Prudential uses long-term thinking to create long-term value. Through our strong fi nancial performance and international strategy, we create fi nancial benefi ts for our shareholders and investors and deliver economic and social benefi ts for the communities in which we operate.
AAAAAAAAAAAAAA Asia life insurance business operating profi t3 up 30 per cent to £920 million
AAAAAAAAAAAAAA High-performing multi-channel distribution with increasing agent activity and productivity and strongly growing sales through an extensive range of bank partners
AAAAAAAAAAAAAA Well balanced life insurance product portfolio emphasising regular premium savings and protection that off ers good returns for customers and shareholders
AAAAAAAAAAAAAA More top three market positions4 than any other life insurer in the region and the region’s largest retail asset manager
4 In terms of new business APE. 5 Based on operating profi t before other income and expenditure. 6 EEV long-term business.
Life assurance % of Group APE new business premiums 45% Asia 35% US 20% UK
Jackson is one of the largest life insurance companies in the US, providing retirement savings and income solutions to approximately 4 million customers. Jackson is also one of the top two providers of variable annuities in the US.
Founded 50 years ago, Jackson has a long and successful record of providing advisers with the products, tools and support to design eff ective retirement solutions for their clients.
M&G is Prudential’s UK and European fund management business with total assets under management of £228 billion.
AAAAAAAAAAAAAA Record operating profi t up 6 per cent to £320 million
AAAAAAAAAAAAAA M&G’s institutional business was recognised for its strength and expertise at the UK Pensions Awards, where it was named Fixed Income Manager of the Year 2012
Prudential has produced a strong performance in 2012. Globally, we have around 24 million insurance customers and have continued to provide each of them with products and services that they value highly, delivering on our promise to offer quality savings and protection products.
We have increased our dividend by 15.9 per cent to 29.19 pence per share. This is the second time in three years we have rebased our dividend upwards. Our approach to growing the dividend demonstrates our confidence in our ability to continue to deliver long-term value for our shareholders.
Section 1: Overview 02 Chairman’s statement 04 Group Chief Executive’s report
Section 2: Business review 12 Financial highlights 14 Chief Financial Offi cer’s overview 20 Business unit review: AAAAAAAAA Insurance operations: Asia, US, UK AAAAAAAAA Asset management: M&G, Eastspring Investments, US
Section 3: Governance 88 Board of directors 93 Governance report 110 Additional disclosures 111 Index to principal directors’ report disclosures
Section 5: Financial statements and European Embedded Value (EEV) basis supplementary information 146 Index to Group fi nancial statements 147 Consolidated income statement 148 Consolidated statement of comprehensive income 149 Consolidated statement of changes in equity 151 Consolidated statement of fi nancial position 153 Consolidated statement of cash fl ows 154 Notes on the Group fi nancial statements 315 Balance sheet of the parent company 316 Notes on the parent company fi nancial statements 324 Statement of directors’ responsibilities in respect of the
Section 6: Additional information 386 Risk factors 392 Glossary 396 Shareholder information 398 How to contact us £2,533mm
Group Chief Executive’s report For information about our strategy and operating principles page 04
Business review For information about our business units’ performance page 20
‘ Our ability to generate strong fi nancial performance despite adverse market conditions and the challenge of historically low long-term interest rates is testament to both the success of our strategy and the eff orts of our management team.’
Welcome to Prudential’s 2012 Annual Report, the fi rst since I became Chairman in July 2012. I am pleased to report that the Group has delivered another excellent performance in 2012, providing products and services of real value to our 24 million insurance customers around the world and strong returns to our shareholders. Our leading presence in the fast-growing economies of Asia drives our long-term profi table growth while our focused businesses in the US and the UK continue to make solid contributions to the Group’s overall performance.
There have been some changes to the Board during the year. When I succeeded Harvey McGrath as Chairman in the middle of last year, I refl ected that his tenure encompassed some of the most diffi cult economic conditions a business like ours could face. On behalf of the Board and the entire Company, I would like to thank him for his stewardship of Prudential during those diffi cult times.
In March 2013, we announced that Anthony Nightingale, CMG, would be joining the Board on 1 June 2013 as a non-executive director and member of the Remuneration Committee. He has spent more than 40 years at Jardine Matheson Group, which is one of Asia’s leading and most diverse business groups, including six years as Managing Director until he retired from executive offi ce in March 2012. Anthony is a Hong Kong representative to the APEC Business Advisory Council and is a member of the Commission on Strategic Development in Hong Kong.
We continue to place great value on the UK, our home market, where we were born 165 years ago. In 2013, we have agreed to be the offi cial title sponsor of Prudential RideLondon, a two-day cycling festival that will take place on 3 and 4 August 2013, which we hope will help build on the legacy of the 2012 London Olympics.
I would like to thank all our employees for contributing to what has been another very strong year. It is their commitment to supporting our customers, along with executing our successful strategy, which allows us to be confi dent that we can continue to provide shareholders with growing returns in the years to come.
‘ In 2012, we have delivered a strong performance. Our Group has achieved signifi cant and profi table growth and produced increased levels of cash, which allowed us to provide our shareholders with a growing dividend.’
I am pleased to report a strong performance in 2012. Our focus on our customers in each of our geographies, combined with the strength of our distribution, franchise and brands, has allowed us to continue to provide distinctive value to our customers. Thanks to this, the Group has continued to deliver on the three key fi nancial metrics we have focused on since 2009: IFRS operating profi t, new business profi t and net cash remittances. In 2012 in Asia, we have achieved two of the 2013 ‘Growth and Cash’ objectives and have continued to make progress towards achieving the others, despite a global macroeconomic environment which remains challenging and historically low long-term interest rates.
Our strategy has remained consistent: to accelerate growth in Asia; to build on the strength of our US operations; to focus the UK business and to optimise asset management. We have remained focused on executing that strategy with discipline and on producing strong results across our geographies.
Asia has delivered excellent results in 2012. Our business, Prudential Corporation Asia, which is already one of the largest in the region, has nevertheless been able to more than double its IFRS operating profi t in three years to almost £1 billion, delivering £988 million in 2012. That growth in IFRS operating profi t was not achieved at the expense of cash generation or by slowing down sales growth. Asia reported record new business profi t in 2012. It also delivered a net cash remittance of £341 million, exceeding its 2013 objective of £300 million. For the fi rst time in our history, Asia was the largest contributor of cash to the Group, an exceptional performance when you consider that in 2009 Asia’s net cash remittance was £40 million. This performance was largely driven by the clear progress we have made in some of our ‘sweet-spot’ markets, particularly Indonesia, Singapore, Malaysia, the Philippines and Thailand.
There was strong growth in the US, with total IFRS operating profi t exceeding £1 billion for the fi rst time, demonstrating the strength of Jackson’s operations in a competitive marketplace. The UK remains focused on with-profi ts products and individual annuities, seeing strong sales of both in a diffi cult market. M&G has seen record net fl ows at £16.9 billion, IFRS operating profi t and funds under management, all driven by its investment performance and customer proposition.
In a turbulent environment, we have continued to take proactive and decisive management action to deliver on our strategy. In our industry, distribution is absolutely key. Therefore we have continued to strengthen our ability to reach our chosen customers in our chosen markets. For instance, we have strengthened our distribution in Thailand by establishing an exclusive partnership with Thanachart Bank, a leading bank in this market, and through the acquisition of its life business,
Thanachart Life. In the US, we have continued to invest in our distribution as well, strengthening our relationship with our partners. We have, throughout the year, ensured that we put value ahead of volume, ensuring that we reached our return on capital and payback targets. To mention a few examples, in Malaysia we refocused the business on higher-value, lower-volume protection business. In Korea and in Taiwan, at times during the year, we refused to write poor-value business, sacrifi cing some sales growth in the process.
First, we take a balanced approach to performance management across the key measures of IFRS, EEV and cash, with a particular focus on IFRS and cash. The Group has reported a strong performance across all business units on these measures. Our IFRS operating profi t based on longer-term investment returns increased by 25 per cent in 2012 to £2,533 million (2011: £2,027 million1) led by Asia and the US. IFRS shareholders’ funds increased by 21 per cent to £10.4 billion, compared to £8.6 billion1 as at 31 December 2011. EEV operating profi t grew by 9 per cent to £4,321 million (2011: £3,978 million). Net cash remittances to the Group from our businesses increased by 9 per cent to £1,200 million (2011: £1,105 million), with Asia now the largest contributor.
Third, we are proactive in managing risk across the cycle. Our balance sheet continues to be defensively positioned and at the end of the period our IGD surplus was £5.1 billion1 (31 December 2011: £4.0 billion). Our surplus increased due to strong net capital generation through operating earnings offset, as usual, by external dividend payments and other costs.
We have organised three investor seminars in London (on 1 December 2010), Kuala Lumpur (on 15 November 2011) and New York (on 29 November 2012). These seminars consisted of presentations on different aspects of our business including: Group strategy; our operating principles; the 2013 ‘Growth and Cash’ objectives; our Asian business, including country-by-country presentations; and Jackson, with further insights into its hedging strategy, capital position and sensitivity to market shocks. We intend to hold a fourth annual seminar in the last quarter of 2013 in London.
2013 ‘Growth and Cash’ objectives 2012 has made a strong contribution to our progress towards delivering our challenging 2013 ‘Growth and Cash’ objectives that I set out at our 2010 investor conference. Asia has achieved two of its three 2013 objectives in 2012 and the Group remains on track to meet the remaining objectives.
Looking at the cumulative cash target of £3.8 billion over the four-year period from 2010 to end-2013, we have so far achieved 85 per cent of the total objective with one year remaining.
Asia profi tability Value of new business 1,266 1,426 IFRS operating profi tnote 3 988 930
4 Remittances from Asia in 2012 include a non-recurring net remittance of £27 million, representing cash from sale of Group’s holding in China Life Insurance Company in Taiwan off set by repayment of funding contingent on future profi ts of the Hong Kong life insurance operations.
5 The net remittance objective for Jackson was increased from £200 million to £260 million to refl ect the positive impact of the acquisition of REALIC.
Our operating performance by business unit Prudential Corporation Asia Our strategy in Asia is focused on meeting the needs of the emerging middle class in the region for savings and protection. The region’s positive demographics, strong economic growth, sound public fi nances and favourable public policy environment with a clear preference for private provision of protection, have all led to a rapidly expanding middle class, with a strong and growing demand for our savings and protection products.
Our life business in Asia, with its focus on capital-effi cient products and fast payback periods, continues to deliver profi table, cash-generative growth. IFRS long-term operating profi t in Asia increased by 30 per cent in the period to £920 million (2011: £709 million1) and net cash remittances increased by 66 per cent to £341 million (2011: £206 million).
Our four largest markets – Indonesia, Hong Kong, Singapore and Malaysia – have made the most material contribution to the region’s growth in recent years. In addition to our well known strength in these four markets, we are building our presence and distribution in other markets that have the potential to become material drivers of growth over the medium and long term. Two such markets are Thailand and the Philippines, which in aggregate grew new business profi t by 93 per cent in 2012. In Thailand, a market with considerable and attractive growth potential, where we were historically underweight, our recently announced exclusive long-term bancassurance partnership with Thanachart, and the acquisition of Thanachart Life, fulfi ls our long-standing ambition to signifi cantly increase our footprint in that country. In the Philippines, where we are a market leader, our business is now making good progress, delivering strong and profi table growth. We believe this market has promising prospects due to its large population and the improved quality of its macroeconomic management, with its renewed emphasis on attracting foreign direct investment as well as the upgrading of the country’s infrastructure. In January 2013, we started life insurance operations in Cambodia, our 13th market, and entered into a partnership with ACLEDA Bank PLC, the largest retail and commercial bank in the country. This is the fi rst deal of its kind in Cambodia, where we believe there are signifi cant opportunities for growth as the market develops.
In 2012, Jackson delivered IFRS long-term operating profi t of £964 million, up 48 per cent on the prior year (2011: £651 million1). This increase in profi ts is in part due to increased fee income from the signifi cant net fl ows captured in the last few years, and in part due to the non-recurring in 2012 of an accelerated deferred acquisition cost amortisation charge of £190 million in 2011. In 2012, new business profi t grew 7 per cent, with APE sales up 15 per cent as historically low interest rates continued to weigh on profi ts. The pricing actions taken during the year allowed Jackson to mitigate the negative impact of these interest rates.
Our UK business has demonstrated resilience as it continues to benefi t from its focus on its core products, with-profi ts and individual annuities, with sales of both increasing by more than 30 per cent. We achieve internal rates of return that are commensurate with other parts of the business. New business profi t increased 20 per cent to £313 million (2011: £260 million) and IFRS long-term operating profi t grew 3 per cent to £703 million (2011: £683 million). We completed two selective bulk annuity deals that contributed to this fi gure.
Uncertainty about the fi nal Solvency II outcome remains. We will continue to evaluate our options, including consideration of the Group’s domicile, in the event that the fi nal outcome is negative and potentially impacts our ability to deliver value to our customers and shareholders. We welcome the decision by the UK Financial Services Authority to strengthen the existing Individual Capital Adequacy Standards (ICAS) regime in the absence of the implementation of Solvency II.
Note 1 The estimated position at 28 February 2013 allows for economic conditions and surplus generation since 31 December 2012. It is stated before the fi nal dividend and the eff ect of the Thanachart acquisition and aft er allowing for a reduction in Jackson’s contribution to IGD surplus of £1.3 billion.
B u sin ess rev iew 11Prudential plc Annual Report 2012
Section 2 12 Financial highlights 14 Chief Financial Offi cer’s overview 20 Business unit review: AAAAAAAAAAAA Insurance operations: Asia, US, UK AAAAAAAAAAAA Asset management: M&G, Eastspring Investments, US 46 Financial review 68 Risk and capital management 79 Corporate responsibility review
Payback period 3 years 3 years 2 years 1 year 3 years 4 years 2 years 2 years Internal rate of return >20% >20% >20% >20% >20% >20% >20% >20%
At 31 Dec 2012 £1,839m £7,824m £(657)m £46,048m £69,189m £18,269m £1,982m £9,597m £(1,129)m £49,505m £92,261m £21,213m £43,944m £122,183m £60,523m £17,716m
Basic earnings per share – based on operating profit after tax and non-controlling interest
3 Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the IFRS fi nancial statements.
4 2012 operating profi t includes one-off gain of £51 million arising on sale of Group’s interest in China Life Insurance Company of Taiwan.
5 2011 included accelerated deferred acquisition costs (DAC) amortisation of £190 million which has not recurred.
6 Underlying free surplus generated comprises underlying free surplus generated from the Group’s long-term business (net of investment in new business) and that generated from asset management operations.
7 Estimated. 8 From March 2013 the basis of calculating Jackson’s contribution to the Group’s
9 Remittances from Asia in 2012 include net remittance of £27 million, representing cash from the sale of the Group’s holding in China Life Insurance Company in Taiwan off set by repayment of funding contingent on future profi ts of the Hong Kong life insurance operations.
Our guiding operating principle is simple – drive the creation of sustainable shareholder value while operating within a conservative risk management framework. Over the last four years, through a combination of disciplined execution and prudent management of our balance sheet risks, Prudential has delivered profi table growth and enhanced its capital fl exibility, despite the challenging market environment.
EEV new business profi t (‘new business profi t’), our primary growth measure, increased by 14 per cent to £2,452 million (2011: £2,151 million), IFRS operating profi t based on longer-term investment returns (‘IFRS operating profi t’) increased by 25 per cent to £2,533 million (2011: £2,027 million)1 and net cash remitted from the business units to the Group increased by 9 per cent to £1,200 million (2011: £1,105 million). As these results demonstrate, the quality of our businesses across Asia, the US and the UK, combined with the strength of our balance sheet and fi nancial discipline, underpins the Group’s ability to deliver both growth and cash in the face of continued macroeconomic headwinds.
Our Asia long-term business has continued to build on the progress of recent years, with IFRS operating profi t of £920 million (2011: £709 million)1 up 30 per cent. This strong performance has been driven by the increase in the size of the in-force portfolio including the growth of our health and protection business. Our largest markets of Indonesia, Hong Kong, Singapore and Malaysia continue to generate good levels of growth, with IFRS operating profi t up 22 per cent collectively. Asia’s long-term EEV operating profi t grew by 11 per cent in 2012 to £1,960 million (2011: £1,764 million), with progress on this measure impacted by lower expected returns as a result of the fall in interest rates during the year.
In the US, long-term business IFRS operating profi t was up 48 per cent in 2012 to £964 million (2011: £651 million)1, which includes a contribution of £67 million from REALIC, following its acquisition in September 2012. The remaining increase primarily refl ects higher fee income generated by growth in the separate account assets, as well as the expected non-recurring impact of accelerated deferred acquisition cost (DAC) amortisation of £190 million in 2011. This has been partially offset by the adverse effect on spread income of lower bond yields. Fee income increased by 29 per cent to £875 million in 2012 (2011: £680 million), as a result of growth in separate account asset balances, which stood at £49 billion at 31 December 2012 (31 December 2011: £38 billion), together with higher average fee levels. Spread income (including the expected return on shareholders’ assets) was £757 million in 2012 (2011: £813 million), with lower yields reducing the average spread margin that we earned on general account liabilities from 258 basis points in 2011 to 239 basis points in 2012 as expected. Jackson’s long-term EEV operating profi t increased by 13 per cent to £1,610 million (2011: £1,431 million) primarily due to improved new business profi ts and higher opening value of in-force business following recent growth in the portfolio. We are pleased with the acquisition of REALIC as it presents a fi nancially attractive deal, generating seasoned insurance income, immediate earnings accretion and a gain on EEV shareholders’ funds of £453 million.
‘Growth and Cash’ fi nancial objectives The following discussion contains forward-looking statements that involve inherent risks and uncertainties. Prudential’s actual future fi nancial condition or performance or other indicated results may differ materially from those indicated in any such forward-looking statement due to a number of important factors (including those discussed under the heading ‘Risk factors’ in this document). See the discussion under the heading ‘Forwardlooking statements’ at the front of this document.
UK to deliver £350 million of net cash remittance to the Group in 2013 (2009: £284 million3).
(iii) Cumulative net cash remittances1: All business units in aggregate to deliver cumulative net cash remittances of at least £3.8 billion over the period 2010 to end-2013. These net remittances are to be underpinned by a targeted level of cumulative underlying free surplus generation of £6.5 billion over the same period.
As mentioned in the Group Chief Executive’s report, we remain focused on these objectives and have continued to make progress towards them. In 2012 we have exceeded our 2013 IFRS operating profi t and net remittance objectives for Asia and we are on track to achieve the rest. We set out below in more detail our progress towards these objectives based on our results for 2012.
2 The net remittance objective for Jackson was increased from £200 million to £260 million to refl ect the positive impact of the acquisition of REALIC.
