between�market�participants�on�the�measurement�date.�The�valuation�techniques� include�the�use�of�recent�arm’s�length�transactions,�reference�to�other�instruments�that�are� substantially�the�same,�discounted�cash�flow�analysis,�option-adjusted�spread�models� and,�if�applicable,�enterprise�valuation�and�may�include�a�number�of�assumptions�relating� to�variables�such�as�credit�risk�and�interest�rates.�Changes�in�assumptions�relating�to�these� variables�could�positively�or�negatively�impact�the�reported�fair�value�of�these�financial� investments.�Details�of�the�financial�investments�classified�as�‘level�3’�to�which�valuation� techniques�are�applied�and�the�sensitivity�of�profit�before�tax�to�a�change�in�the�valuation� of�these�items,�are�presented�in�note�C3.1(d).�
Financial investments – Determining impairment of “available-for-sale” and “amortised cost” assets
Available-for-sale securities The�Group’s�available-for-sale�securities�are�principally�held�by�the�US�insurance� operations.�For�these�securities,�the�consideration�of�evidence�of�impairment�requires� management’s�judgement.�In�making�this�determination,�a�range�of�market�and�industry� indicators�are�considered�including�the�severity�and�duration�of�the�decline�in�fair�value� and�the�financial�condition�and�prospects�of�the�issuer.�The�factors�reviewed�include� economic�conditions,�credit�loss�experience,�other�issuer-specific�developments�and� future�cash�flows.�These�assessments�are�based�on�the�best�available�information�at�the� time.�Factors�such�as�market�liquidity,�the�widening�of�bid/ask�spreads�and�a�change�in� cash�flow�assumptions�can�contribute�to�future�price�volatility.�If�actual�experience�differs� negatively�from�the�assumptions�and�other�considerations�used�in�the�consolidated� financial�statements,�unrealised�losses�currently�in�equity�may�be�recognised�in�the� income�statement�in�future�periods.
Derivative�assets,�net�of�derivative�liabilities� – – (15) (1,256) Other�investments – – 8,294 622 Deposits 15,023 – – – Cash�and�cash�equivalents 15,442 – – –
analysed�on�the�same�basis�of�those�disclosed�in�note�C3.2,�are�as�follows: Available-for-sale debt securities that pass the SPPI test $m $m
Financial assets, net of derivative liabilities, held by the Group’s joint ventures and associates accounted for using the equity method at 31 Dec 2019
Accrued�investment�income 161 – – – Other�debtors 329 – – – Loans 197 – – – Equity�securities�and�holdings�in�collective�investment�schemes – – 5,999 444 Debt�securities – – 6,080 86 Deposits 521 – – – Cash�and�cash�equivalents 513 – – –
Financial assets, net of derivative liabilities, held by the Group’s joint ventures and associates accounted for using the equity method at 31 Dec 2018
Other new accounting pronouncements In�addition�to�the�above,�the�following�new�accounting�pronouncements�have�also�been�issued�and�are�not�yet�effective�but�the�Group�is� not�expecting�them�to�have�a�significant�impact�on�the�Group’s�financial�statements: �— Revised�Conceptual�Framework�for�Financial�Reporting,�issued�in�March�2018�and�effective�from�1�January�2020; �— Amendment�to�IFRS�3�‘Business�Combinations’�issued�in�October�2018�and�effective�from�1�January�2020;� �— Amendments�to�IAS�1�and�IAS�8�‘Definition�of�material’�issued�in�October�2018�and�effective�from�1�January�2020;� �— Amendments�to�IFRS�9,�IAS�39�and�IFRS�7�‘Interest�rate�benchmark�reform’�issued�in�September�2019�and�effective�from�1�January� 2020;�and�
Other income and expenditure Investment�return�and�other�income 50 70 67 (29)% (25)% Interest�payable�on�core�structural�borrowings note (ii) (516) (547) (523) 6% 1%
Adjusted IFRS operating profit based on longer-term investment returns 5,310 4,409 4,429 20% 20%
Re-measurement�of�discontinued�operations�on�demerger D2 188 – – – – Cumulative�exchange�loss�recycled�from�other�comprehensive�income D2 (2,668) – – – –
*�The�debt�securities�of�Jackson�are�held�in�the�general�account�of�the�business.�Realised�gains�and�losses�are�recorded�in�the�income�statement�with�normalised�returns� included�in�adjusted�IFRS�operating�profit�based�on�longer-term�investment�returns�with�variations�from�year�to�year�included�in�the�short-term�fluctuations�category.�The�risk� margin�reserve�charge�for�longer-term�credit-related�losses�included�in�adjusted�IFRS�operating�profit�based�on�longer-term�investment�returns�of�Jackson�for�2019�is�based� on�an�average�annual�risk�margin�reserve�of�17�basis�points�(2018:�18�basis�points)�on�average�book�values�of�$62.6�billion�(2018:�$57.1�billion)�as�shown�below: Moody’s rating category (or equivalent under NAIC ratings of mortgage-backed securities)
B1.3 Determining operating segments and performance measure of operating segments Operating segments The�Group’s�operating�segments�for�financial�reporting�purposes�are�defined�and�presented�in�accordance�with�IFRS�8�‘Operating� Segments’�on�the�basis�of�the�management�reporting�structure�and�its�financial�management�information.�
The�following�value�movements�for�Jackson’s�variable�and�fixed�index�annuity�business�are�excluded�from�adjusted�IFRS�operating� profit�based�on�longer-term�investment�returns.�See�note�B1.2�note�(ii): �— Fair�value�movements�for�equity-based�derivatives; �— Fair�value�movements�for�guaranteed�benefit�options�for�the�‘not�for�life’�portion�of�Guaranteed�Minimum�Withdrawal�Benefit� (GMWB)�and�fixed�index�annuity�business,�and�Guaranteed�Minimum�Income�Benefit�(GMIB)�reinsurance�(see�below); �— Movements�in�the�accounts�carrying�value�of�Guaranteed�Minimum�Death�Benefit�(GMDB),�GMIB�and�the�‘for�life’�portion�of�GMWB� liabilities,�(see�below)�for�which,�under�the�‘grandfathered’�US�GAAP�applied�under�IFRS�for�Jackson’s�insurance�assets�and�liabilities,� the�measurement�basis�gives�rise�to�a�muted�impact�of�current�period�market�movements�(ie�they�are�relatively�insensitive�to�the�effect� of�current�period�equity�market�and�interest�rate�changes); �— A�portion�of�the�fee�assessments�as�well�as�claim�payments,�in�respect�of�guarantee�liabilities;�and �— Related�amortisation�of�deferred�acquisition�costs�for�each�of�the�above�items.
Guaranteed benefit options for the ‘not for life’ portion of GMWB and equity index options for the fixed index annuity business The�‘not�for�life’�portion�of�GMWB�guaranteed�benefit�option�liabilities�is�measured�under�the�US�GAAP�basis�applied�for�IFRS�in�a� manner�consistent�with�IAS�39�under�which�the�projected�future�growth�rate�of�the�account�balance�is�based�on�the�greater�of�US� Treasury�rates�and�current�swap�rates�(rather�than�expected�rates�of�return)�with�only�a�portion�of�the�expected�future�guarantee�fees� included.�Reserve�value�movements�on�these�liabilities�are�sensitive�to�changes�to�levels�of�equity�markets,�implied�volatility�and�interest� rates.�The�equity�index�option�for�fixed�index�annuity�business�is�measured�under�the�US�GAAP�basis�applied�for�IFRS�in�a�manner� consistent�with�IAS�39�under�which�the�projected�future�growth�is�based�on�current�swap�rates.
(d) Policyholder liabilities that are sensitive to market conditions Under�IFRS,�the�degree�to�which�the�carrying�values�of�liabilities�to�policyholders�are�sensitive�to�current�market�conditions�varies� between�business�units�depending�upon�the�nature�of�the�‘grandfathered’�measurement�basis.�
B1.4 Segmental income statement Premiums for conventional with-profits policies and other protection type insurance policies are recognised as revenue when due. Premiums and annuity considerations for linked policies, unitised with-profits and other investment type policies are recognised as revenue when received or, in the case of unitised or unit-linked policies, when units are issued. These amounts exclude premium taxes and similar duties where Prudential collects and settles taxes borne by the policyholder.
Claims paid include maturities, annuities, surrenders and deaths. Maturity claims are recorded as charges on the policy maturity date. Annuity claims are recorded when each annuity instalment becomes due for payment. Surrenders are charged to the income statement when paid and death claims are recorded when notified.