3 Representing the underlying remittances excluding the £150 million impact of proactive fi nancing techniques used to bring forward cash emergence of the in-force book during the fi nancial crisis.
Asia profi tability objectives Actual (as originally reported) Objective 2009 £m 2010 £m 2011 £m 2012 £m
Cumulative net cash remittances from 2010 onwards 3,240 3,800 85 Cumulative underlying group free surplus generation (which is net of investment in new business) 5,779 6,500 89
3 Net remittances from Jackson in 2011 include releases of excess surplus to Group.
5 Including Prudential Capital. 6 The net remittance objective for Jackson was increased from £200 million to £260 million to refl ect the positive impact of the acquisition of REALIC.
In 2012, cash remitted to the Group increased by 9 per cent to £1,200 million (2011: £1,105 million), with considerable amounts of cash remitted from all our business operations highlighting the improved balance of contributions from across the Group. Asia’s remittances increased 66 per cent to £341 million (2011: £206 million), demonstrating its transition into a highly cash-generative business as a result of signifi cant growth and its focus on health and protection products. Asia’s 2012 cash remittance is ahead of its 2013 fi nancial objective of £300 million. We remain confi dent of further positive progress underpinned by strong cash generation from the in-force portfolio and continued growth in capital-effi cient new business. The quality of Jackson’s post-fi nancial crisis expansion in variable annuities is evidenced by its cash remittance of £249 million while continuing to grow the business, and fi nancing the acquisition of REALIC through its internal resources. The positive impact of this fi nancially attractive acquisition will enable Jackson to increase its net remittance objective for Group from £200 million to £260 million in 2013 and beyond. The UK life operations have continued to make sizeable remittances at £313 million (2011: £297 million), supported by shareholder transfers from the with-profi ts fund and cash-positive new annuity business. M&G (including Prudential Capital) delivered net remittances of £297 million (2011: £280 million), refl ecting its relatively capital-light business model that facilitates a high dividend payout ratio from earnings.
Against the cumulative 2010 to 2013 net remittance objective of £3.8 billion, by 31 December 2012 over £3.2 billion has been remitted by business operations. We remain confi dent of achieving this target. Our confi dence is underpinned by the strong underlying free surplus generation of our businesses which, by 31 December 2012, had generated a total of £5.8 billion against our 2010 to 2013 cumulative objective of £6.5 billion.
Risk-Based Capital (RBC) formula as an early warning tool for State regulators to identify potentially inadequately capitalised companies for purposes of initiating regulatory action. The RBC ratio, being the ratio of available capital to regulatory capital, is based on the highest level of capital requirement at which remedial action may be initiated, the Company Action Level.
In March 2013, we have agreed with the FSA to revise the calculation of the contribution Jackson makes to the Group’s IGD surplus. Until now the contribution of Jackson to the reported IGD surplus was based on an intervention level set at 75 per cent of US Risk-Based Capital Company Action Level (CAL). Going forward the contribution of Jackson to IGD surplus will equal the surplus in excess of 250 per cent of CAL. This is more in line with the level at which we currently report free surplus, which we have set at 235 per cent of CAL. In the absence of an agreed Solvency II approach, we believe that this change makes the IGD surplus a more meaningful measure and one that is more closely aligned with economic reality. The change has no impact on the way that the US business is managed or regulated locally. For consistency we also intend to align our free surplus calibration to 250 per cent of CAL going forward.
Shareholders’ funds During 2012, investment markets continued to experience considerable volatility, with positive movements in global equity market indices only towards the end of the year and further falls in long-term interest rates in the US, the UK and a number of Asian countries, most notably Hong Kong and Singapore. Despite these effects, the Group’s EEV shareholders’ funds increased by 14 per cent during 2012 to £22.4 billion (31 December 2011: £19.6 billion). On a per share basis EEV at the end of 31 December 2012 stood at 878 pence, up from 771 pence at 31 December 2011. IFRS shareholders’ funds were 21 per cent higher at £10.4 billion (31 December 2011: £8.6 billion)2.
Summary The fi nancial progress we have reported in 2012 demonstrates the Group’s resilience to the challenges faced by the global economy. By maintaining our bias in favour of less volatile types of income, such as insurance and fee, and by diversifying our products set and distribution platforms, we have continued to improve both the quality and the balance of our earnings. Our disciplined approach to value creation and focus on cash generation, combined with a robust capital position and a conservative risk management stance, provide us with a strong foundation for the future.
AAAAAAAAAAAAAA Double 2009 value of IFRS life and asset management pre-tax operating profi t
AAAAAAAAAAAAAA Deliver £300 million of net cash remittance to the Group.
The manifestation of this demand varies signifi cantly across the region, refl ecting the various stages of development in each individual market, together with their distinct regulatory and competitive environments, cultural differences and customer preferences. However, across all markets there is increasing recognition among governments and regulators of the social utility of a vibrant private sector life insurance market that provides fi nancial security to families, effi ciently channels long-term savings into fi nancial markets and generates employment opportunities within the industry.
During 2012, Asia’s average economic growth rates, although they remained well above the global average, continued to moderate following the post-crisis high seen in 2010. This is to some degree a consequence of the weakness of the economies of North America and Europe. While domestic factors were a signifi cant infl uence in India and China as policymakers grapple with sensitive political situations and economic imbalances, the resilience of many other economies in the region, particularly in South-east Asia, was highlighted by upward revisions to IMF growth forecasts in the second half of the year. Hong Kong’s economic growth accelerated during the fourth quarter last year and looks set to have an improved year in 2013 and the Singaporean Government has said that the outlook for its economy is cautiously positive as it also had a better than expected fourth quarter. However, the strongest performing regional economies were led by Indonesia, Malaysia, the Philippines and Thailand where growth is increasingly driven by the expansion of domestic demand and is less reliant on exports. Face to face sales, typically through an agent, remains the dominant distribution channel throughout the Asia region and the expertise needed to build and manage agency represents a signifi cant barrier for new entrants. Bancassurance has been growing at a faster rate than agency in recent years from a lower base.
As the life insurance industry continues to grow, so the regulatory environment continues to evolve. Regulators are encouraging insurers to strengthen their risk and solvency management processes and to improve their sales processes to ensure that customers receive good quality advice and buy products suitable to their needs. Most international insurers operating in the region are supportive of these trends and generally aim to operate above current local regulatory standards. The recent recommendations of the Monetary Authority of Singapore’s FAIR Panel are indicative of the kind of regulatory efforts under way in the region to improve the overall standard of agency distribution in insurance.
Building and strengthening Prudential’s multichannel distribution capabilities is a constant objective for us. Tied-agency remains a highly effective and effi cient distribution channel in Asia and Prudential has one of the region’s largest agency forces. We focus both on the size and the productivity of our agency force. Agency activity is a key indicator of quality and performance; during 2012 Prudential’s average active agency manpower rate increased by 14 per cent (excluding India). In our sweet-spot of South-east Asia, the increase in active agency manpower of 15 per cent contributed signifi cantly to a 19 per cent increase in new business profi t in the agency channel.
It is part of our strategy to focus on regular premium products which allow our customers to invest over the long term and smooth the impact of timing on their investment returns. We aim to make most of our sales as regular premiums and in 2012, the proportion of regular premium in our APE sales was in excess of 90 per cent, which ensures the profi tability and resilience of our growing in-force book. Although single premium products can provide appropriate opportunities for customers with lump sums, we believe that regular premium policies with protection riders best meet the majority of our customers’ needs. In 2012, 32 per cent of our new business APE was related to protection, up 2 percentage points over prior year. Given the recent volatility in the fi nancial markets, we have seen a shift towards non-linked products; the proportion of linked products in the new business APE mix declined to 29 per cent compared to 32 per cent for 2011.
During 2012, shareholder-backed business policyholder liabilities have increased by 16 per cent to £21.2 billion (31 December 2011: £18.3 billion), due to strong business fl ows of £2.0 billion (up 8 per cent on last year’s equivalent amount of £1.8 billion) and higher bond and equity values.
Underlying free surplus generated by the in-force life business was 9 per cent higher at £771 million (2011: £707 million) refl ecting the increasing scale of the business. Of this total, £292 million (2011: £297 million) was reinvested in new business at internal rates of return of over 20 per cent and average payback periods of three years. The overall cash generating capacity of the life business is clearly demonstrated by net remittances of £384 million to the Group during 2012.
Market conditions in China during 2012 have been challenging as economic growth slowed and the country continued to adjust to a changing political environment.
CITIC-Prudential remains one of the leading foreign joint ventures in a market that remains dominated by domestic players. We do anticipate the market liberalising at some point in the future, however the timing of such an opening remains uncertain. In the meantime, we are focused on continuing to build a high-quality, multichannel distribution organisation.
Prudential’s 50 per cent share of sales for 2012 was £56 million, broadly in line with the prior year. During this year we continued to focus on agent recruitment and on promoting sales of regular premium business. Bancassurance, which accounts for nearly half of our total sales in China, has seen lower productivity from bank branches following the tightening of regulations that came into effect last year.
The Hong Kong economy continues to benefi t from its close ties with mainland China and it remains a fi nancial and logistics hub for the region beyond China, which ensures a continued and strong demand for our products.
On 2 July, we announced that Prudential has received in-principle approval from Cambodia’s Ministry of Economy and Finance to establish a wholly foreign-owned life insurance operation in the country. Although the Cambodian economy is relatively small at present, it has delivered strong GDP growth over the past 10 years and we believe this presents excellent opportunities to develop the life insurance industry in the coming years. The business sold its fi rst policies in January 2013.
In addition to providing value directly to our customers through our products and services, we aim to provide wider benefi ts to the community where we operate. Therefore, Prudential supports a range of corporate social responsibility activities across Asia, with a focus on providing disaster relief, promoting fi nancial literacy and benefi ting children. During 2012, Prudential extended its highly successful children’s fi nancial literacy programme, ‘Cha-Ching’; for example, this has now been adopted in the Philippines as part of the school curriculum.
New business APE was £1,897 million, an increase of 14 per cent over prior year. During the second half of 2012 the reported growth rates did moderate as the economic climate became generally more challenging and specifi cally in Malaysia, Korea and Taiwan we deliberately and proactively slowed sales of lower margin products.
New business profi t of £1,266 million grew at a faster rate than APE at 18 per cent. This refl ects the positive impacts of product participation decisions as outlined above, proactive pricing actions to mitigate the adverse effects of low interest rates and a shift in country mix. Our agency and bank channels grew their respective contribution to new business profi t at similar rates in 2012.
EEV operating profi t from our in-force business of £694 million is in line with prior year as the impact of the signifi cant increase in the unwind that comes from a larger in-force book and the net positive movement in the contribution to profi ts from assumption changes and experience variances was offset by the drag from lower discount rates.
In Korea, the weak economic climate has resulted in a decline in demand for unit-linked products, with consumers opting instead for interest sensitive products. Against this backdrop, we have chosen to relinquish volume rather than compete for the low margin, capital-intensive guaranteed return segment of the market. Consequently, we have deliberately let our sales via banks and brokers decline. Our business has continued to focus on developing a high-quality proprietary distribution channel which saw active agents increase by 9 per cent in 2012.
Our focus in 2012 on health and protection rather than lower margin, higher premium volume savings related top ups has boosted the mix of these products to around 60 per cent and improved our profi tability, at the expense of top line growth. We have continued to expand in the Takaful sector where we remain market leader.
Taiwan is mainly focused on bank distribution through our partnership with E.Sun Commercial Bank and SCB, supplemented by direct marketing and worksite marketing activities which are growing fast. APE was depressed by our decision not to compete in the market with products we consider to be uneconomic.
In Vietnam, we saw a very strong recovery during the fourth quarter with new business APE up 23 per cent over prior year, to deliver an overall 7 per cent increase for the year. In Thailand, we saw growth of 37 per cent driven by our bancassurance capabilities. The Philippines delivered growth of 50 per cent, refl ecting increased agency activity and the success of partnership distribution.
The US is the world’s largest retirement savings market, with large cohorts of the 78 million baby-boomers1 reaching retirement age each year, creating signifi cant demand for retirement income products. Our strategy in the US is to take advantage of this profi table growth opportunity.
APE sales 1,462 1,275 15 1,290 13 New business profi t 873 815 7 825 6 Total IFRS operating profi tnote 964 651 48 659 46 Total EEV operating profi t 1,610 1,431 13 1,448 11
Mike Wells President and Chief Executive Offi cer Jackson National Life Insurance Company
Market overview The United States is the world’s largest retirement savings market. Each year, many of the 78 million ‘baby- boomers’ reach retirement age, which will trigger a shift from savings accumulation to retirement income generation for more than US$10 trillion of accumulated wealth over the next decade1.
Business performance Jackson’s strategy remains focused on providing value to its customers and driving shareholder value while operating within a conservative risk management framework. This approach has enabled us to successfully navigate the signifi cant macroeconomic and fi nancial market challenges of the last fi ve years and ensured a continuation of our strong performance in 2012.
In 2012, Jackson delivered APE retail sales of £1,424 million, an increase of 14 per cent over 2011. With the addition of a modest level of institutional sales, total APE sales increased by 15 per cent to £1,462 million. These strong sales levels helped to drive annuity net fl ows higher to £8.8 billion during 2012, a 19 per cent increase over 2011. Although we do not target volume or market share, our ranking climbed to second in variable annuity sales in the US through the third quarter of 2012 (latest information available), while market share increased to 14.0 per cent from 11.4 per cent for the full year 20112.
Notes 1 Source: US Census Bureau. 2 Sources: Morningstar Annuity Research Center (MARC) Third Quarter 2012
On 4 September 2012, Jackson completed the acquisition of SRLC America Holding Corp (SRLC) from Swiss Re for a consideration of £370 million which is subject to fi nalisation of completion procedures. SRLC was the US holding company of REALIC. The acquisition helps diversify Jackson’s sources of earnings by increasing the amount of income generated from underwriting activities. The transaction is expected to add an additional £100 million to Jackson’s IFRS pre-tax profi ts in the fi rst year, representing stand-alone earnings from REALIC of approximately £115 million, less £15 million of income foregone on the assets sold to fi nance the transaction. In the four month period since completion, REALIC contributed £67 million to Jackson’s IFRS operating profi t while having only a modest impact on statutory capital.
At 31 December 2012, Jackson held £49 billion in separate account assets, compared to £38 billion in 2011. The increase in separate account assets primarily refl ects the impact of positive net fl ows. This resulted in variable annuity separate account fee income of £875 million in 2012, up 29 per cent over the £680 million achieved in 2011.
Product acquisition costs during 2012 increased slightly compared to 2011, despite the growth in sales as a greater proportion of distributors are opting for asset-based commission. Following the introduction of new DAC guidance in 2012, which was applied retrospectively, acquisition costs are no longer fully deferrable, resulting in IFRS new business strain of £174 million in 2012, compared to £156 million in 2011.
Jackson continues to actively manage its investment portfolio to mitigate investment risk. Net realised gains on debt securities amounted to £47 million in 2012 compared to gains of £106 million in 2011. This includes a realised loss net of recoveries of £10 million (2011: gains of £10 million) on credit-related sales of impaired bonds. Write-downs on debt securities were £37 million (2011: £62 million). Interest related gains during the period totalled £94 million (2011: £158 million), primarily due to sales of corporate debt.
In 2012, Jackson’s life in-force book generated £755 million of underlying free surplus (2011: £748 million) refl ecting an increase due to the growth in the business and higher operating variances offset by the impact of low interest rates. Some £281 million was reinvested to write new business (2011: £202 million). The increase in capital consumption was driven by the signifi cant decrease in interest rates which in turn caused a large drop in the valuation rate used to set reserves, resulting in higher strain compared to 2011. Notwithstanding this effect, the fast payback nature of the products, which in 2012 averaged two years across the portfolio (2011: one year) means that returns remain extremely attractive.
The net unrealised gain position has improved from £2,057 million at 31 December 2011 to £2,807 million at 31 December 2012 due to the decline in the US Treasury rates and tighter spreads. Gross unrealised losses improved from £246 million at 31 December 2011 to £178 million at 31 December 2012.
Jackson delivered total APE sales of £1,462 million, a 15 per cent increase over 2011. Jackson has achieved these sales levels, while maintaining its pricing discipline, as it continued to write new business at aggregate internal rates of return in excess of 20 per cent.
Fixed index annuity APE sales of £109 million in 2012 increased 17 per cent from 2011. Jackson ranked eighth in sales of fi xed index annuities through the third quarter of 2012, with a market share of 4.9 per cent, up from a market share of 4.6 per cent in the full year 20112.
2 Sources: AnnuitySpecs.com’s Indexed Sales & Market Report, Third Quarter 2012 and Fourth Quarter 2011: Copyright © 2012, AnnuitySpecs.com. All rights reserved.
E y e co n ce iv ed a n d d es ig n ed b y
AAAAAAAAAAA Deliver £350 million of net cash remittance to the Group
The UK market is also characterised by an ageing population and a concentration of wealth in the 50+ age group, many of whom have built up substantial pension funds in employer-sponsored schemes. These customers require help to convert their wealth into sustainable lifetime income. For the next generation of savers, the responsibility for retirement provision has shifted substantially away from government and employers towards the individual. These customers are typically under-funded for retirement and helping them accumulate saving constitutes a signifi cant opportunity for long-term savings and retirement income providers, at a time when the ability of the state to intervene is signifi cantly diminished.
Our ability to deliver value to our customers and the resulting market franchise allowed us to achieve higher new business profi tability in 2012, as well as increasing cash generation and preserving our strong capital position, despite the challenging economic environment and competitive conditions that prevailed in the UK marketplace.
Business performance Prudential UK has a well-established individual annuity business, built on a robust pipeline of internal vestings from maturing pension policy customers. The internal vestings pipeline is supplemented by sales through intermediaries and strategic partnerships with third parties where Prudential is the offered annuity provider for customers vesting their pensions at retirement.
Annuity sales from internal vestings of £146 million were 20 per cent higher than 2011, due to a combination of several factors – a higher number of customers retiring, higher average fund values and increased client contact activity. Sales of external annuities of APE £95 million were 67 per cent higher in 2012 refl ecting an increase in demand for our with-profi ts Income Choice Annuity which offers customers income security with the potential for income growth.
In the wholesale market, we aim to continue our selective participation approach to bulk and back-book buyouts using our fi nancial strength, superior investment track record, annuitant mortality risk assessment and servicing capabilities. In line with this opportunistic approach, two bulk annuity buy-in insurance agreements were signed in 2012 totalling APE £41 million (2011: single deal APE £33 million). We will continue to maintain our focus on value and only participate in transactions that meet our return on capital and payback requirements.
Our direct advice service, Prudential Financial Planning (PFP), was launched in December 2011 and grew to 129 advisers in 2012, generating APE sales of £21 million. PFP offers a complete fi nancial planning service, focused primarily on our existing direct customer base. The response from our customers has been very encouraging and we intend to continue to grow this channel to 200 advisers by the end of 2013.
The combined fi nancial strength and investment performance track record of Prudential’s UK With-Profi ts Fund continues to provide a key source of non-price differentiation in a competitive market. Our with-profi ts customers benefi t from the security of Prudential’s large inherited estate, which was valued at £7 billion at the year end, and provides a high degree of protection against adverse market movements. The Fund continues to provide customers with solid returns and to outperform the FTSE All-Share Index over medium to long-term horizons. Over the last 15 years, the Fund has delivered a cumulative investment return of 184.3 per cent on investments covering policyholder liabilities. This compares favourably with other with-profi ts funds and the FTSE All-Share Index total return of 106.5 per cent over the same period, and, by offering customers a smoothed return, helps provide protection from the full impact of volatile market conditions. This performance shows that investing in a strong with-profi ts fund can produce good returns for cautious investors, in spite of the combined pressures of volatile market conditions and UK interest rates remaining at historically low levels.
Onshore bonds sales of APE £228 million were up 28 per cent on 2011, including with-profi ts bond sales of APE £214 million, which increased by 34 per cent. Our PruFund range made up 75 per cent of with-profi ts bond sales, with 35 per cent higher sales than in 2011. PruFund continues to be popular with consumers, providing smoothed returns and a range of optional guarantees, which offer a degree of security against potential market falls in a post-crisis environment where investors have become much more risk-averse. Although the demand for guarantees remains high, the increase in PruFund sales is based entirely on the non-guaranteed version of the product, which is attractive to those customers who are prepared to accept some risk to their capital but still want to benefi t from the smoothing offered by a with-profi t product.
Operating free surplus generated from the long-term in-force business in the UK amounted to £507 million (2011: £503 million). Of this total, £45 million (2011: £54 million) was reinvested in writing shareholder-backed business at attractive average IRRs.
During 2012 Prudential UK remitted cash of £313 million to the Group (2011: £297 million), comprising £216 million (2011: £223 million) from the annual with-profi ts transfer to shareholders and £97 million (2011: £74 million) from the shareholder-backed business. The business expects to generate £350 million per annum of sustainable cash remittances by 2013, supported by the strength of the with-profi ts business and surpluses arising from the large book of shareholder-backed annuities, maintained into the future by the pipeline of maturing individual and corporate pensions.
Financial performance Total APE sales of £836 million were 12 per cent higher than 2011, principally due to increased sales of individual annuities and with-profi ts bonds, partly offset by lower sales of corporate pensions. Retail APE sales of £795 million were up 12 per cent on the previous year (2011: £712 million). Although the lower level of interest rates in 2012 had a negative impact on retail new business profi tability, this was more than offset by the positive mix effect from growth in higher margin products such as individual annuities and with-profi ts bonds.
New business profi t increased by 20 per cent to £313 million (2011: £260 million), including bulk annuity transactions. Retail new business profi t at £274 million was 19 per cent above 2011 (2011: £231 million), primarily driven by increased volumes in higher margin product areas.
At half year 2010 we announced that the business had achieved its cost savings target of £195 million per annum. At the end of 2010, an additional series of initiatives to reduce costs by a further £75 million per annum by the end of 2013 was announced. By 31 December 2012 these additional annual cost savings of £75 million per annum had also been achieved, one year earlier than planned.
Gross investment infl ows 36,464 25,981 40 25,981 40 Net investment infl ows: Retail business 7,842 3,895 101 3,895 101 Institutional business 9,039 490 1,745 490 1,745 Total 16,881 4,385 285 4,385 285
Underlying profi t before performance-related fees 298 262 14 262 14 Share of associate's resultsnote (i) 13 26 (50) 26 (50)
Operating profi t from asset management operations 320 301 6 301 6 Operating profi t from Prudential Capital 51 56 (9) 56 (9)
Notes (i) The 2012 fi gure represents M&G’s 49.99 per cent proportionate share in the operating profi t (including performance-related fees) of PPM South Africa following the divestment transaction in 2012. 100 per cent of operating profi ts were included in 2011. (ii) Funds under management includes M&G’s share of the assets managed by PPM South Africa at 49.99 per cent and 100 per cent for 2012 (£4.4 billion) and 2011 (£7.9 billion) respectively.
‘ M&G has had a record-breaking year in terms of net sales, funds under management and profi ts. It continues to execute against its strategy and deliver strong performance for both clients and its shareholder, the Prudential Group.’
Business performance M&G has had a record-breaking year in terms of net sales, funds under management and profi ts.
Underlying operating profi t for the year was £298 million, 14 per cent higher than the previous best of £262 million in 2011. Total operating profi t for 2012 was £320 million.
In the UK, M&G’s core market, net sales totalled £3.0 billion, 30 per cent lower than the previous year, but still suffi ciently high to rank M&G as the top selling house for the year. M&G has ranked fi rst for both net and gross fund sales in the UK for four consecutive calendar years, an unprecedented achievement. Fund sales slowed in the second half as a direct consequence of a decision in July to limit fl ows of new money into two of our best-selling sterling corporate bond funds to ensure continued fl exibility in the management of the funds. We expect UK net sales to continue to slow in 2013.
By contrast, net fund sales in mainland Europe increased sharply. Following a minor net outfl ow in 2011, the business generated a record £5.2 billion of net sales representing 67 per cent of total retail net sales in 2012. Over the year M&G saw retail assets sourced from European clients grow by 75 per cent to £14.4 billion (2011: £8.2 billion). Today M&G has offi ces in 15 different countries and its retail funds are registered for sale in 20 jurisdictions.
Notes 1 Source: Investment Management Association, data as at end of December 2012. 2 Source: SimFund Global. Data as at end of December 2012 in EUR. Based on estimated net sales of funds classed as fund market ‘International’ (registered for sale in more than fi ve countries). Excludes Money Market and Alternative funds.
The profi t from the South Africa entity represents our proportionate share of its operating profi t which, following the divestment transaction in the fi rst quarter of 2012, reduced our ownership to 49.99 per cent. For 2011 and prior periods, the results of the South Africa entity were fully consolidated within our operating profi t.
The institutional business attracted a record level of net funds in 2012, predominantly into fi xed income strategies on the strength of its outstanding record of outperformance. At £9.0 billion, net infl ows were 50 per cent higher than the previous best of £6.0 billion in 2009. The 2012 infl ows include a single £7.6 billion mandate which is expected to be partially or wholly redeemed within the next 24 months.
Other innovations for third-party clients include a series of investment strategies to manage long-term infl ation-linked liabilities. The business successfully launched the M&G Infl ation Opportunities Fund and the M&G Debt Opportunities Fund, which complement the existing M&G Secured Property Income Fund, a portfolio of long-lease properties with inbuilt infl ation-linked increases. This last fund, which has total investor commitments of £1.3 billion, has delivered an annualised return of 7 per cent above the retail prices index (RPI) over the past three years.
Note 1 Excluding performance-related fees, carried interest on private equity investment and profi t from the PPM South Africa entity.
B u sin ess rev iew Asset management: M&G/ Eastspring Investments
Gross investment infl owsnote 9,036 7,824 15 7,707 17 Net investment fl owsnote 1,626 633 157 599 171 Total IFRS operating profi t 75 80 (6) 79 (5)
Market overview Prudential’s asset management business in Asia manages investments for Asia’s third-party retail and institutional clients in addition to investments of Prudential’s Asia, UK and US life companies. It has operations in 11 markets, including Indonesia which was successfully opened during 2012, increasing our asset management footprint in the region.
Financial performance IFRS operating profi t in 2012 was £6 million, compared to £4 million in 2011, principally refl ecting the increase in funds under management over the period.
Market overview Curian Capital, Jackson’s registered investment adviser, provides innovative fee-based managed accounts and investment products to advisers through a sophisticated technology platform. Curian expands Jackson’s access to advisers while also complementing Jackson’s core annuity product lines with Curian’s retail asset management products.
Financial performance Curian reported an IFRS basis operating profi t of £15 million in 2012 compared to £6 million in 2011. This increase was primarily due to higher net revenue from a larger book of assets under management.
Market overview National Planning Holdings, Inc. (NPH) is Jackson’s affi liated independent broker-dealer network. The business is comprised of four broker-dealer fi rms, including INVEST Financial Corporation, Investment Centers of America, National Planning Corporation, and SII Investments.
NPH continues to grow the average business and revenue per representative. By utilising high-quality, state-of-the-art technology, Jackson provides NPH’s advisers with the tools they need to operate their practices more effi ciently. At the same time, through its relationship with NPH, Jackson continues to benefi t from an important retail distribution outlet, as well as receive valuable insights into the needs of fi nancial advisers and their clients.
Financial performance NPH generated revenues of £528 million in 2012, up from £491 million in 2011, on gross product sales of £10.5 billion (2011: £8.6 billion). The network continues to achieve profi table results, with 2012 IFRS operating profi t of £18 million, a 29 per cent increase from £14 million in 2011. At 31 December 2012, the NPH network had 3,540 registered advisers (2011: 3,636 registered advisers).
Profi t after tax attributable to equity holders of the Company £2,197m £1,415m Basic earnings per share 86.5p 55.8p Shareholders' equity, excluding non-controlling interests £10.4bn £8.6bn
Operating earnings per share* (refl ecting operating profi t based on longer-term investment returns after related tax and non-controlling interests) 125.0p 115.7p
Notes (i) Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the
Operating profi t based on longer-term investment returns The Group provides supplementary analysis of profi t before tax attributable to shareholders so as to distinguish operating profi t based on longer-term investment returns from the other elements of total profi t shown. Operating profi t per share is calculated using operating profi ts based on longer-term investment returns, aft er related tax and non-controlling interests.
In 2012, the Group’s IFRS operating profi t based on longer-term investment returns was £2,533 million, an increase of 25 per cent from 2011.
In Asia, IFRS operating profi t based on longer-term investment returns for long-term business increased by £211 million from £709 million1 in 2011 to £920 million in 2012. Included with this result is a £51 million one-off profi t on sale of the Group’s interest in China Life Insurance Company of Taiwan, which was originally acquired in 2008 when Prudential sold its Taiwanese agency business to the company. Excluding this amount, Asia’s long-term business operating profi t increased by 23 per cent to £869 million, primarily refl ecting strong growth in the size of our business in the region, particularly health and protection.
The contribution to profi ts from Indonesia, Hong Kong, Singapore and Malaysia, Prudential’s largest markets in Asia, continues to rise, with operating profi ts from these businesses2 up 22 per cent from £552 million in 2011 to £674 million in 2012. High consumer demand for savings and protection in Indonesia continues to drive growth in premiums and earnings, with operating profi t2 up 23 per cent from £212 million to £260 million. Hong Kong’s operating profi t2 increased by 28 per cent to £88 million (2011: £69 million), as business mix has shifted towards higher return products. Singapore increased by 23 per cent to £206 million (2011: £167 million)2 and Malaysia’s operating profi t2 at £120 million (2011: £104 million) increased by 15 per cent. Operating profi ts from our other long-term insurance operations in the region also increased by 24 per cent to £147 million (2011: £119 million), as these businesses increase in size.
Other income and expenditure (498) (483) 3 (483) 3 RPI to CPI infl ation measure change on defi ned benefi t
Solvency II implementation costs (48) (55) 13 (55) 13 Restructuring costs (19) (16) (19) (16) (19)
Total IFRS basis operating profi t based on longer-term investment returns 2,533 2,027 25 2,022 25
IFRS fi nancial statements. (ii) During 2011 the Group altered its assumptions for future statutory increases to pension payments for its UK defi ned benefi t pension schemes.
This refl ects the UK Government’s decision to change the basis of indexation from RPI to CPI.
Notes 1 Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the IFRS fi nancial statements.
Total operating profi t for 2012 from M&G and Prudential Capital increased by 4 per cent from £357 million in 2011 to £371 million in 2012, primarily refl ecting positive net infl ows into M&G during 2011 and 2012.
Eastspring Investments reported operating profi t of £75 million, down by £5 million from the £80 million recognised in 2011. This refl ects a broadly unchanged level of fee income with the effect of higher fund values offset by a shift in business mix towards bond mandates, together with increased costs as the business develops the Eastspring Investments platform and expands into new markets.
Spread income earned in 2012 was £1,074 million, £9 million higher than the amount received in the prior year of £1,065 million. As expected the margin secured has fallen from 185 basis points in 2011 to 173 basis points in 2012 principally due to spread compression in the US general account business, down from 258 basis points in 2011 to 239 basis points in 2012. Further reductions in this source of income are anticipated in the next few years if the current low interest rate environment persists.
Acquisition costs have increased in absolute terms to £1,997 million, in line with the increased new business sales. Expressed as a percentage of new business APE, 2012 has remained constant with 2011 at 48 per cent.
Administration expenses have increased to £1,248 million, principally refl ecting the growth of the business in the year. Expressed as a ratio to average liabilities, acquisition costs have increased from 83 basis points in 2011 to 87 basis points in 2012. This refl ects changes in business mix and the increased proportion of commission on new sales being taken by US distributors on an annual as opposed to an initial basis.
IFRS basis results – Analysis of long-term insurance business pre-tax IFRS operating profi t based on longer-term investment returns by driver
Spread income 1,074 62,174 173 1,065 57,417 185 1,072 57,572 186 Fee income 1,077 78,807 137 870 68,298 127 875 68,331 128 With-profi ts 311 95,681 33 331 93,056 36 331 92,946 36 Insurance margin 1,032 736 729 Margin on revenues 1,669 1,425 1,404 Expenses: Expected return on shareholder assets 205 200 201 Gain on China Life (Taiwan) shares 51 – –
Operating incomenote (i) 734 201 120 296 1,351 Operating profi t based on longer-term investment returns 320 75 51 39 485
Average funds under management (FUM), including 49.99% proportional share of PPM South Africa £209.0bn
Average FUM, excluding PPM South Africa £205.1bn £55.0bn Margin based on operating incomenote (ii) 36 bps 37 bps Cost/income rationote (iii) 59% 64%
Average funds under management (FUM), including 49.99% proportional share of PPM South Africa £195.1bn
Average FUM, excluding PPM South Africa £190.9bn £51.4bn Margin based on operating incomenote (ii) 35 bps 38 bps Cost/income rationote (iii) 61% 62%
Following the divestment in 2012 of M&G’s holding in PPM South Africa from 75 per cent to 49.99 per cent and its treatment from 2012 as an associate, M&G’s operating income and expense shown in the table above, no longer includes any element from PPM South Africa, with the share of associate’s results being presented in a separate line. In order to avoid year-on-year distortion, in the table above the 2011 operating income, margin and cost/income ratio refl ect the retrospective application of the basis of presentation for 2011 results.
(ii) Margin represents operating income as defi ned in note (i) above as a proportion of average FUM, being the average of monthly FUM, excluding PPM South Africa. The comparatives have been altered to present 2011 on the same basis.
(iii) Cost/income ratio represents cost as a percentage of operating income as defi ned in note (i) above. M&G’s operating income and expense excludes any contribution from M&G’s associate, PPM South Africa.
At Eastspring Investments strong net infl ows and positive market movements have led to an increase in average funds under management from £51.4 billion to £55.0 billion, with operating income rising from £196 million to £201 million. As the growth in funds stemmed principally from internal clients and fi xed income mandates, the average fee margin declined from 38 basis points in 2011 to 37 basis points in 2012. Continued investment in developing the Eastspring Investment platform contributed to a higher cost to income ratio of 64 per cent in 2012 (2011: 62 per cent).
Operating profi t based on longer-term investment returns 2,533 2,027 Short-term fl uctuations in investment returns: – Insurance operations 122 (100) – Other operations 82 (120)
Profi t before tax attributable to shareholders 2,810 1,828 Tax charge attributable to shareholders’ profi t (613) (409) Non-controlling interests – (4)
IFRS short-term fl uctuations in investment returns Short-term fl uctuations in investment returns for our insurance operations of positive £122 million comprised of positive £76 million for Asia, negative £90 million in the US and positive £136 million in the UK.
The positive short-term fl uctuations of £76 million for our Asia operations in 2012 relates to unrealised gains on bond assets held across the region following the fall in long-term yields in the period.
The combination of higher equity markets and lower market volatility in the US has reduced the technical reserves held for the variable annuity guarantees. This favourable effect was more than offset by the net unrealised value movement on derivative instruments held to manage the Group’s exposure to these guarantees, producing a net £90 million negative fl uctuation in our US operation.
Short-term fl uctuations for other operations were positive £82 million. This primarily represents appreciation on Prudential Capital’s bond portfolio partially offset by net realised and unrealised losses in the year on derivatives held centrally to manage market risks.
Shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes The shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes of positive £50 million (2011: positive £21 million) mainly refl ects the partial recognition of actuarial surplus in the Prudential Staff Pension Scheme following the results of the triennial valuation, further details of which are given in note I3 of the IFRS basis results.
Gain on dilution of Group holdings On 22 February 2012, M&G completed transactions to reduce its majority holding in PPM South Africa from 75 per cent to 49.99 per cent. Under IFRS the transactions give rise to a gain on dilution of £42 million, which has been excluded from the Group’s IFRS operating profi t.
Amortisation of acquisition accounting adjustments arising on the purchase of REALIC On 4 September 2012, Jackson completed the acquisition of 100 per cent of the issued share capital of SRLC America Holding Corp. (SRLC), and its primary operating subsidiary, REALIC for a total cash consideration of £370 million. The amortisation primarily comprises the difference between the yield on the acquired investments based on market values at acquisition and historic investment income on book yields recognised in IFRS operating profi t. Movement in the fair value acquisition adjustments on the value of business acquired and policyholder liabilities is also included. Further details are given in note I1 of IFRS basis results.
Eff ective tax rates The effective rate of tax on operating profi t based on longer-term investment returns was 23 per cent (2011: 21 per cent). The 2011 effective rate had benefi ted from utilising carried forward tax losses for which no deferred tax asset had been recognised.
The effective rate of tax on the total IFRS profi t was 22 per cent (2011: 22 per cent). In both 2012 and 2011 we have benefi ted from reductions in the main UK corporation tax rate – 28 per cent to 26 per cent in 2011 and 26 per cent to 24 per cent in 2012.
Prudential Group’s total EEV basis operating profi t based on longer-term investment returns was £4,321 million in 2012, 9 per cent higher than the £3,978 million earned in 2011.
New business profi t at £2,452 million was 14 per cent higher than last year, refl ecting a 14 per cent increase in new business APE. The higher sales volumes and pricing actions coupled with favourable business mix mitigated the pressure on margins from the low level of long-term interest rates.