Total�external�revenue�notes (ii), (iii) 23,197 20,803 44,000 181 44,181 Intra-group�revenue – 34 34 (34) –
Analysis of profit (loss) before tax attributable to shareholders’ returns from continuing operations: Adjusted�IFRS�operating�profit�(loss)�based�on�longer-term�
Acquisition�costs�and�other�operating�expenditure�note B2, note (vii) (5,162) (2,773) (7,935) (592) (8,527) Interest�on�core�structural�borrowings – (20) (20) (527) (547) Loss�on�disposal�of�businesses�and�corporate�transactions�note D1.1 (15) (51) (66) (41) (107)
Profit�(loss)�before�tax�(being tax attributable to shareholders’ and policyholders’ returns) note (v) 2,291 2,322 4,613 (1,056) 3,557
Profit (loss) before tax attributable to shareholders’ returns from continuing operations 2,184 2,322 4,506 (1,056) 3,450
Amortisation�of�acquisition�accounting�adjustments (5) (56) (61) – (61) Loss�on�disposal�of�businesses�and�corporate�transactions�note D1.1 (15) (51) (66) (41) (107)
B1.5 Other investment return Investment return included in the income statement principally comprises interest income, dividends, investment appreciation and depreciation (realised and unrealised gains and losses) on investments designated as fair value through profit or loss, and realised gains and losses (including impairment losses) on items held at amortised cost and Jackson’s debt securities designated as available-for-sale. Movements in unrealised appreciation or depreciation of debt securities designated as available-for-sale are recorded in other comprehensive income. Interest income is recognised as it accrues, taking into account the effective yield on investments. Dividends on equity securities are recognised on the ex-dividend date and rental income is recognised on an accrual basis.
shareholder-backed�business (3,757) – – (3,757) (134) Amortisation�of�acquisition�accounting�adjustments (38) – – (38) (56) (Loss)�on�disposal�of�businesses�and�corporate��
Acquisition�costs�incurred�for�insurance�policies (4,177) (4,313) Acquisition�costs�deferred�less�amortisation�of�acquisition�costs note (i) 2,116 59 Administration�costs�and�other�expenditure* notes (ii),(iii) (5,019) (3,877) Movements�in�amounts�attributable�to�external�unit�holders�of�consolidated�investment�funds (203) (396)
(iii)� Total�depreciation�and�amortisation�expense�is�included�in�‘Acquisition�costs�incurred�for�insurance�policies‘,�‘Administration�costs�and�other�expenditure’�and�‘Acquisition�costs� deferred�less�amortisation�of�acquisition�costs’�and�relates�primarily�to�amortisation�of�deferred�acquisition�costs�of�insurance�contracts�and�asset�management�contracts.�The� segmental�analysis�of�interest�expense�(other�than�interest�expense�in�core�structural�borrowings)�and�depreciation�and�amortisation�included�within�total�acquisition�costs�and� other�expenditure�was�as�follows: Other interest expense Depreciation and amortisation 2019*� $m 2018� $m 2019*� $m 2018� $m
B2.1 Staff and employment costs The�average�number�of�staff�employed�by�the�Group,�for�both�continuing�and�discontinued�operations,�during�the�years�shown�was: Asia�operations 14,471 16,798 US�operations 4,014 4,285 Other�operations* 519 676
The compensation expense charged to the income statement is primarily based upon the fair value of the options granted, the vesting period and the vesting conditions.
The Company has established trusts to facilitate the delivery of Prudential plc shares under these plans. The cost to the Company of acquiring these newly issued shares held in trusts is shown as a deduction from shareholders’ equity.
(d) Share-based payment expense charged to the income statement Total�expense�recognised�in�2019�in�the�consolidated�financial�statements�relating�to�share-based�compensation�is�$181�million�(2018:� $191�million),�all�accounted�for�as�equity-settled.
B4.2 Reconciliation of shareholder effective tax rate for continuing operations In�the�reconciliation�below,�the�expected�tax�rates�reflect�the�corporation�tax�rates�that�are�expected�to�apply�to�the�taxable�profit�or�loss� of�the�relevant�business.�Where�there�are�profits�or�losses�of�more�than�one�jurisdiction,�the�expected�tax�rates�reflect�the�corporation�tax� rates�weighted�by�reference�to�the�amount�of�profit�or�loss�contributing�to�the�aggregate�business�result.
Unrecognised�tax�losses note (ii) – – 46 46 2.4% – – Effect�of�results�of�joint�ventures�and�
Demerger�related�activities note (vi) – – 76 76 4.1% – – Adjustments�in�relation�to�business�disposals (23) – (6) (29) (1.4)% – –
Accounting principles Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders (after related tax and non-controlling interests) by the weighted average number of ordinary shares outstanding during the year, excluding those held in employee share trusts and consolidated investment funds, which are treated as cancelled.
Deferred�acquisition�costs�and�other�intangible�assets� C5.2 5,154 12,264 58 – 17,476 Reinsurers’�share�of�insurance�contract�liabilities 5,458 8,394 4 – 13,856
Accruals�and�deferred�income 582 2,165 Other�creditors 6,724 9,010 Creditors�arising�from�direct�insurance�and�reinsurance�operations 2,831 3,010 Interest�payable 68 149 Funds�withheld�under�reinsurance�of�the�REALIC�business 3,760 3,745 Other�items 523 1,342
Unallocated�surplus�of�with-profits�funds C4.2 4,750 – – 4,750 – – 4,750 3,198 *�The�statement�of�financial�position�for�with-profits�business�comprises�the�with-profits�assets�and�liabilities�of�the�Hong�Kong,�Malaysia�and�Singapore�operations.�‘Other�business’� includes�assets�and�liabilities�of�other�participating�businesses�and�other�non-linked�shareholder-backed�business.
Analysis of financial investments, net of derivative liabilities by business type from continuing operations 31 Dec 2019� $m
Unit-linked and variable annuity separate account Equity�securities�and�holdings�in�collective�investment�schemes 213,797 365 – 214,162
Group total analysis, including other financial liabilities held at fair value from continuing operations
Analysis of financial investments, net of derivative liabilities by business type 31 Dec 2018� $m
With-profits Loans – – 2,168� 2,168 Equity�securities�and�holdings�in�collective�investment�schemes 66,636 6,937 621� 74,194
Unit-linked and variable annuity separate account Equity�securities�and�holdings�in�collective�investment�schemes 194,845 643 11� 195,499
held�at�fair�value – (20,446) –� (20,446) Borrowings�attributable�to�with-profits�businesses – – (2,045)� (2,045) Net�asset�value�attributable�to�unit�holders�of�consolidated�investment�funds (8,727) (4,854) (1,258)� (14,839) Other�financial�liabilities�held�at�fair�value – (3) (4,335)� (4,338)
(b) Valuation approach for level 2 fair valued assets and liabilities A�significant�proportion�of�the�Group’s�level�2�assets�are�corporate�bonds,�structured�securities�and�other�non-national�government�debt� securities.�These�assets,�in�line�with�market�practice,�are�generally�valued�using�a�designated�independent�pricing�service�or�quote�from� third-party�brokers.�These�valuations�are�subject�to�a�number�of�monitoring�controls,�such�as�comparison�to�multiple�pricing�sources� where�available,�monthly�price�variances,�stale�price�reviews�and�variance�analysis�on�prices�achieved�on�subsequent�trades.
Valuation approach for level 3 fair valued assets and liabilities Investments�valued�using�valuation�techniques�include�financial�investments�which�by�their�nature�do�not�have�an�externally�quoted� price�based�on�regular�trades,�and�financial�investments�for�which�markets�are�no�longer�active�as�a�result�of�market�conditions,�eg�market� illiquidity.�The�valuation�techniques�used�include�comparison�to�recent�arm’s�length�transactions,�reference�to�other�instruments�that�are� substantially�the�same,�discounted�cash�flow�analysis,�option-adjusted�spread�models�and,�if�applicable,�enterprise�valuation.�
(d) Transfers into and transfers out of levels The�Group’s�policy�is�to�recognise�transfers�into�and�transfers�out�of�levels�as�of�the�end�of�each�half�year�reporting�period�except�for� material�transfers�which�are�recognised�as�of�the�date�of�the�event�or�change�in�circumstances�that�caused�the�transfer.�Transfers�are� deemed�to�have�occurred�when�there�is�a�material�change�in�the�observed�valuation�inputs�or�a�change�in�the�level�of�trading�activities� of�the�securities.