The new business profi t for the Asia business increased by 18 per cent to £1,266 million compared to £1,076 million in 2011. The growth in new business profi t was driven by Indonesia, Singapore and Malaysia refl ecting strong volume growth in Indonesia and Singapore and favourable product mix changes in Malaysia. Jackson in the US delivered new business profi t of £873 million, an increase of 7 per cent compared to £815 million. Throughout 2012, Jackson proactively adjusted pricing and product features to respond to both market conditions and the competitive environment, actions which counteracted the adverse effect of lower long-term yields and tighter spreads. UK new business profi t increased by 20 per cent to £313 million in 2012 compared to £260 million in 2011 and includes the benefi t of two bulk annuity buy-ins in 2012. This increase refl ected higher sales volumes, and a favourable change in product mix towards higher margin individual annuities and with-profi ts bonds.
Insurance business: Asia 1,960 1,764 11 1,747 12 US 1,610 1,431 13 1,448 11 UK 866 853 2 853 2 Development expenses (7) (5) (40) (5) (40)
Asset management business: M&G (including Prudential Capital) 371 357 4 357 4 Eastspring Investments 75 80 (6) 79 (5) Curian 15 6 150 6 150 US broker-dealer and asset management 24 18 33 18 33
Total EEV basis operating profi t 4,321 3,978 9 3,978 9
EEV basis operating profi t based on longer-term investment returns continued The contribution to operating profi t from life in-force business was £1,984 million (2011: £1,897 million) and comprises £1,493 million (2011: £1,447 million) from the unwind of the discount on the opening embedded value and other expected returns, and £491 million (2011: £450 million) from the effect of operating assumption changes, experience variances and other items. The unwind of discount and other expected returns is £46 million higher than 2011 with the growth in the business more than offsetting the effect on this profi t measure of lower interest rates. The economic effects have adversely affected the unwind and other expected returns by an estimated £83 million.
UK life in-force profi t was lower at £553 million (2011: £593 million) and included £482 million (2011: £485 million) from the unwind of the discount rate on the opening embedded value. Other in-force profi ts totalled £71 million (2011: £108 million) which includes a charge of £52 million for the annuity business refl ecting the net impact of strengthening longevity assumptions, gains on portfolio rebalancing, and releases of margins previously held in the balance sheet. Included in both years are the benefi cial effects on future profi ts arising from the reduction in UK corporation taxes enacted in both periods; in 2012 this amounted to £87 million, while in 2011 it amounted to £79 million.
Profi t before tax attributable to shareholders 5,020 2,922 Tax charge attributable to shareholders’ profi t (1,207) (776) Non-controlling interests – (4)
In Asia, positive short-term fl uctuations in investment returns of £395 million (2011: negative £155 million) principally refl ect unrealised bond and equity gains following market movements in the year, principally in Hong Kong, Singapore and Taiwan.
For our UK business, the short-term fl uctuations in investment returns were positive £315 million (2011: negative £141 million). This arises principally because the actual 2012 investment return of the with-profi ts fund (covering policyholder liabilities and unallocated surplus) of 9.8 per cent was higher than the longer-term assumed rate of 5.0 per cent.
EEV basis profi t aft er tax continued Eff ect of changes in economic assumptions The effect of changes in economic assumptions of negative £16 million, comprises negative £149 million for Asia, positive £85 million for the US and positive £48 million for the UK. These refl ect the aggregate effects of the reduction in long-term yields and the associated decrease in risk discount rates across these businesses.
In our US business, economic effects totalled positive £85 million, principally refl ecting the 50 basis point reduction in the allowance for short-term credit risk for our fi xed annuity business, as the market stabilises and credit spreads reduce.
In the UK, the positive £48 million represents the net impact on future profi ts of reduced bond yields, where the negative impact on with-profi ts has been more than offset by the positive shareholder annuity impact.
Gain on dilution of Group holdings On 22 February 2012, M&G completed transactions to reduce its majority holding in PPM South Africa from 75 per cent to 49.99 per cent, giving rise to gain on dilution of £42 million.
Eff ective tax rates The 2012 effective rate on operating profi t based on longer-term investment returns of 26 per cent was consistent with the equivalent rate in 2011. The 2012 effective rate of tax on total EEV profi t of 24 per cent was lower than the equivalent rate in the previous year (2011: 27 per cent), refl ecting changes in the composition of non-operating items.
Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 3 June 2013. The fi nal dividend will be paid on or about 30 May 2013 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte.) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 12 March 2013. The exchange rate at which the dividend payable to the SG Shareholders will be translated into SG$, will be determined by CDP. The dividend will distribute an estimated £532 million of shareholders’ funds.
The Board has decided to rebase the full year dividend upwards by 4 pence, refl ecting the strong progress made in both the earnings and free surplus generation of the business and in the delivery of our fi nancial objectives. In line with this, the directors recommend a fi nal dividend of 20.79 pence per share (2011: 17.24 pence), which brings the total dividend for the year to 29.19 pence (2011: 25.19 pence), representing an increase of 15.9 per cent over 2011.
The 2012 fi nal dividend of 20.79 pence per ordinary share will be paid on 23 May 2013 in sterling to shareholders on the principal register and the Irish branch register at 6.00pm BST on Tuesday, 2 April 2013 (Record Date), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on the Record Date (HK Shareholders).
Operating profi t based on longer-term investment returns 2,533 2,027 4,321 3,978 Items excluded from operating profi t 277 (199) 699 (1,056)
Profi t for the year 2,197 1,415 3,813 2,142 Exchange movements, net of related tax (216) (105) (469) (158) Unrealised gains and losses on Jackson securities classifi ed as available for salenote (b) 387 349 – –
New share capital subscribed 17 17 17 17 Other 65 9 100 71
Comprising Long-term business: Net worth 6,855 6,286 Value of in-force 15,411 13,364
REALIC) in the year, has been used to pay £921 million to the holding company. (d) Shareholders’ funds for other than long-term business comprises: Asset management operationsnote 1,937 1,783 Holding company net borrowings (2,282) (2,188)
(e) EEV shareholders’ funds excluding goodwill attributable to shareholders at 31 December 2012 is £20,974 million (31 December 2011: £18,172 million).
EEV shareholders’ funds The shareholders’ funds at 31 December 2012 relating to long-term business of £22.3 billion comprise £9.5 billion (up 11 per cent from 31 December 2011) for our Asia long-term business operations, £6.0 billion (up 19 per cent from 31 December 2011) for our US long-term business operations and £6.8 billion (up 12 per cent from 31 December 2011) for our UK long-term business operations.
At 31 December 2012, the embedded value for our Asian long-term business operations was £9.5 billion, with £8.0 billion (up £0.9 billion from 2011) being in the South-east Asia countries of Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam together with Hong Kong. For Prudential’s other Asian markets, the embedded value was £1.5 billion in aggregate, broadly unchanged from 2011.
The Group’s free surplus at the end of the year comprises free surplus for the insurance businesses, representing the excess of the net worth over the required capital included in the EEV results, and IFRS net assets for the asset management businesses excluding goodwill.
The total movement in free surplus net of tax in the year can be analysed as follows: Free surplus generation Expected in-force cash fl ows (including expected return on net assets) 2,405 2,335
– Life operations 2,019 1,972 – Asset management and other operations 386 363
Changes in operating assumptions and experience variances 295 168 RPI to CPI infl ation measure change on defi ned benefi t pension schemes – 33
Underlying free surplus generated in the year from in-force business 2,700 2,536 Investment in new business (618) (553)
Total movement during the year 268 83 Free surplus at 1 January 3,421 3,338
Comprised of: Free surplus relating to long-term insurance business 2,957 2,839 Free surplus of other insurance business 25 29 IFRS net assets of asset management businesses excluding goodwill 707 553
Value created through investment in new business by life operations 2012 £m
Post-tax new business profi t for the year 982 568 241 1,791 Tax 284 305 72 661
Pre-tax new business profi t for the year 1,266 873 313 2,452
Post-tax new business profi t for the year 811 530 195 1,536 Tax 265 285 65 615
New business sales (APE) 1,660 1,275 746 Internal rate of returnnote >20% >20% >20%
Pre-tax new business profi t for the year 1,065 825 260 2,150
Note The internal rate of return (IRR) is equivalent to the discount rate at which the present value of the post-tax cash fl ows expected to be earned over the lifetime of the business written in shareholder-backed life funds is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is equal to the amount required to pay acquisition costs and set up statutory reserves less premiums received, plus encumbered capital. The impact of the time value of options and guarantees is included in the calculation.
Net remittances to the Group from business units 1,200 1,105 Net interest paid (278) (282) Tax received 194 181 Corporate activities (158) (139) Solvency II costs (47) (56)
Total holding company cash fl ow 181 (31) Cash and short-term investments at beginning of year 1,200 1,232 Foreign exchange movements (1) (1)
Cash remittances to the Group from business units The holding company received £1,200 million of net cash remittances from the business units in 2012, an increase of 9 per cent over the £1,105 million received in 2011.
The UK insurance operations remitted £313 million in 2012 (2011: £297 million). Cash from the annual with-profi ts transfer to shareholders contributed £216 million (2011: £223 million). During 2012, surpluses in the UK’s shareholder-backed business were utilised to repay £60 million of funding contingent on future profi ts that was taken out in 2009 and 2010 and to remit a net £97 million (2011: £74 million) to Group. The UK’s objective remains £350 million of net cash remittances in 2013.
After central costs, there was a net cash infl ow before dividend of £911 million in 2012 compared to £809 million in 2011. The dividend paid was £655 million in 2012 compared to £642 million in the same period in 2011.
Goodwill attributable to shareholders 1,469 1,465 Investments 283,428 250,605 Holding company cash and short-term investments 1,380 1,200 Other 23,976 19,475
Less: Liabilities Policyholder liabilities 260,774 227,075 Unallocated surplus of with-profi ts funds 10,589 9,215 271,363 236,290 Less: Shareholders’ accrued interest in the long-term business (12,084) (11,073)
Note The 2011 comparative component of EEV shareholders’ funds for the IFRS basis shareholders’ equity and the additional EEV basis retained profi t have been adjusted for the retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 to the IFRS fi nancial statements. Total EEV shareholders’ funds for 2011 are not altered by the change of IFRS policy.
Investments The Group is exposed to fi nancial risk through its fi nancial assets, fi nancial liabilities and policyholder liabilities. The key fi nancial risk factors that affect the Group include market risk, credit risk and liquidity risk. Information on the Group’s exposure to fi nancial risk factors, and our fi nancial risk management objectives and policies, is provided in the Risk and capital management section. Further information on the sensitivity of the Group’s fi nancial instruments to market risk and its use of derivatives is also provided in the IFRS fi nancial statements.
Policyholder liabilities and unallocated surplus of with-profi ts funds Policyholder liabilities relating to shareholder-backed business grew by £29.5 billion from £133.5 billion at 31 December 2011 to £163.0 billion at 31 December 2012.
The increase refl ects positive net fl ows (premiums net of upfront charges less surrenders, maturities and deaths) of £10.5 billion in 2012 (2011: £9.0 billion), driven by strong infl ows in the US £9.6 billion and Asia £2.0 billion. The negative net fl ows in UK £1.1 billion are distorted by the fl uctuating nature of unit-linked corporate pension scheme transfers. Net fl ows in Asia have increased by 8 per cent to £2.0 billion in 2012 (2011: £1.8 billion) while the overall rate of surrenders in the region (expressed as a percentage of opening liabilities) was 10.6 per cent in 2012 (2011: 9.8 per cent). Excluding India, where the market has been going through a signifi cant period of change following regulatory changes in 2010, the surrender rate in 2012 was 9.7 per cent (2011: 9.6 per cent).
During 2012, the unallocated surplus, which represents the excess of assets over policyholder liabilities for the Group’s with-profi ts funds on an IFRS basis, increased by 15 per cent from £9.2 billion at 31 December 2011 to £10.6 billion at 31 December 2012.
After adjusting for holding company cash and short-term investments of £1,380 million, net core structural borrowings at 31 December 2012 were £2,174 million compared with £2,411 million at 31 December 2011. The decrease of £237 million represents the net fall in borrowings of £57 million, mainly refl ecting the foreign exchange movements in the year, together with a £180 million rise in holding company cash and short-term investments.
In addition to its core structural borrowings set out above, Prudential also has in place an unlimited global commercial paper programme. As at 31 December 2012, commercial paper issued under this programme totalled £183 million, US$1,512 million, ¤493 million, CHF20 million and AU$12 million. The central treasury function also manages our £5 billion medium-term note (MTN) programme, covering both core and non-core borrowings. In November 2012 Prudential issued a £300 million three-year senior note to pre-fi nance a £250 million senior note maturing in January 2013 for operational funding. Also in January 2013 Prudential issued a new US$700 million 5.25 per cent perpetual Innovative Tier 1 hybrid under this programme, primarily to Asian retail investors. Under the MTN programme at 31 December 2012 the outstanding subordinated debt was £835 million, US$1,300 million and ¤20 million and the senior debt outstanding was £550 million. In addition, Prudential’s holding company has access to £2.1 billion of syndicated and bilateral committed revolving credit facilities, provided by 17 major international banks, expiring between 2013 and 2017. Apart from small draw downs to test the process, these facilities have never been drawn, and there were no amounts outstanding at 31 December 2012. The commercial paper programme, the MTN programme and the committed revolving credit facilities are all available for general corporate purposes and to support the liquidity needs of Prudential’s holding company and are intended to maintain a strong and fl exible funding capacity.
The fi nancial strength of PAC is rated AA by Standard & Poor’s, Aa2 by Moody’s and AA by Fitch.
Despite the continued volatility in fi nancial markets, Prudential UK’s With-Profi ts fund performed relatively strongly achieving a 9.8 per cent pre-tax investment return for policyholder asset shares during 2012.
B. Risk exposures (Audited) The Group Risk Framework deploys a common risk language, allowing meaningful comparisons to be made between different business units. Risks are broadly categorised as shown below: Category Risk type Defi nition
Credit risk The risk of loss for the Group’s business or of adverse change in the fi nancial position, resulting from fl uctuations in the credit standing of issuers of securities, counterparties and any debtors in the form of default or other signifi cant credit event (eg downgrade or spread widening).
Liquidity risk The risk of the Group being unable to generate suffi cient cash resources or to meet fi nancial obligations as they fall due in business as usual and stress scenarios.
Non-fi nancial risks Operational risk The risk of loss arising from inadequate or failed internal processes, or from personnel and systems, or from external events other than those covered by business environment risk.
Exposure to forces in the external environment that could signifi cantly change the fundamentals that drive the business’s overall strategy.
The two measures used to monitor the volatility of earnings are European Embedded Value (EEV) operating profi t and International Financial Reporting Standards (IFRS) operating profi t, although EEV and IFRS total profi ts are also considered.
Liquidity: the objective is to ensure that the Group is able to generate suffi cient cash resources to meet fi nancial obligations as they fall due in business as usual and stressed scenarios.
Capital requirements: the limits aim to ensure that: a the Group meets its internal economic capital requirements; b the Group achieves its desired target rating to meet its business objectives; and c supervisory intervention is avoided.
The key fi nancial and non-fi nancial risks and uncertainties faced by the Group, that have been considered by the Group Risk Committee, and Prudential’s approaches to managing them, are described below: B.1 Financial risks a Market risk i Equity risk (Audited) In the UK business, most of Prudential’s equity exposure is incurred in the with-profi ts fund, which includes a large inherited estate estimated at £7.0 billion as at 31 December 2012 (31 December 2011: £6.1 billion). This can absorb market fl uctuations and protect the fund’s solvency. The inherited estate itself is partially protected against falls in equity markets through an active hedging policy.
In Asia, Prudential’s shareholder exposure to equities relates to revenue from unit-linked products and, from a capital perspective, to the effect of falling equity markets on the with-profi ts businesses.
It is our philosophy not to compete on price; rather, we seek to sell at a price suffi cient to fund the cost we incur to hedge or reinsure our risks and to achieve an acceptable return for our shareholders.
Jackson hedges the economics of its products rather than the accounting result. This focus means that we accept a degree of variability in our accounting results in order to ensure we achieve the appropriate economic result. Accordingly, while Jackson’s hedges are effective on an economic basis, due to different accounting treatment for the hedges and some of the underlying hedged items on an IFRS basis, the reported income effect is more variable.
In the US, there is interest rate risk across the portfolio. The majority of Jackson’s fi xed annuity and life liabilities allow for an annual reset of the crediting rate, which provides for a greater level of discretion in determining the amount of interest rate risk to assume. The primary concerns with these liabilities relate to potential surrenders when rates increase and, in a low interest environment, the minimum guarantees required by state law. For variable annuities, interest rate changes will infl uence the level of reserves held for certain guaranteed benefi ts. With its large fi xed annuity and fi xed index annuity books, Jackson has natural offsets for its variable annuity interest-rate related risks. Jackson manages interest rate exposure through a combination of interest rate swaps and interest rate options.
iii Foreign exchange risk (Audited) Prudential principally operates in the UK, the US and in Asia. The geographical diversity of its businesses means that Prudential is inevitably subject to the risk of exchange rate fl uctuations. Prudential’s international operations in the US and Asia, which represent a signifi cant proportion of its operating profi t and shareholders’ funds, generally write policies and invest in assets denominated in local currency. Although this practice limits the effect of exchange rate fl uctuations on local operating results, it can lead to signifi cant fl uctuations in Prudential’s consolidated fi nancial statements when results are expressed in pounds sterling.
Shareholders are not directly exposed to value movements on assets backing participating or unit-linked operations, with sensitivity mainly related to shareholder-backed operations.
(Audited) In addition to business unit and Group-wide operational limits on credit risk, Prudential monitors closely its counterparty exposures at Group level, highlighting those that are large or of concern. Where appropriate, Prudential will reduce its exposure, purchase credit protection or make use of collateral arrangements to control its levels of credit risk.
The Group’s total debt securities portfolio on an IFRS basis comprised the following at 31 December 2012: Participating funds
UK The UK’s debt portfolio on an IFRS basis is £83.9 billion as at 31 December 2012, including £50.5 billion within the UK with-profi ts fund. Shareholders’ risk exposure to the with-profi ts fund is limited as the solvency is protected by the large inherited estate. Outside the with-profi ts fund there is £6.3 billion in unit-linked funds where the shareholders’ risk is limited, with the remaining £27.1 billion backing the shareholders’ annuity business and other non-linked business (of which 75 per cent is rated AAA to A-, 23 per cent BBB and 2 per cent non-investment grade). The UK shareholder-backed portfolio did not experience any default losses in 2012.
US At 31 December 2012, Jackson’s fi xed income debt securities portfolio consisted of: Corporate and government security and commercial loans: Government 4,126 2,163 Publicly traded and SEC Rule 144A securitiesnote 19,699 16,281 Non-SEC Rule 144A securities 3,542 3,198
Within the RMBS portfolio of £2.4 billion, the portion guaranteed by the US government sponsored agencies is 57 per cent. The CMBS portfolio of £2.6 billion is performing strongly, with 40 per cent of the portfolio rated AAA and less than 2 per cent rated below investment grade. The entire portfolio has an average credit enhancement level of 31 per cent. This level provides signifi cant protection, since it means the underlying collateral has to incur a 31 per cent loss, net of recoveries, before our holding is at risk.