(b) Additional analysis of US insurance operations debt securities 31 Dec 2019� $m 31 Dec 2018� $m
(iii) Age analysis of unrealised losses for the periods indicated The�following�table�shows�the�age�analysis�of�all�the�unrealised�losses�in�the�portfolio�by�reference�to�the�length�of�time�the�securities� have�been�in�an�unrealised�loss�position: Age analysis 31 Dec 2019� $m 31 Dec 2018� $m
(d) Group sovereign debt and bank debt exposure The�Group�exposures�held�by�the�shareholder-backed�business�and�with-profits�funds�in�sovereign�debts�and�bank�debt�securities�are� analysed�below.�The�tables�exclude�assets�held�to�cover�linked�liabilities�and�those�of�the�consolidated�unit�trusts�and�similar�funds.�In� addition,�the�tables�below�exclude�the�proportionate�share�of�sovereign�debt�holdings�of�the�Group’s�joint�venture�operations.�
Net�asset�value�attributable� to�unit�holders�of� consolidated�unit�trusts� and�similar�funds� 5,998 5,998 – – – – – – 5,998
Net�asset�value�attributable� to�unit�holders�of� consolidated�unit�trusts� and�similar�funds� 14,839 14,839 – – – – – – 14,839
Maturity profile for investment contracts from continuing operations� $m 1 year or less
A dditional inform ation prudentialplc.com� Prudential plc Annual�Report�2019 261 31 Dec 2018� $m
(excludes $43 million classified as unallocated to a segment) 85,089 244,483 226,715 556,287 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 4,700 – 18,231 22,931 – Group’s share of policyholder liabilities of joint ventures and associate note (d) 10,101 – – 10,101
Reclassification of reinsured UK annuity contracts as held for sale – – (14,689) (14,689) Net flows: Addition for closed block of group payout annuities in the US – 5,532 – 5,532 Shareholders’ transfers post-tax (87) – (346) (433) Investment-related items and other movements (3,718) (13,350) (7,318) (24,386) Foreign exchange translation differences (1,914) – (13,171) (15,085)
(excludes $50 million classified as unallocated to a segment) 91,836 236,380 193,020 521,236 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 3,198 – 16,982 20,180 – Group’s share of policyholder liabilities of joint ventures and associate note (d) 10,374 – – 10,374
Comprising: – Policyholder liabilities on the consolidated statement of financial position (excludes $186 million classified as unallocated to a segment) 115,943 269,549 – 385,492 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 4,750 – – 4,750 – Group’s share of policyholder liabilities of joint ventures and associate note (d) 11,877 – – 11,877
Notes (a) The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a result of each of the components listed.
(b) The analysis includes the impact of premiums, claims and investment movements on policyholders’ liabilities. The impact does not represent premiums, claims and investment movements as reported in the income statement. For example, premiums shown above exclude any deductions for fees/charges; claims (surrenders, maturities and deaths) shown above represent the policyholder liabilities provision released rather than the claims amount paid to the policyholder.
(d) The Group’s investment in joint ventures and associate are accounted for on an equity method basis in the Group’s statement of financial position. The Group’s share of the policyholder liabilities as shown above relates to life businesses of the China JV, India and the Takaful business in Malaysia.
Reclassification of reinsured UK annuity contracts as held for sale – – (14,689) (14,689) Net flows: Addition for closed block of group payout annuities in the US – 5,532 – 5,532 Investment-related items and other movements (1,608) (13,350) (2,637) (17,595) Foreign exchange translation differences (1,626) – (3,313) (4,939)
Comprising: – Policyholder liabilities on the consolidated statement of financial position (excludes $50 million classified as unallocated to a segment) 41,331 236,380 51,911 329,622 – Group’s share of policyholder liabilities relating to joint ventures and associate 10,374 – – 10,374
(d) Other movements for 2019 are for continuing operations only and include premiums received and claims paid on investment contracts without discretionary participating features, which are taken directly to the statement of financial position in accordance with IAS 39 and changes in the unallocated surplus of with-profits funds resulting from the recapture of the intra-group reinsurance agreement between the with-profits discontinued UK and Europe operations and Asia insurance operations prior to the demerger, which is eliminated in the income statement for the continuing operations of the Group. For 2018, in addition to premiums received and claims paid on investment contracts without discretionary participating features, other movements also included the reclassification of the reinsured UK annuity business as held for sale at 31 December 2018 and the changes in the unallocated surplus of with-profits funds resulting from actuarial gains and losses on the Group’s defined benefit pension schemes allocated to the with-profits funds of the discontinued UK and Europe operations, which were recognised directly in other comprehensive income.
(iv) Reinsurers’ share of insurance contract liabilities The measurement of reinsurance assets is consistent with the measurement of the underlying direct insurance contracts. The treatment of any gains or losses arising on the purchase of reinsurance contracts is dependent on the underlying accounting basis of the entity concerned.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 265
Net commissions received on ceded business and claims incurred ceded to external reinsurers for Asia totalled $355 million and $552 million respectively during 2019 (2018: $294 million and $362 million, respectively). Net commissions received on ceded business and claims incurred ceded to external reinsurers for Jackson totalled $20 million and $630 million respectively during 2019 (2018: $9 million and $653 million, respectively). There were no deferred gains or losses on reinsurance contracts for Asia and Jackson in either 2019 or 2018.
C4.2 Asia insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
Shareholders’ transfers post-tax (87) – – (87) Investment-related items and other movements note (c) (2,110) (1,903) 295 (3,718) Foreign exchange translation differences note (d) (288) (1,020) (606) (1,914)
Comprising: – Policyholder liabilities on the consolidated statement of financial position 50,505 20,846 20,485 91,836 – Unallocated surplus of with-profits funds on the consolidated statement of financial
Comprising: – Policyholder liabilities on the consolidated statement of financial position 65,558 23,571 26,814 115,943 – Unallocated surplus of with-profits funds on the consolidated statement of financial
(ii) Duration of policyholder liabilities The table below shows the carrying value of policyholder liabilities and the maturity profile of the cash flows on a discounted basis, taking account of expected future premiums and investment returns: $m $m
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 267
(iii) Aggregate account values The table below shows the distribution of account values for fixed annuities (fixed interest rate and fixed index), the fixed account portion of variable annuities, and interest-sensitive life business within the range of minimum guaranteed interest rates as described in note C4.4(b). As at 31 December 2019, approximately 87 per cent (31 December 2018: 87 per cent) of Jackson’s fixed annuities, variable annuity fixed account options and interest-sensitive life business account values correspond to crediting rates that are at the minimum guaranteed interest rates.
Participating products often offer a guaranteed maturity or surrender value. Declared regular bonuses are guaranteed once vested. Future bonus rates and cash dividends are not guaranteed. Market value adjustments and surrender penalties are used for certain products where the law permits such adjustments. Guarantees are predominantly supported by segregated life funds and their estates.
These products often offer a guaranteed maturity and surrender value. It is common in Asia for regulations or market-driven demand and competition to provide some form of capital value protection and minimum crediting interest rate guarantees. This is reflected within the guaranteed maturity and surrender values. Guarantees are borne by shareholders.
For India and Taiwan, US GAAP is applied for measuring insurance liabilities. For these businesses, the future policyholder benefit provisions for non-linked business are determined using the net level premium method, with an allowance for surrenders, maintenance and claims expenses. Rates of interest used in establishing the policyholder benefit provisions vary by operation depending on the circumstances attaching to each block of business.
Health and protection features are offered as supplements to the products listed above or sold as standalone products. Protection covers mortality or morbidity benefits including health, disability, critical illness and accident coverage.
The determination of the liabilities of health and protection contracts are driven by the local solvency basis. A gross premium valuation method is used in those countries where a risk-based capital framework is adopted for local solvency. Under the gross premium valuation method, all cash flows are valued explicitly using best estimate assumptions with a suitable margin for prudence.
The Hong Kong business unit applies a net premium valuation method to determine the future policyholder benefit provisions.
Fixed interest rate annuities are primarily deferred annuity products that are used for asset accumulation in retirement planning and for providing income in retirement.
The policyholder of a fixed interest rate annuity pays Jackson a premium, which is credited to the policyholder’s account. Periodically, interest is credited to the policyholder’s account and in some cases administrative charges are deducted from the policyholder’s account. Jackson makes benefit payments at a future date as specified in the policy based on the value of the policyholder’s account at that date. On more than 90 per cent (2018: 94 per cent) of in-force business, Jackson may reset the interest rate on each contract anniversary, subject to a guaranteed minimum, in line with state regulations. When the annuity matures, Jackson either pays the contract holder the account value or a series of payments in the form of an immediate annuity product.
As explained in note A4.1, all of Jackson’s insurance liabilities are based on US GAAP. An overview of the deferral and amortisation of acquisition costs for Jackson is provided in note C5.2(i)(b).
Capitalised acquisition costs and deferred income for these contracts are amortised over the life of the book of contracts. See the variable annuity section below for further discussion.
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Fixed index annuities vary in structure but are generally deferred annuities that enable policyholders to obtain a portion of an equity-linked return (based on participation rates, caps and spreads), and provide a guaranteed minimum return.
Jackson hedges the equity return risk on fixed index products using offsetting equity exposure in the variable annuity product. The cost of hedging is taken into account in setting the index participation rates, caps or spreads.
Jackson also offers fixed interest accounts on some fixed index annuity products. At 31 December 2019, fixed interest accounts of fixed index annuities totalled $4.3 billion (31 December 2018: $3.4 billion) in account value.
The liability for policyholder benefits that represent the guaranteed minimum return is determined similarly to the liabilities of the fixed interest annuity above. The equity-linked return option within the contract is treated as an embedded derivative liability under US GAAP and therefore this element of the liability is recognised at fair value.
At 31 December 2019, group pay-out annuities accounted for 2 per cent (31 December 2018: 2 per cent) of Jackson’s policy and contract liabilities.
The liability for future benefits is determined under US GAAP methodology for limited-payment contracts, using assumptions as of the acquisition date as to mortality and expense plus provisions for adverse deviation.
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At 31 December 2019, variable annuities accounted for 78 per cent (31 December 2018: 75 per cent) of Jackson’s policy and contract liabilities.
Variable annuities are deferred annuities that have the same tax advantages and pay-out options as fixed interest rate and fixed index annuities. They are also used for asset accumulation in retirement planning and to provide income in retirement.
Jackson had variable annuity funds in fixed accounts totalling $7.8 billion (31 December 2018: $8.1 billion) with minimum guaranteed rates ranging from 1.0 per cent to 3.0 per cent and a 2.19 per cent average guaranteed rate (31 December 2018: 1.0 per cent to 3.0 per cent and a 1.7 per cent average guaranteed rate).
Non-performance risk is incorporated into the fair value calculation through the use of discount interest rates sourced from an AA corporate credit curve as a proxy for Jackson’s own credit risk. Other risk margins, particularly for policyholder behaviour and long-term volatility, are also incorporated into the model through the use of explicitly conservative assumptions. On a periodic basis, Jackson validates the resulting fair values based on comparisons to other models and market movements.
The value of future fees to offset payments made under the guarantees are established so that on day one no gain arises.
Benefits that are payable at annuitisation (guaranteed minimum income benefit) This feature is no longer offered and existing coverage is substantially reinsured, subject to deductibles and annual claim limits.
Guaranteed Minimum Income Benefits are reinsured, subject to a deductible and annual claim limits. Due to the net settlement provisions of the reinsurance agreement, under the ‘grandfathered’ US GAAP, it is recognised at fair value with the change in fair value included as a component of short-term fluctuations. Volatility and non-performance risk is considered as per GMWB above.
Provisions for Guaranteed Minimum Accumulation Benefit (GMAB) are recognised at fair value under US GAAP. Volatility and non-performance risk is considered as per GMWB above.
Deferred acquisition costs (DAC) Capitalised acquisition costs and deferred income for these contracts are amortised over the life of the book of contracts. The majority of Jackson’s DAC relates to its variable annuities business.
Estimated gross profits for the fixed interest rate annuities, fixed index annuities and variable annuities include estimates of the following, each of which will be determined based on the best estimate of amounts over the life of the book of contracts without provision for adverse deviation: — Amounts expected to be assessed against policyholder balances for mortality less benefit claims in excess of related policyholder balances; — Amounts expected to be assessed for contract administration less costs incurred for contract administration; — Amounts expected to be earned from the investment of policyholder balances less interest credited to policyholder balances; — Amounts expected to be assessed against policyholder balances upon termination of contracts (sometimes referred to as surrender charges); — Assumptions for the long-term investment return for the separate accounts and future hedge costs; and
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At 31 December 2019, life insurance products accounted for 7 per cent (31 December 2018: 9 per cent) of Jackson’s policy and contract liabilities.
— Traditional life provides protection for either a defined period or until a stated age and includes a predetermined cash value.
— Variable universal life is a type of life insurance policy that combines death benefit protection with the ability for the policyholder account to be invested in separate account funds.
Excluding the business that is subject to the retrocession treaties at 31 December 2019, Jackson had interest-sensitive life business in force with total account value of $7.9 billion (31 December 2018: $8.2 billion), with minimum guaranteed interest rates ranging from 2.5 per cent to 6.0 per cent with a 4.68 per cent average guaranteed rate (31 December 2018: 2.5 per cent to 6.0 per cent with a 4.67 per cent average guaranteed rate).
For term and traditional life insurance contracts, provisions for future policy benefits are determined under US GAAP using the net level premium method and assumptions as of the issue or acquisition date as to mortality, interest, policy lapses and expenses plus provisions for adverse deviation for directly sold business and assumptions at purchase for acquired business.
Institutional products are: guaranteed investment contracts (GICs), funding agreements (including agreements issued in conjunction with Jackson’s participation in the US Federal Home Loan Bank programme) and Medium Term Note funding agreements.
Institutional products are classified as investment contracts, and are accounted for as financial liabilities at amortised cost. The currency risk on contracts that represent currency obligations other than US dollars are hedged using crosscurrency swaps.
Goodwill is tested for impairment by comparing the cash-generating unit’s carrying amount, including any goodwill, with its recoverable amount. The Group’s methodology of assessing whether goodwill may be impaired for acquired life and asset management operations is discussed below: For acquired life businesses, the Company routinely compares the aggregate of net asset value and acquired goodwill on an IFRS basis of the acquired life business with the value of the current in-force business as determined using the EEV methodology. Any excess of IFRS value over EEV carrying value is then compared with EEV basis value of current and projected future new business to determine whether there is any indication that the goodwill in the IFRS statement of financial position may be impaired. The methodology and assumptions underpinning the Group’s EEV basis of reporting are included in the EEV basis supplementary information in this Annual Report.
For TMBAM, the discounted cash flow valuation is based on the latest three-year plan and cash flow projections for the later years. For TFUND, which was acquired in December 2019, the valuation is based on the 10-year cash flow projections used in assessing the acquisition. The value in use for these acquired asset management businesses is particularly sensitive to a number of key assumptions as follows: — The set of economic, market and business assumptions used to derive the cash flow projections for the businesses; — The assumed growth rate on forecast cash flows beyond the terminal year of the cash flow projections after considering expected future and past growth rates. At 31 December 2019, a growth rate of 2.25 per cent has been used to extrapolate beyond the projection period (2018: 2.25 per cent in respect of TMBAM); — The risk discount rate applied in accordance with the nature of the businesses. The pre-tax discount rate applied at 31 December 2019 was 9 per cent (2018: 9 per cent in respect of TMBAM); and
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C5.2 Deferred acquisition costs and other intangible assets Intangible assets acquired on the purchase of a subsidiary or portfolio of contracts are measured at fair value on acquisition. Deferred acquisition costs are accounted for as described in note A4.1(c). Other intangible assets, such as distribution rights and software, are valued initially at the price paid to acquire them and are subsequently carried at cost less amortisation and any accumulated impairment losses. For intangibles other than DAC, amortisation follows the pattern in which the future economic benefits are expected to be consumed. If the pattern cannot be determined reliably, a straight-line method is applied. For software, the amortisation generally represents the licence period of the software acquired. Amortisation of intangible assets is charged to the ‘acquisition costs and other expenditure’ line in the consolidated income statement. Impairment testing is conducted when there is an indication of impairment.
Deferred acquisition costs and other intangible assets attributable to shareholders From continuing operations 17,409 14,865 From discontinued operations – 143
Total of deferred acquisition costs and other intangible assets 17,476 15,185
Present value of acquired in-force policies for insurance contracts as classified under IFRS 4 (PVIF) 38 43 Distribution rights and other intangibles 3,132 2,108
Total of deferred acquisition costs and other intangible assets note (a) 17,409 15,008
Demerger of UK and Europe operations – – (134) (9) (143) –
Amortisation to the income statement: Adjusted IFRS operating profit based on longer-term investment returns (257) (297) – (238) (792) (1,370)
Disposals and transfers – – – (11) (11) (19) Exchange differences and other movements 31 – – 103 134 (141) Amortisation of DAC related to net unrealised valuation movements on the US insurance operation’s available-for-sale securities recognised within other comprehensive income – (631) – – (631) 328 * Under the Group’s application of IFRS 4, US GAAP is used for measuring the insurance assets and liabilities of its US and certain Asia operations. Under US GAAP, most of the US insurance operation’s products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with the emergence of actual and expected gross profits which are determined using an assumption for long-term investment returns for the separate account of 7.4 per cent (2018: 7.4 per cent), gross of asset management fees and other charges to policyholders, but net of external fund management fees. The other assumption impacting expected gross profits include mortality assumptions, lapses, assumed unit costs and future hedge costs. The amounts included in the income statement and other comprehensive income affect the pattern of profit emergence and thus the DAC amortisation attaching. DAC amortisation is allocated to the operating and non-operating components of the Group’s supplementary analysis of profit and other comprehensive income by reference to the underlying items.