Unrealised gains and losses on debt securities in the US Jackson’s net unrealised gains from debt securities were £2,807 million at 31 December 2012, compared to £2,057 million at 31 December 2011. The gross unrealised loss position was £178 million at 31 December 2012 (31 December 2011: £246 million). Gross unrealised losses on securities priced at less than 80 per cent of face value totalled £53 million at 31 December 2012 compared to £158 million at 31 December 2011.
Asset management The debt portfolio of the Group’s asset management operations of £1.8 billion as at 31 December 2012 is principally related to Prudential Capital operations. Of this amount £1.5 billion were rated AAA to A- by S&P or Aaa by Moody’s.
Holdings of UK government debt accounted for £3.4 billion of the shareholder sovereign debt portfolio at 31 December 2012. Post year end, the United Kingdom no longer has a unanimous AAA rating, as Moody’s on 22 February 2013 lowered its rating to Aa1. However, given that the vast majority of the debt backs sterling liabilities, the downgrade has not resulted in large price fl uctuations in the gilt market and that the rating remains very strong, the downgrade is not expected to signifi cantly impact the Group’s balance sheet and earnings.
iii Exposure to bank debt securities (Audited) Prudential expects that any second order sovereign credit exposures would most likely be concentrated in the banking sector. The Group’s bank exposure is a function of its core investment business, as well as of the hedging and other activities undertaken to manage its various fi nancial risks. Prudential relies on public information and credit research sources to identify banks with large concentrations of indirect exposure.
Prudential has a range of controls and processes to manage credit exposure. In addition to the control frameworks that cover shareholder and policyholder credit risk within each business unit, the Group Credit Risk Committee oversees shareholder credit risk across the Group. The Committee receives comprehensive management information, including details of counterparty and invested credit exposure (including structured credit and loans), secured and unsecured cash balances, top 30 credit exposures, and an analysis of shareholder exposure by industry/country and rating. The business units and the Group Risk function also continually monitor the portfolio for emerging credit risks through various tools and processes.
In terms of shareholder exposures to the bank debt of PIIGS, Prudential held £260 million at 31 December 2012 (31 December 2011: £328 million). This comprised £130 million of covered bonds, £93 million senior debt, £3 million Tier 1 debt and £34 million Tier 2 debt. There was no direct exposure to Greek banks.
In respect of operational risks, we believe we have strong investment operations, counterparty risk and change management capabilities that enable us to manage the transition to a new Eurozone regime if events require it to do so.
Notes (i) The majority of Asia insurance operations loans are commercial loans held by the Malaysian operation that are rated investment grade by two local rating agencies. (ii) The US insurance operations held £6.2 billion of loans, comprising £3.5 billion of commercial mortgage loans and £2.7 billion of policy loans.
Approximately £1.8 billion of the policy loans are held as collateral related to the three reinsurance treaties with Swiss Re, which are off set by a funds withheld liability. These loans are carried at fair value. All other loans are accounted for at amortised cost, less any impairment. All commercial mortgage loans held by US insurance operations are collateralised by properties. The US commercial mortgage loan portfolio does not include any single-family residential mortgage loans and therefore is not exposed to the risk of defaults associated with residential sub-prime mortgage loans. Jackson incurred write downs of £5 million on its commercial mortgage book (2011: write-downs of £28 million).
All over-the-counter derivative transactions, with the exception of some Asian transactions, are conducted under standardised ISDA (International Swaps and Derivatives Association Inc) master agreements and the Group has collateral agreements between the individual Group entities and relevant counterparties in place under each of these market master agreements.
Prudential’s morbidity risk is mitigated by appropriate underwriting and use of reinsurance and the morbidity assumptions refl ect recent experience and expectation of future trends for each relevant line of business.
With regard to business environment risk, including the impacts of regulatory developments, the Group has a wide-ranging programme of active and constructive engagement with governments, policymakers and regulators in its key markets and with relevant international institutions. Such engagement is undertaken both directly and indirectly via trade associations. The Group has procedures in place to monitor and track political and regulatory developments and assess their potential impact on the Group. Where appropriate, the Group provides submissions and technical input to offi cials and others, either via submissions to formal consultations or through interactions with offi cials.
Solvency II represents a regulatory risk due to the uncertainty of what the rules will be when fi nalised, their potential impacts, and the timing of their introduction. The risks are that the Group may not be able to respond suffi ciently quickly to the strategic implication of the change given levels of uncertainty around the content and timing; operational risk in terms of the scale and complexity of the delivery and uncertainty over timelines; and the additional capital that the Group may be required to hold. Solvency II is covered in more detail in the Capital Management section below.
C. Capital management C.1 Regulatory capital (IGD) (Audited) Prudential is subject to the capital adequacy requirements of the European Union Insurance Groups Directive (IGD) as implemented by the Financial Services Authority (FSA) in the UK. The IGD capital adequacy requirements involve aggregating surplus capital calculated on a FSA consistent basis for regulated subsidiaries, from which Group borrowings, except those subordinated debt issues that qualify as capital, are deducted. No credit for the benefi t of diversifi cation is permitted under this approach.
Prudential’s capital position remains strong. Prudential has continued to place emphasis on maintaining the Group’s fi nancial strength through optimising the balance between writing profi table new business, conserving capital and generating cash. Prudential estimates that its IGD capital surplus is £5.1 billion at 31 December 2012 (before taking into account the 2012 fi nal dividend), with available capital covering its capital requirements 3.0 times. This compares to a capital surplus of £4.0 billion at the end of 2011 (before taking into account the 2011 fi nal dividend).
(Unaudited) On this revised basis, the IGD surplus at 28 February 2013 is estimated at £4.4 billion1 (equivalent to a capital cover of 2.5 times) which includes the £0.4 billion of subordinated debt raised in January 2013 and is after deducting £1.3 billion in respect of the Jackson change from 75 per cent to 250 per cent of CAL.
Prudential continues to have further options available to manage available and required capital. These could take the form of increasing available capital (for example, through fi nancial reinsurance) or reducing required capital (for example, through the mix and level of new business) and the use of other risk mitigation measures such as hedging and reinsurance. A number of such options were utilised through the last fi nancial crisis in 2008 and 2009 to enhance the Group’s IGD surplus. One such arrangement allowed the Group to recognise a proportion of the shareholder’s interest in future transfers from the UK’s with-profi ts business and this remained in place, contributing £0.36 billion to the IGD at 31 December 2012. We will phase this out in two equal steps, reducing the credit taken to £0.18 billion from January 2013 and we expect to take zero credit from January 2014.
(Unaudited) As at 31 December 2012, stress testing of our IGD capital position to various events has the following results: AAAAAAAAAAAA An instantaneous 20 per cent fall in equity markets from 31 December 2012 levels would reduce the IGD surplus by £450 million; AAAAAAAAAAAA A 40 per cent fall in equity markets (comprising an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period) would reduce the IGD surplus by £950 million; AAAAAAAAAAAA A 100 basis points reduction (subject to a fl oor of zero) in interest rates would reduce the IGD surplus by £850 million*; and
AAAAAAAAAAAA Credit defaults of ten times the expected level would reduce IGD surplus by £700 million.
IGD surplus represents the accumulation of surpluses across all of our operations based on local regulatory minimum capital requirements with some adjustments, pursuant to the requirements of Solvency I. The calculation does not fully adjust capital requirements for risk nor does it capture the true economic value of assets. Global regulatory developments, such as Solvency II and ComFrame, aim to ensure that the calculation of regulatory surplus continues to evolve over time into a more meaningful economic measure.
There is broad agreement that ultimately it would be benefi cial to replace the IGD regime with a regime that would be more risk based. Solvency II was supposed to provide such a framework but we now know that it will not be implemented before 31 December 2015. The structure of the Group and the approach we have taken to managing our risks, with a sizeable credit reserve in the UK annuity book, a strong inherited estate in UK with profi ts and the relatively low risk nature of our asset management and Asian operations, together with a high level of IGD surplus, means we have positioned ourselves well for future regulatory developments and stresses to our business.
* The impact of the 100 basis points reduction in interest rates is exacerbated by the current regulatory permitted practice used by Jackson, which values all interest rate swaps at book value rather than fair value for regulatory purposes. At 31 December 2012, removing the permitted practice would have increased reported IGD surplus by £0.3 billion. As at 31 December 2012, it is estimated that a 100 basis point reduction in interest rates (subject to a fl oor of zero) would have resulted in an IGD surplus of £4.9 billion, excluding the permitted practice. The eff ect of the revised calculation of Jackson’s contribution to IGD surplus as at 31 December 2012 would have been to increase the sensitivity to equity market falls by approximately £50 million.
The delays in fi nalising the Omnibus II Directive and implementing measures are expected to result in a deferral of the Solvency II implementation date for fi rms beyond the previously anticipated date of 1 January 2014. At this stage, it remains unclear exactly when Solvency II will come into force, although a deferral until 1 January 2016 or beyond appears likely.
Having assessed the requirements of Solvency II, an implementation programme was initiated with dedicated teams to manage the required work across the Group. The activity of the local Solvency II teams is being coordinated centrally to achieve consistency in the understanding and application of the requirements. Prudential is continuing its preparations to adopt the regime when it eventually comes into force and is undertaking in parallel an evaluation of the possible actions to mitigate its effects. Prudential regularly reviews its range of options to maximise the strategic fl exibility of the Group. This includes consideration of optimising the Group’s domicile as a possible response to an adverse outcome on Solvency II.
Over the coming months Prudential will remain in regular contact with the FSA as it continues to engage in the ‘pre-application’ stage of the approval process for the internal model. In addition, Prudential also expects to engage in the initial stage of the FSA’s proposed ‘Individual Capital Adequacy Standards Plus (ICAS+)’ regime, which will ultimately enable its UK insurance entities to leverage the developments made in relation to the Solvency II internal model for the purpose of meeting existing ICAS regime.
Prudential believes that the results of these stress tests, together with the Group’s strong underlying earnings capacity, its established hedging programmes and its additional areas of fi nancial fl exibility, demonstrate that it is in a position to withstand signifi cant deterioration in market conditions.
Prudential also uses an economic capital assessment to monitor its capital requirements across the Group, allowing for realistic diversifi cation benefi ts and continues to maintain a strong position. This assessment provides valuable insights into its risk profi le.
Specifi cally, Pillar 1 covers the quantitative requirements around own funds, valuation rules for assets and liabilities and capital requirements. Pillar 2 provides the qualitative requirements for risk management, governance and controls, including the requirement for insurers to submit an Own Risk and Solvency Assessment which will be used by the regulator as part of the supervisory review process. Pillar 3 deals with the enhanced requirements for supervisory reporting and public disclosure.
A key aspect of Solvency II is that the assessment of risks and capital requirements are intended to be aligned more closely with economic capital methodologies and may allow Prudential to make use of internal economic capital models if approved by the relevant supervisory authority.
C.4 Risk mitigation and hedging (Unaudited) Prudential manages its actual risk profi le against its tolerance of risk. To do this, Prudential maintains risk registers that include details of the risks Prudential has identifi ed and of the controls and mitigating actions it employs in managing them. Any mitigation strategies involving large transactions such as a material derivative transaction involving shareholder business are subject to review at Group level before implementation.
Prudential uses a range of risk management and mitigation strategies. The most important of these include: adjusting asset portfolios to reduce investment risks (such as duration mismatches or overweight counterparty exposures); using derivatives to hedge market risks; implementing reinsurance programmes to manage insurance risk; implementing corporate insurance programmes to limit the impact of operational risks; and revising business plans where appropriate.
C.3 Capital allocation (Unaudited) Prudential’s approach to capital allocation is to attain a balance between risk and return, investing in those businesses that create shareholder value. In order to effi ciently allocate capital, Prudential measures the use of, and the return on, capital.
Corporate responsibility (CR) is integral to the way we do business at Prudential. This review gives an overview of our activities. Prudential also publishes an annual CR report which is available online at www.prudential.co.uk
As a Group with a long-term view, we believe it is important to participate in global debates and policy considerations that affect our customers. Across our business, we share our knowledge and expertise to help inform public policy in all our markets.
Serving our customers Today we serve around 24 million insurance customers in diverse markets where people’s specifi c savings, investment and protection needs are different. However, what is common among all our customers is that the fi nancial decisions they make are among the most important of their lives.
Prudential Corporation Asia launched a number of tailored products in 2012. PRUmyhealth medical plan was launched in Hong Kong, offering comprehensive health protection with lifetime global coverage, and in Malaysia PRUFlexi Med was launched, which provides customers with the fl exibility to choose a number of medical benefi ts based on their needs.
Jackson has established a signifi cant presence in the alternative investments market, in a period where customers seek greater security in times of economic uncertainty, and is a leader in alternative investments in the retail adviser market.
Over the last decade, Prudential has been widely recognised as the UK’s leading with-profi ts manager. Our long-term approach to the management of the with-profi ts fund has continued to benefi t customers during 2012, as it helps to provide protection from the full impact of volatile market conditions. The fund has consistently outperformed the FTSE All-Share Index. Over the last 15 years, the fund has delivered a cumulative investment return of 184.3 per cent on investments covering policyholder liabilities. This compares favourably with the FTSE All-Share Index total return of 106.5 per cent over the same period. Total bonus payments are expected to top £2 billion in 2013, and our policyholders will typically see year-on-year increases of between 3.5 per cent and 6.5 per cent in accumulating with-profi ts policy values. Since 2003, an estimated £22 billion has been added to policy values.
Prudential UK was in the best performing 8 per cent, up from 15 per cent in 2011, of fi nancial companies included in data published by the Financial Ombudsman Service.
M&G is a long-term investor that takes its responsibilities as a shareholder seriously, often working closely with the management of the companies in which it invests. Active voting is an integral part of M&G’s investment approach. We believe that exercising our votes both adds value and protects our interests as shareholders. The M&G website provides an overview of voting history: www.mandg.co.uk/Corporate/CorporateResponsibility /CorporateGovernance/Votinghistory.jsp
Our diversity and inclusion policies are guided by the principles of the UN’s Universal Declaration of Human Rights and the International Labour Organisation’s core labour standards. These are also incorporated in our Group Code of Business Conduct, which sets expected standards of employee behaviour.
We maintain an inclusive culture that is sensitive to the needs of employees with a disability. We continue employing people who become disabled, and provide training and career development opportunities for all. We also give full and fair consideration and encouragement to all applicants with suitable aptitude and abilities, regardless of disability.
At Group Head Offi ce, the Connect programme of lunchtime events brings together colleagues on subjects ranging from learning about developments in the business and Prudential’s heritage, to themes like parenting.
We believe it is important for our employees to have the opportunity to benefi t from the Group’s success through share ownership. In the UK, we operate two all-employee share plans: a Share Incentive Plan (SIP) and a Save As You Earn (SAYE) scheme. In 2012, a majority of eligible employees participated in one or both of these plans.
We have several initiatives in place to maintain our commitment to diversity and inclusion. These include: AAAAAAAAAAAAA Apprenticeship schemes and support for underprivileged students to provide entry-level positions for young people; AAAAAAAAAAAAA Training in unconscious bias to improve inclusion throughout the organisation; AAAAAAAAAAAAA Pay reviews to prevent systematic concerns around equal pay and opportunity by gender, ethnic group and working patterns; and
AAAAAAAAAAAAA Collaborative partnerships with organisations that strengthen and further the diversity and inclusion agenda, such as the Diversity and Inclusion in Asia Network (DIAN), and Peckham, an American non-profi t community rehabilitation organisation. In the UK, we are also sponsors of the 2012 Working Mums Top Employer Awards, and co-sponsors of the inaugural Women in Investment Management event targeting female students.
In our UK-based businesses, we have various programmes designed to create focused learning networks and active talent communities. These include: M&G’s Cornerstone, focused on senior management; Catalyst, aimed at junior talent; Investor Development Programmes; and Sales Business Leadership Programmes. Prudential UK provides Career Development Centres for middle managers, and at Group Head Offi ce, Enhance offers employees the opportunity to hone their skills for working effectively and to develop in areas such as cross-cultural awareness and building effectiveness partnerships.
Improving education and skills In Asia, with the support of the Ministry of Education, PCA partnered with the China Insurance Regulatory Commission and the Chinese Academy of Social Sciences to develop an insurance educational course that could be taught across schools in China. Since its launch in 2007, more than 57,000 children have benefi ted from the course to date, strengthening their knowledge of insurance and how it relates to their everyday lives.
In the UK, the Business Class programme, run by Business in the Community, gives Prudential UK colleagues the opportunity to use their knowledge, experience and skills to help with some of the most pressing issues in local schools. Businesses partner with schools in the most deprived areas, and work strategically for three years on an action plan driven by the school’s needs, covering areas such as leadership, curriculum and achievement. In 2012, the programme helped 15 schools, 7,500 students and 90 teachers.
Supporting local communities As a long-term business, we are committed to supporting the long-term well-being of the communities in which we operate.
Each of Prudential’s businesses has community investment programmes in place which provide support to charitable organisations, both through funding and the experience and expertise of our employees.
Last year more than 7,350 employees across the Group gave up their time to help in their communities, using their skills and knowledge to benefi t others.
We establish long-term relationships with our charity partners to ensure that the projects we support are sustainable, and we work closely with them to ensure that our programmes continuously improve.
The diversity of our markets means that our programmes vary from region to region, but a shared focus for our community investment is education and life skills. These activities include fi nancial education, support to improve social mobility and employee volunteering.
Financial education Financial education forms an important part of our educational activity. We believe that encouraging people to manage their money prudently helps to underpin overall economic development and success for communities.
Cha-Ching was launched in seven countries in 2011, to help parents in Asia develop money-smart values among children from the ages of seven to 12. The programme has produced a series of three-minute music videos with sing-a-long subtitles that teach children about four key money management concepts – Earn, Save, Spend and Donate – through a band of six characters. These videos have been shown daily on the Cartoon Network, Asia’s most watched children’s channel. Cha-Ching is supported by an interactive website (www.cha-ching.com) and mobile applications offering digital resources for parents, children and teachers.
Over the last year, Cha-Ching has received signifi cant support across the region, with more than 20,000 children and teachers benefi ting from the programme to date. In April 2012, the Philippines Department of Education signed a Memorandum of Agreement to incorporate Cha-Ching into the curriculum of public primary schools, and NGOs including Junior Achievement have organised Cha-Ching workshops for children in Hong Kong and Thailand. Singapore Airlines and Garuda Indonesia have incorporated the music videos into their in-fl ight entertainment content for travelling families.