‡ In January 2019, the Group renewed its regional strategic bancassurance alliance with United Overseas Bank Limited (UOB). The new agreement extends the original alliance, which commenced in 2010, to 2034 and increases the geographical scope to include a fifth market, Vietnam, alongside the existing markets of Singapore, Malaysia, Thailand and Indonesia. As part of this transaction, Prudential has agreed to pay UOB an initial fee of $853 million (equivalent to SGD1,150 million) for distribution rights which are not dependent on future sales volumes. Of the $853 million, $301 million was paid in 2019, with another two instalments being payable in 2020 and 2021. After allowing for discounting, the amount included in additions in the table above is $834 million.
In periods where the cap and floor features of the mean reversion technique (which is used for moderating the effect of short-term volatility in investment returns) are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect.
Furthermore, in those periods where the cap or floor is relevant, the mean reversion technique provides no further dampening and additional volatility may result. In 2019, the DAC amortisation charge for adjusted IFRS operating profit based on longer-term investment returns was determined after including a credit for decelerated amortisation of $280 million (2018: $259 million charge for acceleration). The deceleration arising in 2019 reflects a mechanical decrease in the projected separate account return for the next five years under the mean-reversion technique. Under this technique, the projected level of return for each of the next five years is adjusted so that, in combination with the actual rates of return for the preceding three years (including the current year), the assumed long-term annual separate account return of 7.4 per cent is realised on average over the entire eight-year period. The deceleration in DAC amortisation in 2019 is primarily driven by the actual separate account return in the year being higher than that assumed.
The application of the mean reversion formula (described in note A4.1) has the effect of dampening the impact of equity market movements on DAC amortisation while the mean reversion assumption lies within the corridor. At 31 December 2019, it would take approximate movements in separate account values of more than either negative 26 per cent or positive 49 per cent for mean reversion assumption to move outside the corridor.
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(ii) Deferred acquisition costs related to insurance and investment contracts The movements in deferred acquisition costs relating to insurance and investment contracts are as follows: Insurance contracts
Note All of the additions of investment contracts are through internal development. The carrying amount of the DAC balance comprises the following gross and accumulated amortisation amounts: Gross amount 34 231 Accumulated amortisation (1) (132)
C6.1 Core structural borrowings of shareholder-financed businesses Accounting principles Although initially recognised at fair value, net of transaction costs, borrowings, excluding liabilities of consolidated collateralised debt obligations, are subsequently accounted for on an amortised cost basis using the effective interest method. Under the effective interest method, the difference between the redemption value of the borrowing and the initial proceeds (net of related issue costs) is amortised through the income statement to the date of maturity or for hybrid debt, over the expected life of the instrument.
Total subordinated debt substituted to M&G plc in 2019 note (ii) – 3,718
Total debt not substituted to M&G plc in 2019 5,344 5,793
Total core structural borrowings of shareholder-financed businesses note (viii) 5,594 9,761
(iii) These borrowings can be converted, in whole or in part, at the Company’s option and subject to certain conditions, on any interest payment date, into one or more series of Prudential preference shares.
(iv) In May 2019, the Company redeemed its £400 million 11.375 per cent Tier 2 subordinated notes. (v) The senior debt ranks above subordinated debt in the event of liquidation. (vi) The bank loan of $350 million was drawn in November 2019 at a cost of LIBOR plus 0.2 per cent. The loan matures on 7 November 2024. The £275 million bank loan was repaid by the Group in October 2019. (vii) Jackson’s borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
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(viii) The changes in the carrying value of the structural borrowings of shareholder-financed businesses for the Group (including both continuing and discontinued operations) are analysed below: Cash movements $m Non-cash movements $m
Balance at beginning of year Issue of debt Redemption of debt
Analysed as: Total from continuing operations 1,160 Total from discontinued UK and Europe operations 5,129
The financial and insurance assets and liabilities on the Group’s balance sheet are, to varying degrees, subject to market and insurance risk and other changes of experience assumptions that may have a material effect on IFRS basis profit or loss and shareholders’ equity. The market and insurance risks, including how they affect Group’s operations and how these are managed are discussed in the Risk report referred to above.
Risk that utilisation of withdrawal benefits or lapse levels differ from those assumed in pricing
Credit risk and interest rate risk on investments Profit and loss and shareholders’ equity are volatile for the incidence of these risks on unrealised appreciation of fixed income securities classified as available-for-sale under IAS 39
Interest rate risk on liabilities (meeting guaranteed rates of accumulation on fixed annuity products)
Detailed analyses of sensitivity of IFRS basis profit or loss and shareholders’ equity to key market and other risks by business unit are provided in notes C7.2, C7.3 and C7.4. The sensitivity analyses provided show the effect on profit or loss and shareholders’ equity to changes in the relevant risk variables, all of which are reasonably possible at the relevant balance sheet date. In the equity risk sensitivity analysis shown, the Group has considered the impact of an instantaneous 20 per cent fall in equity markets. If equity markets were to fall by more than 20 per cent, the Group believes that this would not be an instantaneous fall but rather would be expected to occur over a period of time during which the hedge positions within Jackson, where equity risk is greatest, would be rebalanced. The equity risk sensitivity analysis provided assumes that all equity indices fall by the same percentage.
The published sensitivities only allow for limited management actions such as changes to policyholder bonuses, where applicable. If the economic conditions set out in the sensitivities persisted, the financial impacts may differ to the instantaneous impacts. In this case management could also take additional actions to help mitigate the impact of these stresses, including (but not limited to) rebalancing investment portfolios, further market risk hedging, increased use of reinsurance, repricing of in-force benefits, changes to new business pricing and the mix of new business being sold.
Following the adoption of US dollar as the Group’s presentation currency, the Group has no exposure to currency fluctuation from business units that operate in US dollars, or currencies pegged to the US dollar (such as Hong Kong dollars), and reduced exposure to currencies partially managed to the US dollar within a basket of currencies (such as Singapore dollars). Sensitivities to exchange rate movements in the Group’s key markets are therefore expected to be limited.
Impact of diversification on risk exposure The Group benefits from diversification benefits achieved through the geographical spread of the Group’s operations and, within those operations, through a broad mix of product types. Relevant correlation factors include: — Correlation across geographic regions for both financial and non-financial risk factors; and — Correlation across risk factors for longevity risk, expenses, persistency and other risks.
Other limitations on the sensitivities include: the use of hypothetical market movements to demonstrate potential risk that only represent Prudential’s view of reasonably possible near-term market changes and that cannot be predicted with any certainty; the assumption that interest rates in all countries move identically; and the lack of consideration of the inter-relation of interest rates, equity markets and foreign currency exchange rates.
Asia also sells regular premium health and protection business (which may attach to a unit-linked or other savings products). This exposes Asia to persistency, mortality and morbidity risk. This is discussed further below.
(i) Sensitivity to interest rate risk Excluding with-profits and unit-linked businesses, the results of the Asia business are sensitive to the movements in interest rates, as described above.
For the purposes of analysing sensitivity to variations in interest rates, reference has been made to the movements in the 10-year government bond rates of the regions. At 31 December 2019, 10-year government bond rates vary from region to region and range from 0.7 per cent to 7.2 per cent (31 December 2018: 0.9 per cent to 8.1 per cent).
Profit before tax attributable to shareholders (705) (744) 397 (430) Related deferred tax (where applicable) 3 26 (19) 33
Net effect on profit after tax and shareholders’ equity (702) (718) 378 (397)
(ii) Sensitivity to equity price risk The non-linked shareholder-backed business has limited exposure to equity and property investment (31 December 2019: $3,480 million; 31 December 2018: $2,740 million). The increase in 2019 reflects higher equity markets and business growth. Generally, changes in equity and property investment values are not directly offset by movements in non-linked policyholder liabilities. Movements in equities backing with-profits and unit-linked business have been excluded as they are generally matched by an equal movement in insurance liabilities (including unallocated surplus of with-profits funds).
The estimated sensitivity to a 10 per cent and 20 per cent change in equity and property prices for shareholder-backed Asia other business (including those held by the Group’s joint venture and associate businesses), which would be reflected in short-term fluctuations in investment returns of the Group’s segmental analysis of profit before tax, is as follows: Decrease of 20%
Profit before tax attributable to shareholders (864) (432) (709) (355) Related deferred tax (where applicable) 48 24 21 10
Net effect on profit after tax and shareholders’ equity (816) (408) (688) (345)
C7.3 US insurance operations Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks Jackson’s reported adjusted IFRS operating profit based on longer-term investment returns is sensitive to market conditions, both with respect to income earned on spread-based products and indirectly with respect to income earned on variable annuity asset management fees. Jackson’s main exposures to market risk are to interest rate risk and equity risk.