Prudential RideLondon Prudential is sponsoring RideLondon, an annual two-day festival of cycling which was formally launched in February 2013 with the Mayor of London, Boris Johnson, who predicted the event will become a living legacy of the London Olympic and Paralympic Games of 2012. Prudential RideLondon will be a world-class festival of cycling, starting in August 2013, that combines a free family ride in central London, a world-class professional cyclists’ race and an amateur cyclists’ race to raise money for charity.
Disaster relief and preparedness Many of our customers in Asia are located in areas prone to natural disasters. For a number of years we have supported local initiatives to support relief efforts following disasters in countries where we operate, and we also maintain a disaster relief fund which can be activated in emergencies. Our commitment to disaster relief also often goes beyond fi nancial aid, with our people helping on the ground.
In the aftermath of the disaster, Prudential partnered with Help Age International and FOPDEV (Foundation for Older Persons Development) to provide help where it was needed most. In June 2012, a team of 65 PRUvolunteers from 10 countries across Asia, supported by our Thai colleagues, travelled to Fang District in northern Thailand for six days to help build and renovate fl ood-resistant homes for old people in Mai Ai, as part of the ‘New House for New Life’ project. The team also helped renovate a school, built a dam for improved water management, and participated in an evacuation simulation exercise with the residents to better prepare them for future fl oods.
Since its launch in Asia eight years ago, the ‘Investing in Your Future’ volunteer-led fi nancial literacy programme has reached more than 38,000 women. These seminars teach basic fi nancial planning skills for different stages in their lives. Female volunteers from Prudential donate their time and expertise to deliver the seminars in China, India, Indonesia and Vietnam. The project works closely with the All-China Women’s Federation, the Women’s Association and Labour Union in Vietnam, and the Ministry of Women’s Empowerment and Child Protection in Indonesia.
Each year, employees across the Group vote for the shortlisted project they believe has made the greatest impact. In 2012, the winning project was ‘Learning About Earning’. This programme – in partnership with Junior Achievement – benefi ted 234 impoverished children from a small village outside Jakarta, through the commitment of 430 employees from Prudential Corporation Asia’s Indonesian business, who helped the children develop basic communication and fi nancial skills.
The Carbon Reduction Commitment (CRC) Energy Effi ciency Scheme is a mandatory UK scheme aimed at improving energy effi ciency and cutting carbon dioxide emissions in large public and private sector organisations, which are responsible for around 12 per cent of the UK’s emissions. The scheme features a range of reputational and fi nancial drivers, which aim to encourage organisations to develop energy management strategies that promote a better understanding of energy usage. All CRC participants must measure and report carbon emissions annually. The fi rst CRC performance league table, which is due to be updated later this year, placed Prudential ahead of its insurance peer group. In 2012, for the fi rst time, participants had to purchase allowances from the Government before the end of July. Prudential’s annual carbon emission for the 2011/12 compliance year was 75,742 tonnes of CO2, 5,438 tonnes less than in 2010/11, which translated into a fi nancial liability of £908,904.
The Environmental Forum, a sub-group of Prudential plc’s Environment Health and Safety Council, is supporting Corporate Property’s UK Environmental Employee Engagement programme. This initiative focuses on encouraging employees to make their own contribution to help their Business Unit improve its environmental performance. Each UK Business Unit has signed up to the programme to meet the challenge by a mix of intranet campaigns, competitions, employee forums and attitude surveys.
The direct cash donations to charitable organisations amounted to £9.6 million, of which approximately £4.0 million came from our EU operations, which are principally our UK insurance operation and M&G, with the remaining £5.6 million being contributed to charitable organisations by Jackson National Life Insurance Company and Prudential Corporation Asia.
Protecting the environment We recognise that managing our buildings effi ciently and minimising our greenhouse gas emissions is not only benefi cial to the environment but also makes good business sense.
We aim to ensure that we minimise the impact of our activities on the environment. Our strategy focuses on reducing the direct impact of the properties we occupy, as well as the properties we manage through PRUPIM (Prudential Property Investment Managers Limited), which is a top-25 global real estate fund manager, with £16 billion of assets under management (at 31 December 2012).
In the UK, we have signed up to the Prompt Payment Code, launched in December 2008 by the UK Department for Business, Enterprise and Regulatory Reform. In 2012, our trade creditor days, based on the ratio of amounts that were owed to trade creditors at the year end to the aggregate of the amounts invoiced by trade creditors during the year, were 22 days (2011: 22 days).
Procurement practices in Prudential UK have been successfully accredited with the Chartered Institute of Purchasing and Supply certifi cation, an industry benchmark of recognised good practice.
Reducing our impact: property investment portfolio The fundamental principle behind PRUPIM’s approach to Responsible Property Investment is that by having a leading position we are better able to protect and enhance performance for its clients. This strategy focuses on four areas: ensuring portfolio resilience; driving environmental improvements; building strong relationships; and responsibility in its own operations.
PRUPIM’s focus on delivering energy reductions across its managed portfolio has achieved some signifi cant results. For example, in the UK, PRUPIM has reduced carbon emissions intensity by 17 per cent at 23 of its largest multi-let offi ces and 16 per cent at its shopping centres, generating savings of over £3.6 million for its occupiers. Its UK shopping centres now divert 80 per cent of waste from landfi ll and 49 per cent of waste is diverted from landfi ll at our ISO 14001 offi ces.
We have also achieved the environmental standard ISO 14001 at nine shopping centres and 27 multi-let offi ces, which together account for 64 per cent of the carbon emission under management control.
Local governance In M&G, Jackson and Prudential UK there are governance committees in place – with senior management representation – which agree strategy and spend. In Asia, the Prudence Foundation has been established as a unifi ed charitable platform to align and maximise the impact of community efforts across the region.
Governance 88 Board of directors 93 Corporate Governance report: 93 Role of the Board and Governance Framework 100 Audit Committee report 103 Nomination Committee report 104 Risk Committee report 105 Risk governance 107 Relations with shareholders 110 Additional disclosures 111 Index to principal directors’ report disclosures
Tidjane was the Chief Financial Offi cer from March 2008 until his appointment as Group Chief Executive in 2009.
Tidjane spent the fi rst part of his professional career with McKinsey & Company in Paris and New York, serving insurance companies and banks. He then spent a number of years in Africa where he was Chief Executive and later Chairman of the National Bureau for Technical Studies and Development in Côte d’Ivoire and a cabinet member as Secretary of Planning and Development. Tidjane returned to France to become a partner with McKinsey & Company and one of the leaders of their Financial Institutions practice before joining Aviva in 2002. He worked at Aviva until 2008, holding successively the positions of Group Strategy and Development Director, Managing Director of Aviva International, Group Executive Director and Chief Executive Offi cer, Europe.
Paul Manduca was the Senior Independent Director prior to his appointment as Chairman. He was also a member of the Audit and Remuneration Committees from October 2010 to June 2012 and a member of the Nomination Committee from January 2011.
Paul was a non-executive director of Wm Morrison Supermarkets Plc (Morrisons) from September 2005 until March 2011. During that time, he was the Senior Independent Director, a member of the Nomination Committee and Chairman of the Remuneration Committee of Morrisons, and prior to that he chaired the Audit Committee of Morrisons. Paul retired as Chairman of JPM European Smaller Companies Investment Trust Plc in December 2012 and was the Chairman of Aon UK Limited until September 2012. He was also a non-executive director and Chairman of the Audit Committee of KazMunaiGas Exploration & Production until the end of September 2012.
Paul was the Senior Independent Director and Chairman of the Audit Committee of Development Securities plc until March 2010, Chairman of Bridgewell Group plc until 2007 and a director of Henderson Smaller Companies Investment Trust plc until 2006. Prior to that, he was European CEO of Deutsche Asset Management from 2002 to 2005, global CEO of Rothschild Asset Management from 1999 to 2002 and founding CEO of Threadneedle Asset Management Limited from 1994 to 1999 when he was also a director of Eagle Star and Allied Dunbar. Paul is a member of the Securities Institute, a former Chairman of the Association of Investment Companies from 1991 to 1993, and former member of the Takeover Panel. He is also the Chairman of Henderson Diversifi ed Income Limited. Age 61.
Rob Devey has been the Chief Executive of Prudential UK and Europe since 2009. Before joining Prudential, Rob worked at Lloyds Banking Group from 2002, where he held a number of senior leadership roles across insurance and retail banking. Prior to joining Lloyds Banking Group, Rob was a consultant with the Boston Consulting Group (BCG) in the UK, US and Europe.
Rob chairs the London Leadership Team of Business in The Community and is also a trustee of the LloydsTSB Foundation for England and Wales. Age 44.
Before joining Prudential, Nic Nicandrou worked at Aviva, where he held a number of senior fi nance roles, including Norwich Union Life Finance Director and Board Member, Aviva Group Financial Control Director, Aviva Group Financial Management and Reporting Director and CGNU Group Financial Reporting Director. Nic started his career at PriceWaterhouseCoopers where he worked in both London and Paris. Age 47.
John Foley has been Group Chief Risk Offi cer since January 2011. He joined Prudential as Deputy Group Treasurer in 2000 before being appointed Managing Director, Prudential Capital (formerly Prudential Finance (UK)) and Group Treasurer in 2001. He was appointed Chief Executive of Prudential Capital and to the Group Executive Committee in 2007. Prior to joining Prudential, John spent three years with National Australia Bank as General Manager, Global Capital Markets. John began his career at Hill Samuel & Co Limited where, over a 20 year period, he worked in every division of the bank, culminating in senior roles in risk, capital markets and treasury of the combined TSB and Hill Samuel Bank. Age 56.
Keki is also a director of Britannia Industries Limited, JM Financial Limited, JM Financial Services Limited, Piramal Enterprises Limited, Siemens Limited, The Indian Hotels Company Limited and Godrej Properties Limited, all of which are quoted on the Bombay Stock Exchange. In addition, he acts as adviser to Fleishman-Hillard Inc and is Chairman of Marsh & McLennan Companies Group, India.
Before he retired from Unilever in 2005, Keki was Director, Home and Personal Care, responsible for the HPC business of Unilever worldwide, a Board member of Unilever PLC and Unilever N.V., and a member of Unilever’s Executive Committee. He joined Hindustan Lever Ltd in India in 1973 and in 1987, he joined the Board of Hindustan Lever and became Chairman in 1996. Age 67.
Mike Wells is President and CEO of Jackson National Life Insurance Company (Jackson). Mike has served in a variety of senior and strategic positions at Jackson over the last 15 years, including President of Jackson National Life Distributors. Mike has been Vice Chairman and Chief Operating Offi cer of Jackson for the last nine years. During this period he has led the development of Jackson’s variable annuity business and been responsible for IT, strategy, operations, communications, distributions, Curian and the retail broker dealers. Age 52.
B o ard o f d irecto rs Board of directors
Appointments Board: August 2007 Chairman of the Audit Committee: October 2009 Risk Committee: November 2010 Nomination Committee: July 2012
Ann is also a non-executive director of British American Tobacco plc, Rio Tinto plc, Rio Tinto Limited, UBS AG, Arden Holdings Limited, Atrium Underwriting Group Limited and Atrium Underwriters Limited. From its nationalisation in 2008 until January 2009, Ann was Interim Chief Financial Offi cer and Executive Director of Northern Rock. Age 57.
Alistair was a partner of KPMG from 1986 to 2010. He joined KPMG (then Peat Marwick Mitchell) in 1973 and held a number of senior leadership positions. These included Vice Chairman of UK Financial Services and Head of UK Insurance Practice, International Managing Partner – Global Markets and UK Vice Chairman. Latterly he served as a Global Vice Chairman of KPMG from 2007 to 2010.
Alistair acted as a non-executive director of the Foreign & Commonwealth Offi ce from 2005 to 2010 and chaired the audit committee until 2009. He was an Association Member of BUPA until January 2012. Alistair is a member of the Strategy and Development Board and a Visiting Professor at Cass Business School. In February 2012 Alistair was appointed as a Trustee of the Design Museum in London. Age 60.
Appointments Board: October 2010 Chairman of the Risk Committee: October 2010 Audit Committee: November 2010 Nomination Committee: July 2012
Sir Howard is chairman of the Phoenix Group, and a Professor at Institut d’Études Politiques (Sciences Po). He is also Chairman of the UK Government’s Airports Commission. He chairs the International Advisory Board of the China Securities Regulatory Commission and is a member of the International Advisory Board of the China Banking Regulatory Commission. He is also an independent director of Morgan Stanley Inc and a Director of the National Theatre. Age 62.
Michael remains a director of Nestlé in India, and was appointed Chairman of the Evian Group, a think tank and forum for dialogue promoting free trade, from 2001 to 2011. He also serves as a non-executive director on the Boards of the Bobst Group in Switzerland, Hasbro Inc. in the USA, and Gottex Fund Management Holdings Limited in Guernsey. In addition, he is a Member of the Swaziland International Business Advisory Panel under the auspices of the Global Leadership Foundation (GLF) London, as well as being a member of the Development Committee of the International Business Leaders Forum (IBLF) until stepping down in 2011. Age 70.
Lord Turnbull was a member of the Remuneration Committee from November 2010, and a member of the Audit Committee from January 2007 to November 2010.
Lord Turnbull is a non-executive director of Frontier Economics Limited and The British Land Company PLC. He was formerly Chairman of BH Global Limited until January 2013 and a non-executive director of the Arup Group from 2006 to 2007. He also worked part-time as a Senior Adviser to the London partners of Booz and Co (UK) until February 2011. Age 68.
From 1998 to 2007, Kai worked for Standard Chartered PLC where he was a Group Executive Director responsible for Asia Governance and Risk. His responsibilities included developing strategy and business performance across Asia, as well as strategic merger and acquisition activity. Prior to that, he spent 19 years at Bank of America and from 1990 was based in Asia as Group Executive Vice President and Head of the Asia Wholesale Banking Group. From 2004 to 2007, he was a non-executive director at Tate & Lyle plc and at Visa International, where he served on the Asia Pacifi c Board.
Kai is currently a non-executive director and lead independent director of Singapore Telecommunications Limited, a member of the Board of the Casino Regulatory Authority of Singapore, a non-executive director of PSA International Pte. Limited, Chairman of the Governing Board of the Duke-NUS Graduate Medical School and a director and Chairman of Clifford Capital Pte. Limited. Age 62.
The Board confi rms that it has also complied with the HK Code throughout the period other than in respect of the responsibilities of the Remuneration Committee as regards making recommendations to the Board in respect of the remuneration of non-executive directors. It would be inconsistent with the principles of the UK Code for the Remuneration Committee, which is comprised solely of non-executive directors, to be involved in the setting of their own fees.
The UK Code can be viewed on the Financial Reporting Council’s website, with a copy of the HK Code available on the website of the Hong Kong Stock Exchange.
The Board, which I lead, is responsible for ensuring that our governance is strong, clear and appropriate, and plays the best possible part in supporting our business and its growth.
Like all aspects of business, governance is constantly evolving, and we ensure that we are well prepared for new developments. As well as complying with the relevant codes, we keep a close eye on upcoming changes to those codes, and carry out intensive work to prepare our policies, structures and procedures well in advance.
We are committed to reporting on our governance in a clear and transparent way, and will continue to ensure that our governance is the best in its class and a central part of how we do business.
The Board has terms of reference which specifi cally set out matters reserved for its decision. These are kept under regular review and include matters such as setting the Group’s strategy and monitoring its implementation, the approval of annual budgets and business plans, as well as the risk appetite of the Group and its capital and liquidity positions. The Board has approved a governance framework and under these procedures, all business units are required to seek approval from the Board for matters exceeding pre-determined authority limits. The terms of reference are regularly reviewed and enable the Board to exercise effective control over the Group’s affairs.
Executive directors Tidjane Thiam 10 7 – – – – Nic Nicandrou 10 6 – – – – Rob Devey 10 7 – – – – John Foley 10 7 – – – – Michael McLintock 9 6 – – – – Barry Stowe 10 4 – – – – Mike Wells 10 4 – – – –
Non-executive directors Keki Dadiseth 9 3 – 4 – – Howard Davies4 10 5 12 – 2 5 Michael Garrett 10 6 – 5 – – Ann Godbehere4 10 7 12 – 2 5 Alistair Johnston 10 7 12 – – – Kai Nargolwala6 10 6 – 5 – 4 Kathleen O'Donovan (retired 31 March 2012) 1 1 3 – 4 –
3 Paul Manduca missed one Nomination Committee meeting and one additional Board meeting due to a confl ict of interest. 4 Appointed as members of the Nomination Committee on 2 July 2012.
Chairman The roles of Chairman and Group Chief Executive are separate and clearly defi ned. The scope of these roles is approved and kept under regular review by the Board so that no individual has unfettered decision-making powers.
Harvey McGrath retired as Chairman of the Board in July 2012 and was succeeded by Paul Manduca.
Chief Executive The Group Chief Executive is responsible for the management of the Group and the implementation of the strategy and policy approved by the Board. In discharging his responsibilities, the Group Chief Executive is advised and assisted by the Group Executive Committee which comprises business unit heads and a Group Head Offi ce team of functional specialists.
The Senior Independent Director is responsible for maintaining contact with shareholders with a view to understanding their concerns and issues, as well as providing ongoing support to the Chairman and acting as an intermediary for the other non-executive directors if required. The Senior Independent Director is accessible to all stakeholders, including debt investors, particularly if they have concerns and where contact through the normal channels may have failed or would be inappropriate.
Meetings During 2012, the Board met on 10 scheduled occasions and held seven additional meetings. A separate off-site strategy event was also held. A detailed forward agenda has been in operation for a number of years and this is kept updated to refl ect not only regular items of business but also any topical matters arising during the year.
Given the geographical spread of the Group’s business, at least one board meeting a year is held overseas at one of the Group’s business operations. These meetings facilitate a fuller understanding of operations in that jurisdiction and provide an opportunity for the directors to meet with senior members of the management teams in those countries. The overseas meeting for 2012 was held in Singapore.
On 1 January 2012, Kai Nargolwala and Alistair Johnston joined the Board as non-executive directors. Kathleen O’Donovan retired as a non-executive director on 31 March 2012. Harvey McGrath retired as a director on 2 July 2012 and was succeeded as Chairman by Paul Manduca. Philip Remnant was appointed as the Senior Independent Director with effect from 1 January 2013.
The biographies of all current directors are set out on pages 88 to 92.
Non-executive directors are typically expected to serve for two terms of three years from their initial election by shareholders although the Board may invite them to serve for an additional period. Non-executive directors serving a third term are subject to rigorous annual review.
Succession planning The Board is actively engaged in succession planning for both executive and non-executive roles to ensure that Board composition is regularly refreshed and that the Board retains its effectiveness at all times. This is delivered through an established review process that is applied across all businesses and covers both director and senior management succession and development and also through the work of the Nomination Committee as described more fully on page 103. The Board considers annually the outcome of the review and actions arising from the review are implemented as part of the management development agenda.
Independence The independence of the non-executive directors is determined with reference to the UK and HK Codes. Prudential is required to affi rm annually the independence of all non-executive directors under the Hong Kong Listing Rules and also the independence of its Audit Committee members under the Sarbanes-Oxley legislation. The Board has appropriate processes in place to manage any potential confl icts of interest.
Alistair Johnston was a partner in the Company’s auditor, KPMG, from 1986 to 2010. However, he did not audit the Prudential Group and he no longer has any fi nancial or other interest in KPMG. The Board does not consider that this former relationship with KPMG affects Alistair’s status as an independent director of Prudential.
Induction and development The Group Company Secretary supports the Chairman in providing tailored induction programmes for new directors and ongoing development for all directors. On appointment all directors embark upon a wide-ranging induction programme covering, amongst other things, the principal bases of accounting for the Group’s results, the role of the Board and its key committees and the ambit of the internal audit and risk management functions. In addition, they receive detailed briefi ngs on the Group’s principal businesses, its product range, the markets in which it operates and the overall competitive environment. These sessions are facilitated through meetings with executive management and other senior members of the management team. Other areas addressed include the directors’ obligations under the different listing regimes, legal issues affecting directors of fi nancial services companies, the Group’s governance arrangements and its investor relations programme, as well as its remuneration policies.
Throughout their period in offi ce, directors are regularly updated on the Group’s businesses and the regulatory and industry-specifi c environments in which it operates as well as on their legal and other duties and obligations as directors where appropriate. The scope of these updates is reviewed in line with the requirements of the business and can be in the form of written reports to the Board, or presentations by senior executives or by external advisers where appropriate. In order to enhance their knowledge and effectiveness throughout their term in offi ce, non-executive directors serving on key committees are updated regularly on matters specifi c to the relevant committee and receive presentations from senior executives on topics of interest to them.
Performance evaluation In respect of 2011, there was a formal and rigorous review of the Board, its Committees and their effectiveness which was undertaken by an external consultancy. Areas of improvement were identifi ed and good progress was made against these during the course of 2012.
The performance of the non-executive directors and the Group Chief Executive is evaluated by the Chairman in individual meetings. The Senior Independent Director leads the non-executive directors in a performance evaluation of the Chairman.
External appointments Directors may hold directorships or other signifi cant interests in companies outside the Group which may have business relationships with the Group.
Non-executive directors may serve on a number of other boards provided that they are able to demonstrate satisfactory time commitment to their role at Prudential and that they discuss any new appointment with the Chairman prior to accepting. This ensures that they do not compromise their independence and that any potential confl icts of interest and any possible issues arising out of the time commitments required by the new role can be identifi ed and addressed appropriately. The major commitments of our non-executive directors are detailed in their biographies set out on pages 90 to 92.
Executive directors may accept external directorships and retain any fees earned from those directorships subject to prior discussion with the Group Chief Executive and always provided this does not lead to any confl icts of interest. In line with the UK Code, executive directors would be expected to hold no more than one non-executive directorship, nor the chairmanship, of a FTSE 100 company. Some of our executive directors hold directorships or trustee positions of unquoted companies or institutions. Details of any fees retained are included in the Directors’ remuneration report on page 131 and major commitments of our executive directors are detailed in their biographies on pages 88 to 90.
In addition, the Articles of Association of the Company permit the directors and offi cers of the Company to be indemnifi ed in respect of liabilities incurred as a result of their offi ce.
Accountability Internal control and risk management The Board has overall responsibility for the system of internal control and risk management and for reviewing its effectiveness. The framework setting out the Group’s approach to internal control, risk management and corporate responsibility comprises the following: Group governance framework: Documents the Group’s internal control policies and processes in an online manual, including the Group’s risk framework, code of business conduct and detailed policies on key operational and fi nancial risks. Business units are also required to follow any additional processes necessary to comply with local statutory and regulatory requirements.
Group risk framework: Provides an overview of the Group-wide philosophy and approach to risk management and sets out the key risk management processes which support the Group’s compliance with internal, statutory and regulatory requirements.
The governance framework principally relates to the operational management of the Group’s businesses and includes pre-determined authority limits delegated by the Board in respect of matters which are necessary for the effective day-to-day running and management of the business.
The system is regularly reviewed and complies with the UK and HK Codes, as well as the relevant provisions of Sarbanes-Oxley. In complying with the UK Code, the Group follows the 2005 Turnbull Guidance relating to the sections of the Code dealing with risk management and internal control. The Board reviewed the effectiveness of the system of internal control in February 2013, covering all material controls, including fi nancial, operational and compliance controls, risk management systems and the adequacy of the resources, qualifi cations and experience of staff of the Group’s accounting and fi nancial reporting function. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives and gives reasonable, but not absolute, assurance. The Board confi rms that there is an ongoing process for identifying, evaluating and managing the signifi cant risks faced by the Group, which has been in place throughout the period and up to the date of this report.
The chief executive and chief fi nancial offi cer of each business unit, as well as the senior management in Group Head Offi ce, annually certify compliance with the Group’s governance, internal control and risk management requirements. The risk management function reviewed any matters identifi ed by the certifi cation process, and also assessed the risk and control issues that arose and were reported during the year. This included routine and exception-based risk reporting, matters identifi ed and reported by other Group Head Offi ce oversight functions and the fi ndings from the work of the internal audit function, which executes risk-based audit plans throughout the Group. The results were reported to and reviewed by the Audit Committee.
In line with the Turnbull Guidance, the certifi cation provided above does not apply to certain material joint ventures where the Group does not exercise full management control. In these cases, the Group satisfi es itself that suitable governance and risk management arrangements are in place to protect the Group’s interests. However, the relevant Group company which is party to the joint venture must, in respect of any services it provides in support of the joint venture, comply with the requirements of the Group’s internal governance framework.
The Business Review provides further detail on Prudential’s risk appetite and exposures on pages 68 to 78 and corporate responsibility activities on pages 79 to 85.
The internal control and risk management systems described above and also under the sections on Risk Governance on page 105 and the Audit Committee on page 101, cover the Company’s fi nancial reporting process and the Group’s process for the preparation of consolidated fi nancial statements.
During 2012, the Committee held 12 scheduled meetings and details of Committee members’ attendance is set out on page 94.
During 2012, the Audit Committee continued to focus on ensuring the Group’s fi nancial reporting remained clear, robust and informative, and continued to work closely with the Risk Committee to ensure an integrated approach to risk assurance and risk management was achieved. The Committee met regularly with the Group-wide Internal Audit Director and the Audit Partner from the external auditor.
The principal responsibilities of the Committee are to: AAAAAAAAAAAAA monitor the integrity of the fi nancial statements, including the review of half and full-year results, the annual report and accounts and other signifi cant fi nancial announcements and review the critical accounting policies and key judgmental areas contained therein; AAAAAAAAAAAAA monitor the framework and eff ectiveness of the Group’s systems of internal control, including the Turnbull compliance statement and Sarbanes-Oxley procedures; AAAAAAAAAAAAA monitor auditor independence and the external auditor’s plans and audit strategy, the eff ectiveness of the external audit process, the external auditor’s qualifi cations, expertise and resources, and make recommendations for the re-appointment of the external auditor; AAAAAAAAAAAAA review the internal audit plan and resources, and monitor the audit framework and eff ectiveness of the internal audit function; AAAAAAAAAAAAA monitor the eff ectiveness of compliance processes and controls, and performance against the Group Compliance Plan; AAAAAAAAAAAAA review the anti-money laundering procedures in place, as well as the review of procedures operated for handling allegations from whistleblowers; and
The Audit Committee has received balanced and timely information over the course of the year which has enabled it to provide eff ective oversight of the Group’s key fi nancial reporting risks and internal controls.
Financial reporting The Committee is regularly briefed by management on developments in International Financial Reporting Standards and focussed on the critical accounting policies and practices as part of its review of fi nancial statements prior to recommending their publication to the Board. The Committee also reviewed any changes or decisions requiring a major element of judgement, unusual transactions, clarity of disclosures, signifi cant audit adjustments (of which there were none in 2012), the going concern assumption, compliance with accounting standards, and compliance with obligations under applicable laws, regulations and governance codes.
No material control implications were raised through these procedures during the year.
Business unit audit committees Every business unit has its own audit committee which provides oversight to the respective business unit and reports any relevant matters to the Committee. The members and chairmen are comprised primarily of senior management who are independent of the respective business unit. The minutes of these committees are reported regularly to the Committee and their meetings are attended by senior management of the respective business unit, including the business units’ heads of fi nance, risk, compliance and Group-wide internal audit.
Eff ectiveness of business unit audit committees Group-wide Internal Audit has reviewed the effectiveness of each business unit audit committee using an established evaluation tool. The evaluation comprises an annual review questionnaire which is divided into specifi c areas for appraisal and a walk through of each committee’s terms of reference, assessing whether these are appropriate for the business unit and if the committee has fulfi lled its responsibilities under the terms. A memorandum summarising the fi ndings of the review, as well as any action points, is compiled for each business unit audit committee.
Pursuant to the requirements of Section 404 of the Sarbanes-Oxley Act, the Group undertakes an annual assessment of the effectiveness of internal control over fi nancial reporting. Further details are provided below.
Group-wide Internal Audit The Committee regards its relationship with the internal audit function as pivotal to the effectiveness of its own activities. Group-wide Internal Audit plays an important role in supporting the Committee to fulfi l its responsibilities under the UK and HK Codes, as well as the Sarbanes-Oxley Act, and provides independent assurance on the Group’s processes of identifi cation and control of risk. Each of the Group’s business units has an internal audit team, the heads of which report to the Group-wide Internal Audit Director. Internal audit resources, plans and work are overseen by the Committee and by the business unit audit committees. Total approved internal audit headcount across the Group was 148 at 31 December 2012. The Group-wide Internal Audit Director reports functionally to the Committee and for management purposes to the Chief Financial Offi cer.
External audit The Committee has a key oversight role in relation to the external auditor, KPMG Audit Plc, whose primary relationship is with the Committee. The Group has established an Auditor Independence Policy which ensures that the independence and objectivity of the external auditor is not impaired. The four key principles of the policy underpin the provision of non-audit services by the external auditor, namely that the auditor should not audit its own fi rm’s work, make management decisions for the Group, have a mutuality of fi nancial interest with the Group, or be put in the role of advocate for the Group.
Independence Policy, all services were approved prior to work commencing and each of the non-audit services was confi rmed to be permissible for the external auditor to undertake as defi ned by the Sarbanes-Oxley Act. The Committee reviewed the non-audit services provided to the Group by KPMG at regular intervals during 2012. These included tax services, due diligence services, attestation reports on internal controls not required by legislation, agreed-upon procedures, other reports, certifi cations and examinations required by regulators, risk and compliance work, advising on accounting standards and regulatory rules and provision of comfort letters. A summary of fees payable to the auditor for the year ended 31 December 2012 is provided in note I6 to the Group fi nancial statements.
Auditor performance and independence The Committee assessed the performance, as well as the independence and objectivity, of the external auditor and the effectiveness of the audit process. The review of the effectiveness of the external audit process was conducted through a questionnaire-based exercise administered by Group Finance.
The Committee also reviewed the external audit strategy and received reports from the auditor on its own policies and procedures regarding independence and quality control, including an annual confi rmation of its independence in line with industry standards.
Re-appointment of auditor The Group operates a policy under which at least once every fi ve years a formal review is undertaken by the Committee to assess whether the external audit should be re-tendered. The external audit was last put out to competitive tender in 1999 when the present auditor was appointed. Since 2005 the Committee has annually considered the need to re-tender the external audit service and it again considered this in February 2012, concluding that there was nothing in the performance of the auditor which required a change.
Review of Committee eff ectiveness The effectiveness of the Committee was reviewed as part of the internally facilitated review of the Board and its committees. The fi ndings will be discussed by the Board in March 2013.
The Committee is satisfi ed, taking into account the fi ndings of the internal review, that it had been operating as an effective audit committee throughout the year. Further reviews of the effectiveness of the Committee will be undertaken regularly and will, from time to time, be conducted by external consultants.
The Nomination Committee plays a leading role in assessing the balance of skills and experience on the Board and the Group’s principal committees. The Committee identifi es the roles and capabilities required to meet the demands of the business and, with due regard to diversity, ensures that suitable succession planning is in place. Candidates continue to be considered on merit against specifi c criteria determined by the Committee.
During 2012, the Committee, under the leadership of Lord Turnbull, led the search for a new Chairman and, once the Chairman had been appointed, embarked on the search for a Senior Independent Director led by the Chairman.
The principal responsibilities of the Committee are to: AAAAAAAAAAAAA review the size, structure and composition of the Board, including the skills, knowledge, experience and diversity of Board members, and make recommendations to the Board with regard to changes; AAAAAAAAAAAAA identify and nominate candidates for appointment to the Board, based on merit and against objective criteria; AAAAAAAAAAAAA make recommendations to the membership of the audit, risk, remuneration and nomination committees in consultation with the Chairmen of those committees; and
AAAAAAAAAAAAA consider and, where necessary, authorise any actual or potential situational confl icts, upon such terms and conditions as the Committee considered appropriate, arising out of a proposed new appointment, the changed circumstances of an existing appointment or that of a director’s connected person.
The Committee will continue to review the time commitment required from each of our non-executive directors and, going into 2013, the Committee will continue to review and refresh the skills required to pursue our strategic objectives successfully.
In performing its duties, the Committee has access to the Group Chief Risk Offi cer and the services of the Group Company Secretary. The Committee may seek external professional advice at the Company’s expense.
Meetings The Committee meets at least four times a year to consider the Group’s risk appetite and provide oversight to the management of risk within the Group. The Chairman of the Committee is a member of the Audit Committee and works closely with that committee in fulfi lling the Risk Committee’s responsibilities.
The Chairman reviewed the work of the Committee and the Group’s risk framework as part of the ongoing dialogue with the regulator.
The Committee Chairman reported to the Board on matters of signifi cance after each meeting. The terms of reference for the Committee are kept under regular review and are updated where required. A copy of these can be found on the Group’s website.
Principles and objectives Risk is defi ned as the uncertainty that Prudential faces in successfully implementing its strategies and objectives. This includes all internal or external events, acts or omissions that have the potential to threaten the success and survival of Prudential.
In keeping with this philosophy, the Group has fi ve objectives for risk and capital management which are as follows: Framework: to design, implement and maintain a capital management and risk oversight framework, which is consistent with the Group’s risk appetite and philosophy towards risk taking; Monitoring: to establish a ‘no surprises’ risk management culture by identifying the risk landscape, assessing and monitoring risk exposures and understanding change drivers; Control: to implement suitable risk mitigation strategies and remedial actions where exposures are deemed inappropriate, and to manage the response to potentially extreme events; Communication: to effectively communicate the Group risk, capital and profi tability position to both internal and external stakeholders; and
1st line of defence 2nd line of defence 3rd line of defence
Risk management Risk taking and the management thereof forms the fi rst line of defence and is facilitated through both the Group Executive Committee (GEC) and the Balance Sheet and Capital Management Committee (BSCMC).
The GEC is comprised of the chief executives of each of the Group’s major business units, as well as a number of functional specialists, and supports the Group Chief Executive in the executive management of the Group.
Group Compliance Committee: the committee reports to the Group Executive Risk Committee and meets every two months to oversee the effectiveness of risk and capital management for all fi nancial and non-fi nancial risks faced by the Group and has responsibility to consider Group-wide regulatory compliance risks and controls.
Reporting The Risk Committee is provided with regular reports on the activities of the risk function and, where it affects the results of the assurances under the Turnbull compliance statement, the Audit Committee also receives appropriate reporting from the same function. Reports to the Risk Committee include information on the activities of the Group Executive Risk Committee, the Group Operational Risk Committee, the Group Credit Risk Committee, the Solvency II Technical Oversight Committee, the Technical Actuarial Committee and the Group Compliance Committee, as well as reports from Group-wide Internal Audit.
Each business unit reviews the risks inherent in their business operations as part of the annual preparation of their business plan, and subsequently, these opportunities and risks are regularly reviewed against business objectives with Group Risk. The impact of large transactions or divergences from the agreed business plan are also reviewed and reported by Group Risk.
o v ern an ce rep o rt Risk governance/Relations with shareholders
Communication with shareholders Being a major institutional investor, the Company is very aware of the importance of maintaining good relations with its shareholders, as well as with its debt investors. Discussions are held regularly with major shareholders and a programme of meetings took place throughout the year. In addition, Prudential regularly holds a conference for investors to provide further insight on selected areas of the business. In 2012, the conference was held in New York during November.
The latest analysts’ and brokers’ reports on the Company and the sector are circulated regularly to Board members to develop further their knowledge and understanding of external views about the Company. The Chairman and the non-executive directors also provided feedback to the Board on topics raised with them by major shareholders. Major shareholders and debt investors are welcome to meet with newly appointed directors, or any of the directors generally.
The Annual General Meeting is an important forum for both institutional and private shareholders and the Company encourages all its shareholders to vote. Shareholders are given the opportunity during annual general meetings to put questions to the Board on matters relating to the Group’s operations and performance.
Details of the 2012 AGM, including the major items discussed at the meeting and the results of the voting, can be found on the Company’s website. All directors in offi ce at the time of the Annual General Meeting held on 17 May 2012 attended the AGM, with the exception of Michael Garrett, who was unable to do so due to a prior commitment.
In accordance with the relevant legislation, shareholders holding 5 per cent or more of the fully paid up issued share capital of the Company, are able to require the directors to hold a general meeting. If the shareholders’ request identifi es a resolution to be moved at the meeting, the resolution must be included in the notice of meeting. Where such a request has been duly lodged with the Company, the directors are obliged to call a general meeting within 21 days of becoming subject to the request and must set a date for the meeting not more than 28 days from the date of the issue of the notice. Shareholders can also require the Company to circulate a statement of not more than 1,000 words on the subject matter of the resolution. Shareholders need not cover the costs of circulating such statements where the requests relate to the annual general meeting of a public company and provided suffi cient requests to require the circulation are received prior to the fi nancial year end preceding the meeting. Written shareholder requests should be addressed to the Group Company Secretary at the registered offi ce.
Share capital The Company’s issued share capital as at 31 December 2012, which is set out in note H11 on page 287, consisted of 2,557,242,352 (2011: 2,548,039,330) ordinary shares of 5 pence each, all fully paid up and listed on the London Stock Exchange and the Hong Kong Stock Exchange. Subject to applicable local securities law, the Company’s shares may be registered on the main register in the UK or the Company’s branch registers in Ireland or Hong Kong. The number of accounts on the share register at 31 December 2012 was 60,522 (2011: 63,338).