A prolonged low interest rate environment may result in a lengthening of maturities of the fixed annuity and interest-sensitive life contract holder liabilities from initial estimates, primarily due to lower policy lapses. As interest rates remain at low levels, Jackson may also have to reinvest the cash it receives as interest or proceeds from investments that have matured or that have been sold at lower yields, reducing its investment margins. Moreover, borrowers may prepay or redeem the securities in their investment portfolios with greater frequency in order to borrow at lower market rates, which exacerbates this risk. The majority of Jackson’s fixed annuities, variable annuity fixed account options and life products were designed with contractual provisions that allow crediting rates to be re-set annually, subject to minimum crediting rate guarantees.
(i) Sensitivity to equity risk Jackson had variable annuity contracts with guarantees, for which the net amount at risk (NAR) is defined as the amount of guaranteed benefit in excess of current account value, as follows: Minimum return‡
Combination net deposits plus minimum return, highest specified anniversary account value minus withdrawals post-anniversary * Amounts shown for GMWB comprise sums for the ‘not for life’ portion (where the guaranteed withdrawal base less the account value equals to the net amount at risk (NAR)), and a ‘for life’ portion (where the NAR has been estimated as the present value of future expected benefit payment remaining after the amount of the ‘not for life’ guaranteed benefits is zero). † The GMIB guarantees are substantially reinsured. ‡ Ranges shown based on simple interest. The upper limits of 5 per cent or 8 per cent simple interest are approximately equal to 4.1 per cent and 6 per cent respectively, on a compound interest basis over a typical 10-year bonus period. For example 1 + 10 x 0.05 is similar to 1.04 growing at a compound rate of 4 per cent for a further nine years. The “Combination GMWB” category also includes benefits with a defined increase in the withdrawal percentage under pre-defined non-market conditions.
Account balances of contracts with guarantees were invested in variable separate accounts as follows: Mutual fund type: Money market 956 1,049
Due to the nature of valuation under IFRS of the free-standing derivatives and the variable annuity guarantee features, this hedge, while highly effective on an economic basis, would not automatically offset within the financial statements as the impact of equity market movements resets the free-standing derivatives immediately while the hedged liabilities reset more slowly and fees are recognised prospectively in the period in which they are earned. Jackson’s hedging programme is focused on managing the economic risks in the business and protecting statutory solvency in the circumstances of large market movements. The hedging programme does not aim to hedge IFRS accounting results, which can lead to volatility in the IFRS results in a period of significant market movements, as was seen in 2019.
The estimated sensitivity of Jackson’s profit and shareholders’ equity to immediate increases and decreases in equity markets is shown below. The sensitivities are shown net of related changes in DAC amortisation.
Net effect on profit after tax and shareholders’ equity* 762 202 1,460 608 1,065 429 59 (126)
The above sensitivities assume instantaneous market movements while the actual impact on financial results would vary contingent upon the volume of new product sales and lapses, changes to the derivative portfolio, correlation of market returns and various other factors including volatility, interest rates and elapsed time.
Debt securities and related derivatives are marked to fair value. Value movements on derivatives, again net of related changes to amortisation of DAC and deferred tax, are recorded within the income statement. Fair value movements on debt securities, net of related changes to amortisation of DAC and deferred tax, are recorded within other comprehensive income. The estimated sensitivity of these items and policyholder liabilities to a 1 per cent and 2 per cent decrease (with no floor of zero applied) and increase in interest rates is as follows: Decrease Increase Decrease Increase of 2% of 1% of 2% of 1% of 2% of 1% of 2% of 1%
Profit or loss: Profit before tax (net of related changes in amortisation of DAC) (6,238) (2,815) 3,914 2,141 (4,502) (2,188) 2,815 1,530
Net effect on profit after tax (4,928) (2,224) 3,092 1,691 (3,557) (1,728) 2,224 1,209
Other comprehensive income: Direct effect on carrying value of debt securities (net of related changes in amortisation of DAC) 5,342 2,840 (5,342) (2,840) 5,265 2,988 (5,265) (2,988)
Net effect on other comprehensive income 4,220 2,244 (4,220) (2,244) 4,160 2,360 (4,160) (2,360)
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C7.4 Asset management and other operations (i) Asset management The profit for the year of asset management operations are sensitive to the level of assets under management, as this significantly affects the value of management fees earned by the business in the current and future years. The Group’s asset management operations do not hold significant financial investments.
(ii) Other operations At 31 December 2019, the financial investments of the other operations are principally short-term treasury bills held by the Group’s treasury function for liquidity purposes and so there is limited sensitivity to credit risk and interest rate movements.
C8.2 Deferred tax The statement of financial position contains the following deferred tax assets and liabilities in relation to: 2019 $m
Deferred tax assets Unrealised losses or gains on investments 144 – (16) – (128) – Balances relating to investment and insurance
Of the short-term temporary differences of $3,888 million relating to deferred tax assets, $3,068 million relating to the US insurance operations is expected to be recovered in line with the run off of the in-force book, and the majority of the remaining balances are expected to be recovered within 5 years.
The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets. For the 2019 results and financial position at 31 December 2019, the following tax benefits and losses have not been recognised: Tax benefits Losses Tax benefits Losses
Shares issued under share-based schemes 8,115,540 – 22 5,868,964 1 22 Impact of change in presentation currency – 6 101 – (10) (155)
Options outstanding under save as you earn schemes to subscribe for shares at each year end shown below are as follows: Number of shares to subscribe for
The Company purchased the following number of shares in respect of employee incentive plans. The shares purchased each month are as follows: Number of shares
* The cost in US dollars for the shares purchased each month shown has been calculated from the share prices in pounds sterling using the monthly average exchange rate.
All share transactions were made on an exchange other than the Stock Exchange of Hong Kong. Other than set out above, the Group did not purchase, sell or redeem any Prudential plc listed securities during 2019 or 2018.
Balance at 1 January 1,151 1,275 Demerger of UK and Europe operations (725) – Charged to income statement: Additional provisions 188 307 Unused amounts released (7) (24)
C12.1 Group objectives, policies and processes for managing capital (i) Capital measure The Group manages its Group LCSM available capital as its measure of capital. At 31 December 2019 estimated Group shareholder LCSM available capital is $14.0 billion (31 December 2018: $13.5 billion).
(ii) External capital requirements Following the demerger of the UK and Europe operations from Prudential plc, the Hong Kong Insurance Authority (IA) has assumed the role of the group-wide supervisor for the Prudential Group with the Group no longer subject to Solvency II capital requirements. Ultimately, Prudential plc will become subject to the Group Wide Supervision (GWS) framework which is currently under development by the Hong Kong IA and is expected to be finalised in the second half of 2020.
More details on holding company cash flows and balances are given in section I(iii) of the Additional unaudited financial information. Reserve adequacy testing under a range of scenarios and dynamic solvency testing is carried out, including under certain scenarios mandated by the US and Asia regulators.
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The Group manages its assets, liabilities and capital locally, in accordance with local regulatory requirements and reflecting the different types of liabilities in each business unit. As a result of the diversity of products offered by Prudential and the different regulatory regimes under which it operates, the Group employs differing methods of asset/liability and capital management, depending on the business concerned.
The actual capital is the difference between the admitted assets and admitted liabilities with trading and available-for-sale assets marked-to-market and other assets at book value. Policyholder liabilities are based on a gross premium valuation method using best estimate assumptions with a separate risk margin.
Mathematical reserves are based on a net premium valuation method using assumptions which include a suitable margin for prudence. The valuation interest rate used to calculate these reserves is subject to a maximum that reflects a blend between the risk-adjusted portfolio yield and the reinvestment yield. The approach used to determine the reinvestment yield for reserving allows for average yields thus the impact of movements in interest rates are reflected in the valuation interest rate over time. The available capital is based on assets that are marked-to-market. The Hong Kong IA is in the process of developing a risk-based capital framework, targeted to be introduced by 2024, and has performed several quantitative impact studies over the past few years.
Market liberalisation measures were introduced by BNM in April 2009, which increases the limit from 49 per cent to 70 per cent on foreign equity ownership for insurance companies and Takaful operators in Malaysia. A higher foreign equity limit beyond 70 per cent for insurance companies will be considered by BNM on a case by case basis for companies who support expansion of insurance provision to the most vulnerable in Malaysian society.
(ii) US insurance operations The regulatory framework for Jackson is governed by the requirements of the US NAIC-approved Risk-Based Capital standards. Under these requirements life insurance companies report using a formula-based capital standard, which includes components calculated by applying after-tax factors to various asset, premium and reserve items and a separate model-based component for market risk and interest rate risk associated primarily with variable annuity products. The 31 December 2019 Jackson local statutory results reflect early adoption of the NAIC regulatory framework reforms at the valuation date as agreed with the Department of Insurance Financial Services (DIFS), and Jackson’s decision not to renew its long-standing permitted practice with the DIFS, which allowed certain derivative instruments, taken out to protect Jackson against declines in long-term interest rates, to be included at book value in the local statutory returns. At 31 December 2019, these derivatives were held at fair value.
(iii) Asset management operations – regulatory and other surplus Certain asset management subsidiaries of the Group are subject to local regulatory requirements. The movement in the year of the estimated surplus regulatory capital position of those subsidiaries, combined with the movement in the IFRS basis shareholders’ funds for unregulated asset management operations, is as follows: Regulatory and other surplus
C12.3 Transferability of available capital For Asia, the amounts retained within the insurance companies are at levels that provide an appropriate level of capital strength in excess of the local regulatory minimum. The businesses in Asia may, in general, remit dividends to parent entities, provided the statutory insurance fund meets the local regulatory solvency requirements and there are sufficient statutory accounting profits. For with-profits funds, the excess of assets over liabilities is retained within the funds, with distribution to shareholders tied to the shareholders’ share of declared bonuses.
For Jackson, capital retention is maintained at a level consistent with an appropriate rating by Standard & Poor’s (currently rated AA-). Jackson can pay dividends on its capital stock only out of earned surplus unless prior regulatory approval is obtained. Furthermore, dividends that exceed the greater of statutory net gain from operations less net realised investments losses for the prior year or 10 per cent of Jackson’s prior year end statutory surplus, excluding any increase arising from the application of permitted practices, require prior regulatory approval.
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The Group does not have any right-of-use assets that would meet the definition of investment property. As at 31 December 2019, total right-of-use assets comprised $569 million of property and $24 million of non-property assets, of which $18 million are attributable to shareholders.
Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group’s operations. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. The Group assesses at lease commencement whether it is reasonably certain to exercise the option. This assertion is revisited if there is a material change in circumstances. The undiscounted value of lease payments beyond the break period not recognised in the lease liabilities as at 31 December 2019 is $185 million.
A reconciliation of the carrying amount of these items from the beginning of the year to the end of the year is as follows: Group occupied property
Representing: Analysed as: The Group has non-cancellable property subleases which have been classified as operating leases in 2019 under IFRS 16. The sublease rental income received for the leases is $11 million in 2019.
Tangible assets from continuing operations At 31 December 2019, of the $197 million (31 December 2018: $205 million) tangible assets, $83 million (31 December 2018: $94 million) were held by the Group’s with-profits businesses.
Prudential Life Insurance Company, and the disposal of Prudential Vietnam Finance Company Limited, a wholly owned subsidiary that provides consumer finance. (ii) In 2019, the $(407) million other transactions reflects costs related to the demerger of M&G plc from Prudential plc. These include the following amounts: – $(78) million transaction related costs, principally fees to advisors; – $(182) million being the fee paid to the holders of two subordinated debt instruments as discussed in note C6.1(i); and – $(147) million for one-off costs arising from the separation of the M&G plc business from Prudential plc.
The terms of the sale agreement include an option for the Group to increase its ownership to 100 per cent in the future. The Group has recognised, in line with IFRS, a financial liability and a reduction in shareholders’ equity of $130 million as of the acquisition date for the option, being the discounted expected consideration payable for the remaining 49.9 per cent.
Purchase consideration 142 * The goodwill on acquisition of $260 million is mainly attributable to the expected benefits from new customers and synergies. Refer to note C5.1 for changes to the carrying amount of goodwill during the year. The Group has chosen to apply the full goodwill method under IFRS 3, ‘Business Combinations’ for this acquisition, with non-controlling interests being measured at fair value on the acquisition date.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 297
(Loss) profit before tax (386) 862 Tax (charge) credit note (3) (775) 280
The profit and other comprehensive income for the period from the discontinued UK and Europe operations were wholly attributable to the equity holders of the Company.
Intra-group capital support arrangements Prudential has put in place intra-group arrangements to formalise undertakings by Prudential to the regulators of the Hong Kong subsidiaries regarding their solvency levels.
The Group continues to monitor closely the development of the coronavirus outbreak and its impact on market conditions. If current economic conditions persist, management could take additional actions to mitigate the impact. These actions include, but are not limited to, rebalancing investment portfolios, further market risk hedging, increased use of reinsurance, repricing of in-force benefits, changes to new business pricing and the mix of new business being sold.
Transactions between the Company and its subsidiaries are eliminated on consolidation. The Company has transactions and outstanding balances with certain unit trusts, Open-Ended Investment Companies (OEICs), collateralised debt obligations and similar entities that are not consolidated and where a Group company acts as manager, which are regarded as related parties for the purposes of IAS 24. The balances are included in the Group’s statement of financial position at fair value or amortised cost in accordance with IAS 39 classifications. The transactions are included in the income statement and include amounts paid on issue of shares or units, amounts received on cancellation of shares or units and amounts paid in respect of the periodic charge and administration fee.
In addition, there are no material transactions between the Group’s joint ventures and associates, which are accounted for on an equity method basis, and other Group companies.
Additional details on the Directors’ interests in shares, transactions or arrangements are given in the Directors’ remuneration report. Key management remuneration is disclosed in note B2.3.
(i) Subsidiaries Subsidiaries are those investees that the Group controls. The majority of the Group’s subsidiaries are corporate entities, but the Group’s insurance operations also invest in a number of limited partnerships.
(iii) Structured entities Structured entities are those that have been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. Voting rights relate to administrative tasks. Relevant activities are directed by means of contractual arrangements. The Group invests in structured entities such as: — Collective investment schemes; — Limited partnerships; — Variable interest entities; — Investment vehicles within separate accounts offered through variable annuities; — Collateralised debt obligations; — Mortgage-backed securities; and — Similar asset-backed securities.
Collective investment schemes The Group invests in collective investment schemes, which invest mainly in equities, bonds, cash and cash equivalents, and properties. The Group’s percentage ownership in these entities can fluctuate on a daily basis according to the participation of the Group and other investors in them.
— Where the entity is managed by a Group asset manager, and the Group’s ownership holding in the entity is between 20 per cent and 50 per cent, the facts and circumstances of the Group’s involvement in the entity are considered, including the rights to any fees earned by the asset manager from the entity, in forming a judgement as to whether the Group has control over the entity.
— Where the entity is managed by an asset manager outside the Group, an assessment is made of whether the Group has existing rights that gives it the ability to direct the current activities of the entity and therefore control the entity. In assessing the Group’s ability to direct an entity, the Group considers its ability relative to other investors. The Group has a limited number of investment funds where it considers it has such ability.
Where the Group is deemed to control these entities, they are treated as a subsidiary and are consolidated, with the interests of investors other than the Group being classified as liabilities, and appear as net asset value attributable to unit holders of consolidated investment funds.
Limited partnerships The Group’s insurance operations invest in a number of limited partnerships, either directly or through unit trusts, through a mix of capital and loans. These limited partnerships are managed by general partners, in which the Group holds equity. Such interest in general partners and limited partnerships provide the Group with voting and similar rights to participate in the governance framework of the relevant activities in which limited partnerships are engaged in. Accounting for the limited partnerships as subsidiaries, joint ventures, associates or other financial investments depends on the terms of each partnership agreement and the shareholdings in the general partners.
The Group consolidates the vehicles that hold the investments where the Group is deemed to control the vehicles. When assessing control over the vehicles, the factors considered include the purpose and design of the vehicle, the Group’s exposure to the variability of returns and the scope of the Group’s ability to direct the relevant activities of the vehicle including any kick-out or removal rights that are held by third parties. The outcome of the control assessment is dependent on the terms and conditions of the respective individual arrangements.
For joint ventures and associates accounted for using the equity method, the 12 months financial information of these investments up to 31 December 2019 (covering the same period as that of the Group) has been used in these consolidated financial statements.
The Group’s share of the profits (including short-term fluctuations in investment returns), net of related tax, and carrying amount of interest in joint ventures and associates, which are equity accounted as shown in the consolidated income statement at 31 December 2019 is $397 million (2018: $319 million) for shareholder-backed business and comprises the following: Share of profits from joint ventures and associates, net of related tax 2019 $m 2018 $m
The Group’s interest in joint ventures gives rise to no contingent liabilities or capital commitments that are material to the Group.
Direct subsidiary undertakings of the parent company, Prudential plc (shares held directly or via nominees)
Prudential Corporation Asia Limited OS 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong
Prudential Group Holdings Limited OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom
Aberdeen Standard Cash Creation Fund U 34.16% 28th Floor Bangkok City Tower, 179 South Sathorn Road, Thungmahamek, Sathorn, Bangkok 10120, Thailand
Allied Life Brokerage Agency, Inc LPI 100.00% 400 East Court Avenue, Des Moines, IA 50309, USA
BeGeneral Insurance S.A. OS 51.00% Immeuble WOODIN Center 1st Floor, Avenue Nogues, Plateaux, Abidjan, Cote d’Ivoire
Beneficial General Insurance S.A. OS 50.04% 1944 Blvd de la République, BP 2328, Douala, Cameroon
BOCHK Aggressive Growth Fund U 65.61% 27/F., Bank of China Tower, 1 Garden Road, Hong Kong
BOCI-Prudential Trustee Limited OS 36.00% 12/F & 25/F, Citicorp Centre, 18 Whitfield Road, Causeway Bay, Hong Kong
CEP IV-A CWV AIV LP LPI 23.97% 850 New Burton Road, Suite 201, Dover, DE 19904, USA
CEP IV-A Davenport AIV LP LPI 23.94% 615 South Dupont Highway, Dover, DE 19901, USA
Eastspring Al-Wara’ Investments Berhad OS 100.00% Level 25, Menara Hong Leong, No. 6 Jalan Damanlela, Bukit Damansara, 50490 Kuala Lumpur, Malaysia
Eastspring Asset Management Korea Co. Ltd. OS 100.00% 15th Floor, Shinhan Investment Tower, 70 Yoidae-ro, Yeungdeungpo-gu, Seoul 07325, Korea
Eastspring Infrastructure Debt Fund L.P. PI 90.00% PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands
Eastspring Investments - Global Growth Equity Fund U 73.57% 26, Boulevard Royal, L-2449, Luxembourg
Eastspring Investments (Hong Kong) Limited OS 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong
Eastspring Investments (Luxembourg) SA OS 100.00% 26 Boulevard Royal, L-2449, Luxembourg
Eastspring Investments (Singapore) Limited OS 100.00% 10 Marina Boulevard, #32-01, Marina Bay Financial Centre Tower 2, Singapore 018983
U 100.00% Eastspring Investments Limited, Marunouchi Park Bldg., 2-6-1 Marunochi, Chiyoda-ku, Tokyo, Japan 100-6905
Eastspring Investments Asia Pacific Equity Fund U 99.99% 26, Boulevard Royal, L-2449, Luxembourg
Eastspring Investments Asian High Yield Bond MY Fund U 86.36% Eastspring Investments Berhad, Level 22, Menara Prudential, Persiaran TRX Barat, 55188 Tun Razak Exchange, Kuala Lumpur, Malaysia
Eastspring Investments Asian Infrastructure Equity Fund U 50.78% 26, Boulevard Royal, L-2449, Luxembourg
Eastspring Investments China A Shares Growth Fund U 100.00% 26, Boulevard Royal, L-2449, Luxembourg
Eastspring Investments Emerging Markets Star Players U 36.99% Eastspring Investments Limited, Marunouchi Park Bldg., 2-6-1 Marunochi, Chiyoda-ku, Tokyo, Japan 100-6905
Eastspring Investments European Inv Grade Bond Fund U 99.28% 26, Boulevard Royal, L-2449, Luxembourg
MI 100.00% 23rd Floor, Saigon Trade Center, 37 Ton Duc Thang Street, District 1, Ho Chi Minh City, Vietnam
Eastspring Investments India Equity Fund U 68.69% 26, Boulevard Royal, L-2449, Luxembourg
Eastspring Investments Limited OS 100.00% Marunouchi Park Building, 6-1 Marunouchi 2-chome, Chiyoda-Ku, Tokyo, Japan
Eastspring Investments MY Focus Fund U 21.40% Eastspring Investments Berhad, Level 22, Menara Prudential, Persiaran TRX Barat, 55188 Tun Razak Exchange, Kuala Lumpur, Malaysia
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 305
U 99.76% 10 Marina Boulevard, #32-01, Marina Bay Financial Centre, Singapore 018983
Eastspring Investments Vietnam Navigator Fund U 71.42% 23rd Floor, Saigon Trade Center Building, 37 Ton Duc Thang Street, Ben Nghe Ward, District 1, Ho Chi Minh City, Vietnam
Eastspring Investments World Value Equity Fund U 92.88% 26, Boulevard Royal, L-2449, Luxembourg
OS 100.00% Unit 306-308, 3/F., 1233 Lujiazui Ring Road, China (Shanghai) Pilot Free Trade Zone, China
Eastspring Real Assets Partners OS 100.00% PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands
Fubon China Currency Fund U 20.59% 8F, No. 108, Sec 1, Tun Hwa, South Road, Taipei, Taiwan
Furnival Insurance Company PCC Limited OS 100.00% PO Box 34, St Martin’s House Le Bordage, St Peter Port Guernsey, GY1 4AU
ICICI Prudential Asset Management Company Limited OS 49.00% 12th Floor, Narain Manzil, 23, Barakhamba Road, New Delhi 110001, India
ICICI Prudential Life Insurance Company Limited OS 22.11% ICICI PruLife Towers, 1089 Appasaheb Marathe Marg, Prabhadevi, Mumbai 400025, India
U 47.36% 79 Sir John Rogerson's Quay, Dublin 2, D02 RK 57, Ireland iShares S&P 500 Financials Sector UCITS U 22.98%
Jackson Holdings LLC OS 100.00% 1105 North Market Street, Suite 1300, Wilmington, DE 19801, USA
Jackson National Life Distributors LLC OS 100.00% 1209 Orange Street, Wilmington, DE 19801, USA
Manulife Asia Pacific Bond Fund U 27.29% 9/F, No 89 Son Ren Road, Taipei, Taiwan
National Planning Holdings, LLC OS 100.00% 1209 Orange Street, Wilmington, DE 19801, USA
Nomura Six Years Ladder Maturity Asia Pacific Emerging Market Bond Fund
PGDS (US One) LLC OS 100.00% 1209 Orange Street, Wilmington, DE 19801, USA
PPM CLO 2 Ltd. OS 100.00% PO Box 1093, Queensgate House, Grand Cayman KY1-1102, Cayman Islands
PPM CLO 2, LLC PS 100.00% 4001 Kennet Pike, Suite 301, Wilmington, DE, 19807, USA
PPM CLO 2018-1 Ltd. PS 100.00% Queensgate House, South Church Street, George Town, Grand Cayman KY1-1102, Cayman Islands
PPM CLO 3, LLC PS 100.00% 4001 Kennet Pike, Suite 301, Wilmington, DE, 19807, USA
Prenetics Limited PS 14.27% 7th Floor, Prosperity Millennia Plaza, 663 King’s Road, North Point, Hong Kong
Prudential BSN Takaful Berhad† OS 49.00% Level 8A, Menara Prudential, No. 10 Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia
Prudential Five Limited (in liquidation) OS 100.00% c/o Mazars LLP, 45 Church Street, Birmingham, B3 2RT, United Kingdom
Prudential General Insurance Hong Kong Limited OS 100.00% 59th Floor, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong
Prudential Group Secretarial Services Limited OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom
Prudential Holdings Limited OS 100.00% 4th Floor, Saltire Court, 20, Castle Terrace, Edinburgh, EH1 2EN, United Kingdom
Prudential Life Assurance (Lao) Company Limited OS 100.00% 5th Floor, Lao international Business and Tourist Center Project (Vientiane Center), Khouvieng Road, Nongchan Village, Sisattanak District, Vientiane Capital, Lao PDR
Prudential Life Vault Limited OS 100.00% 98 Awolowo Road, South-West Ikoyi, Lagos, Nigeria
Prudential Myanmar Life Insurance Limited OS 100.00% #15-01, 15th Floor, Sule Square, 221 Sule Pagoda Road, Kyauktada Township, Yangon, Myanmar
Prudential Singapore Holdings Pte. Limited OS 100.00% 30 Cecil Street, #30-01 Prudential Tower, Singapore 049712
ROP, Inc OS 100.00% 1209 Orange Street, Wilmington, DE 19801, USA
SCB SET Banking Sector Index (Accumulation) U 32.08% 7-8th Floor, SCB Park Plaza 1, 18 Ratchadapisek Road, Chatuchak, Bangkok 10900, Thailand
Schroder Asian Investment Grade Credit U 41.08% 138 Market Street, #23-01 CapitaGreen, Singapore 048946
Schroder US Dollar Money Fund U 37.19% HSBC Institutional Trust Service (Asia) Limited, 1 Queen's Road Central, Hong Kong.
SINOPAC China High Yield Fixed Income Fund U 35.38% 9F No.39 Section 1, Chung Hua Road, Taipei, Taiwan
Squire Capital I LLC MI 100.00% 1 Corporate Way, Lansing, MI 48951, USA
Taishin Emerging Markets Bond Fund U 28.78% 1F, No.9, Dehui St., Zhongshan Dist. Taipei, Taiwan
(c) Related undertakings continued Other subsidiaries, joint ventures, associates and significant holdings of the Group – no shares held directly by the parent company, Prudential plc or its nominees: continued