The Company also maintains secondary listings on the New York Stock Exchange in the form of American Depositary Receipts which are referenced to ordinary shares on the main UK register, under a depositary agreement with J.P. Morgan, and on the Singapore Stock Exchange in the form of interests in shares, which are referenced to the shares on the Hong Kong register under a depository agreement with the Central Depository (Pte) Limited (the ‘CDP’).
Where, under an employee share plan operated by the Company, participants are the benefi cial owners of the shares but not the registered owners, the voting rights are normally exercisable by the registered owner in accordance with the relevant plan rules. Trustees may vote at their discretion, but do not vote on any unawarded shares held as surplus assets.
Some of the Company’s employee share plans include restrictions on transfer of shares while the shares are subject to the plan. All directors are required to obtain a number of qualifi cation shares within one year of appointment, which they would also be expected to retain under guidelines approved by the Board and as described on page 129 of the Directors’ remuneration report.
Details of shares issued during 2012 and 2011 are given in note H11 on page 287.
In discharging these objectives, the Committee helps to support the certifi cations by the Group Chief Executive and the Chief Financial Offi cer of the effectiveness of disclosure procedures and controls required by Section 302 of the Act.
The following additional disclosures are made in compliance with the Companies Act 2006, the Disclosure and Transparency Rules and the UK and HK Codes.
Post-balance sheet events Important events affecting the Company after the end of the fi nancial year are detailed in note I11 on page 314.
At no time during the year did any director hold a material interest in any contract of signifi cance with the Company or any subsidiary undertaking.
Customers The fi ve largest customers of the Group constituted in aggregate less than 30 per cent of its total sales for each of 2011 and 2012.
d d itio n al d isclo su res/In d ex to p rin cip al d irecto rs’ rep o rt d isclo su res
Directors in offi ce during the year Board of directors 88-92; 95
Structure of share capital, including restrictions on the transfer of securities, voting rights and signifi cant shareholders
D irecto rs’ rem u n eratio n rep o rt 113Prudential plc Annual Report 2012 114 Directors’ remuneration report 116 Remuneration policy report 122 2012 implementation of remuneration policy 136 Supplementary information
Dear Shareholder I am pleased to present the Remuneration Committee’s report on directors’ remuneration for the year to 31 December 2012.
The Group has developed substantially over recent years and we believe that it is essential that our executive reward arrangements remain closely aligned with the Group’s business strategy and ambitions.
Our aims Our aim in undertaking the review was to develop and implement reward structures which provide lasting competitive advantage for the Group in order to: AAAAAAAAAAAA Attract and retain the high calibre executives required to lead and develop the Group; and
These changes are described in detail in the fi rst pages of this report.
irecto rs’ rem u n eratio n rep o rt Directors’ remuneration report
We have consulted widely on the proposals We have undertaken extensive consultation with our key institutional investors on the changes to the reward architecture. I have personally met with shareholders and their representatives who together comprise more than half of our shareholder base.
Rewarding 2012 performance During 2012, the Group delivered further increases in new business profi tability, IFRS profi tability and cash generation. This was accomplished in the context of continuing macroeconomic uncertainty. The Group exceeded the targets that the Committee set at the start of the year as well as the results delivered in 2011.
The excellent results delivered in 2012 built on strong fi nancial performance over recent years. This has generated signifi cant returns for shareholders over the period 2010 to 2012 through share price growth and dividends paid. These returns have signifi cantly outstripped those produced by our peers in the international insurance sector over the same period.
This report has been drawn up in accordance with the UK Corporate Governance Code, Schedule 8 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008, the UK Listing Authority Listing Rules and the Corporate Governance Code in Appendix 14 to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong. KPMG Audit Plc has audited the information provided on pages 134 to 142.
During the year, the Company has complied with the provisions of Section D and Schedule A of the UK Corporate Governance Code which are in force regarding directors’ remuneration.
As part of the review of remuneration architecture which took place during 2012, the Committee revisited the aims and operation of Prudential’s remuneration strategy. The table below summarises how the Remuneration Committee achieves these aims: To attract and retain the high calibre executives required to lead and develop the Group
AAAAAAAAAAAA Consistent with the Group’s risk appetite so that the delivery of the business plan can be sustained.
AAAAAAAAAAAAA Reward arrangements are designed to be consistent with the Group’s risk framework and appetite, and minimise regulatory and operational risk.
This strategy and these principles shape remuneration policies and practices which are aligned with our business model. They are designed to ensure that a strong governance approach is adopted and applied across all business units. The Committee continues to review this strategy and these principles regularly.
Remuneration architecture review In 2012, the Committee undertook a review of all aspects of the Group’s executive remuneration architecture. The aim of the review was to ensure that the Group’s remuneration structures continue to be aligned with the Group’s business strategy and ambitions, and with the remuneration strategy set out above, giving the Company a competitive advantage in the international talent market. This was a review of remuneration structures and did not result in any changes to incentive opportunities as a percentage of salary.
All executive directors defer 40 per cent of bonus into shares for three years.
Prudential Long Term Incentive Plan awards are made in shares and vesting will be dependent on two performance measures: IFRS operating profi t (50 per cent of award); and
Prudential's performance against these metrics is measured over the three fi nancial years starting from the year of award.
Note The President and Chief Executive Offi cer of Jackson also shares in the JNL bonus pool while the Chief Executive of M&G retains separate arrangements.
Fixed pay Short-term variable pay Long-term variable pay Share ownership guidelines
Annual bonus Executives will continue to receive awards under the Annual Incentive Plan (AIP).
The percentage of salary used to calculate maximum bonus opportunity is unchanged.
The proportion of bonus deferred will be 40 per cent for all executive directors.
Clawback provisions have been enhanced for the deferred portion of 2013 and subsequent bonuses.
A cap will be introduced to the Chief Executive of M&G's maximum annual bonus opportunity of the lower of 0.75 per cent of M&G’s IFRS profi t or six times salary.
Outstanding awards made under the GPSP and BUPP will not be aff ected by the introduction of the Prudential Long Term Incentive Plan.
A new long-term incentive plan (the Prudential Long Term Incentive Plan) will be proposed for shareholder approval at the 2013 AGM.
The expanded TSR peer group ensures the continued relevance of comparators.
IFRS operating profi t is central to the management of the business and a key driver of shareholder value.
The calculation of the Chief Executive of M&G's LTIP award is transparent and aligned with the other executive directors.
R em u n eratio n p o licy rep o rt
The Prudential Long Term Incentive Plan has been designed to reward the creation of IFRS profi t as well as the sustained delivery of superior returns to shareholders. Performance will be assessed over a three-year period on the following basis: Performance condition
Participants will be incentivised to deliver and outperform the long-term business plan. The awards will vest based on achievement of IFRS operating profi t compared to performance ranges.
Threshold, plan and maximum achievement levels will be set at the beginning of the performance periods in line with the three-year business plan. 25 per cent of the award will vest for threshold performance, increasing to 100 per cent for stretch performance.
The long-term incentive plan will continue to reward executives for superior shareholder returns.
The Remuneration Committee believes that adequate controls exist to ensure that these performance measures will not create an implicit incentive to take undue operational or fi nancial risks or to adopt an unduly risky capital structure.
As with the Group Performance Share Plan (GPSP), the performance achieved against target, and the resulting vesting of the award, will be assessed by an independent third party.
The Committee believes that the proposed performance measures are more relevant to the Group and at least as stretching as those used in the Group Performance Share Plan and the Business Unit Performance Plan.
We have undertaken an extensive process of consultation about these proposals with shareholders and their representatives who together comprise more than half of our shareholder base. The Committee took account of shareholder feedback when developing these proposals.
Base salary To provide executives with a guaranteed level of remuneration.
Salary is intended to reward executives for the performance of their role.
In determining base salaries for each executive the Committee considers: The performance and experience of the executive; Internal relativities; Company fi nancial performance; Salary increases for all employees; and
Annual bonus To incentivise and reward the achievement of stretching annual business plans which are: Determined in line with the Group’s long-term commitments to shareholders; and
Executive directors participate in annual bonus plans based on the achievement of Group and business unit fi nancial performance measures including profi tability, cash fl ow and capital adequacy, and personal objectives. Targets are determined in line with the business plan.
Executive directors are required to defer between 30 per cent and 50 per cent of annual bonus (for the Chief Executive of M&G, 50 per cent of bonus over £500,000 is deferred) into Prudential shares for three years.
All executive directors participate in the Group Performance Share Plan (GPSP). GPSP awards vest based on relative TSR.
Business unit Chief Executives also participate in business unit performance plans (BUPPs or the M&G Executive LTIP) which focus on those fi nancial measures which contribute to the long-term success of the business unit and, therefore, the Group.
To create a community of interest between the executives and shareholders.
Executives have fi ve years to build up their shareholding. Full details of the current shareholdings of the directors are provided on page 133.
All executive directors received core health and security benefi ts (for example medical insurance and life assurance).
Other benefi ts may be off ered to executives, dependent on: Local market practice; The benefi ts off ered to other employees within the business unit; and
No benefi ts are pensionable. Details of the costs of providing the benefi ts to each executive director are outlined in the remuneration table on page 134.
irecto rs’ rem u n eratio n rep o rt Remuneration policy report
Awards for the majority of executive directors are subject to the achievement of: Net free surplus generated; IFRS operating profi t; EEV operating profi t; Holding company cash fl ow; Insurance Groups Directive (IGD) Capital Surplus; and
As part of the review of remuneration architecture which took place during 2012, the clawback provisions applied to the deferred portion of bonuses for 2013 onwards have been strengthened.
The percentage of annual bonus awards which executives are required to defer has been made consistent across our senior executive team at 40 per cent.
The Chief Executive of M&G's long-term incentive opportunity was not capped as a percentage of salary in 2012. There is an overriding cap on total remuneration for this role of 3 per cent of M&G’s IFRS profi t.
A breakdown of the long-term incentive opportunities available to executive directors is set out on page 123.
GPSP awards vest based on relative TSR (Total Shareholder Return, a combination of share price growth and dividends paid) performance relative to an index of international insurers.
Full details of the proposal are outlined on pages 118 to 119.
As part of the review of remuneration architecture, the executive director shareholding guidelines have been enhanced.
Executive directors based in the UK and Asia are entitled to receive pension contributions or a cash supplement (or combination of the two) of 25 per cent of base salary.
Jackson’s Defi ned Contribution Retirement Plan has a guaranteed element and additional contributions based on the profi tability of JNL.
In 2012, the Committee met fi ve times. Key activities at each meeting are shown in the table below: Meeting Key activities
February 2012 Approve the 2011 directors’ remuneration report; Consider 2011 bonus awards for executive directors (and total compensation fi gure for Michael McLintock); Consider vesting of the long-term incentive awards with a performance period ending on 31 December 2011; and
Approve the annual bonus measures and targets to be used in 2012.
December 2012 Note the level of participation in the Company’s all-employee share plans; Approve executive directors’ 2013 salaries and incentive opportunities; Consider the annual bonus measures and targets to be used in 2013; Review an initial draft of the 2012 directors’ remuneration report; Confi rm changes to the remuneration architecture in light of shareholder feedback; and
The Chairman and the Group Chief Executive attend meetings by invitation. The Committee also had the benefi t of advice from the Chief Financial Offi cer, Group Human Resources Director and Director of Group Reward and Employee Relations. The Group Chief Risk Offi cer advised the Committee on adherence to the Group’s risk appetite and framework. Individuals are never present when their own remuneration is discussed.
During 2012, Deloitte LLP were the independent advisor to the Committee. Advice was also provided by PricewaterhouseCoopers LLP. Market data was sourced from Deloitte LLP, Towers Watson, McLagan Partners and LOMA. Norton Rose, Slaughter & May, Linklaters and Allen & Overy provided legal counsel, including advice on employment law and the operation of the Company’s share plans. Some of these fi rms also provided other services to the Company: Deloitte LLP and PricewaterhouseCoopers LLP provided advice on Solvency II, taxation and other fi nancial matters, Towers Watson provided actuarial advice and Slaughter & May and Norton Rose provided commercial, corporate and general legal advice.
Notes 1 Michael McLintock’s annual bonus and long-term incentive opportunity under the M&G Executive LTIP (rather than the BUPP) are based on M&G’s performance both in absolute terms and relative to its peers. In line with practice in the asset management sector, there is no specifi ed maximum incentive award. Michael’s total remuneration is subject to an overriding cap such that his total remuneration should not be greater than 3 per cent of M&G’s annual IFRS profi ts. The fi gure shown for his 2012 M&G Executive LTIP award is the expected value of this grant.
After careful consideration the Committee decided to increase salaries by 3 per cent as set out in the table on the right. Salary increases for the wider workforce vary across our business units, based on local market conditions. It is anticipated that 2013 salary budgets will increase between 3 per cent and 5 per cent, for the wider workforce.
The fi nancial measures used to assess performance for the 2012 AIP are set out below. These remain unchanged for 2013. Executive directors who have business unit responsibilities are assessed on both Group and business unit performance.
Executive directors’ bonus opportunities, the weighting of performance measures for 2012 and the proportion of annual bonuses deferred are set out below.
Rob Devey 160% 40% of total bonus 20% 60% 20% John Foley 160% 40% of total bonus 50% – 50% Michael McLintock Note 1 50% of bonus above £500,000 10% 60% 30% Nic Nicandrou 175% 40% of total bonus 80% – 20% Barry Stowe 160% 40% of total bonus 20% 60% 20% Tidjane Thiam 200% 50% of total bonus 80% – 20% Mike Wells note 2 c.400% 30% of total bonus 30% 60% 10%
As set out in the Remuneration Committee Chairman’s letter, during 2012 the Group delivered further increases in its key fi nancial measures, specifi cally new business profi tability, IFRS profi tability and cash generation. The outstanding performance delivered in 2012 against these measures exceeded both the Group’s 2011 performance and the stretching targets set by the Committee at the start of the year. The Group Chief Risk Offi cer was invited to attend the Remuneration Committee meeting held in March 2013 and advised the Committee on the Group’s adherence to its risk appetite and framework during 2012.
2012 fi nancial performance, relative to the targets set by the Committee, is summarised below: Measure Group PCA UK M&G
Cash fl ow Above stretch target Above stretch target At Plan level – Net free surplus generated Above stretch target Between Plan and stretch target – – IFRS profi t Above stretch target Above stretch target Above stretch target Between Plan and stretch target IGD surplus Above stretch target Between Plan and stretch target Above stretch target – NBP EEV profi t Above stretch target Above stretch target Above stretch target – In-force EEV profi t Above stretch target Between Plan and stretch target Between Plan and stretch target –
On the basis of this outstanding performance, the Committee approved the following 2012 AIP payments: Executive 2012 salary Maximum 2012 AIP 2012 outcome (as a percentage of max)
Long-term incentives Details of the awards made under these plans in 2012 can be found on pages 137 to 139.
All executive directors receive GPSP awards. GPSP awards vest on the basis of the Group’s Total Shareholder Return (TSR) performance over a three-year period. TSR is the combination of the share price growth and the dividends paid. Prudential’s TSR achievement over the performance period is compared with the TSR of an index composed of 10 international insurers (see box below). This performance measure was selected because it focuses on the value delivered to shareholders. TSR is measured on a local currency basis since this has the benefi t of simplicity and directness of comparison.
The vesting schedule for outstanding GPSP awards is set out below: x index x index x index x index
On 31 December 2012, the performance period for 2010 GPSP awards (which began on 1 January 2010) came to an end. Over the performance period the Group has delivered superior returns for shareholders through share price growth and dividends paid. This resulted in Prudential achieving excellent TSR performance of 156.4 per cent.
The Committee, having satisfi ed itself about the quality of the Company’s underlying fi nancial performance, confi rmed vesting of 100 per cent of the 2010 to 2012 GPSP award (for reference, 100 per cent of the 2009 to 2011 GPSP award vested).
The line chart below compares Prudential’s TSR during the three years from 1 January 2010 to 31 December 2012 with that of the peer group against which TSR is measured for the purposes of the GPSP.
Prudential TSR v peer group index – total returns index % over three years to December 2012
Asia BUPP The Chief Executive, PCA receives awards under the Asia BUPP. These awards are dependent on the achievement of PCA’s new business profi t, IFRS profi t and cash remittance targets over the three-year performance period. Each of these measures will determine vesting of one third of each award. Threshold performance results in 30 per cent of the award vesting, increasing to 100 per cent for stretch performance.
On 31 December 2012, the performance period for the 2010 Asia BUPP award (which began on 1 January 2010) came to an end. Over the period, the new business profi t, IFRS profi t and cash remittance achieved by the PCA business unit meant that the Committee, having satisfi ed itself as to the quality of the business units’ underlying fi nancial performance, confi rmed vesting of 95.2 per cent of Barry Stowe’s 2010 to 2012 Asia BUPP award (for reference, 86.5 per cent of Barry Stowe’s 2009 to 2011 Asia BUPP award vested).
On 31 December 2012, the performance period for the 2010 Jackson BUPP came to an end. Although no current executive director had a 2010 award under this plan the vesting level for other participants was 100 per cent (for reference 93.75 per cent of the 2009 to 2011 awards vested).
UK BUPP The Chief Executive, UK & Europe receives awards under the UK BUPP. Given the cash-generative priorities of the UK Business Unit, UK BUPP awards are assessed using the same relative TSR measure applied to GPSP awards.
Limits on award sizes The rules of the GPSP and BUPP set a limit on the value of shares which may be awarded to an executive in a fi nancial year. The combined value of shares awarded under the two plans may not exceed a maximum of 550 per cent of salary although the awards made in a particular year are often signifi cantly below this limit. On a change in control of Prudential, vesting of awards made under these arrangements would be prorated for performance and to refl ect the elapsed portion of the performance period.
The Chief Executive, M&G receives awards under the M&G Executive Long-Term Incentive Plan. Under this plan an annual award of phantom shares is made with a notional starting share price of £1. The phantom share price at vesting is determined by the increase or decrease in M&G’s profi tability over the three-year performance period with profi t and investment performance adjustments also applied: Profi t growth The value of phantom shares vesting will be adjusted by a profi t measure as follows: AAAAAAAAAAAAA No adjustment will be made if profi ts in the third year of the performance period are at least equal to the average annual profi t generated over the performance period; AAAAAAAAAAAAA A loss or zero profi t will result in the value of the award being reduced to zero, irrespective of investment performance; and
As described in the remuneration architecture review section of this report, the method used to determine the number of phantom shares awarded to Michael McLintock under the M&G Executive Long-Term Incentive Plan has been revised. With effect from 2013, Michael McLintock will receive an annual award with a face value of three times his salary. The ultimate value of the 2013 award will be determined with reference to the profi tability and investment performance of M&G over the three years from 1 January 2013 to 31 December 2015 using the measures set out above.
Prior to his appointment as an executive director, Mike Wells participated in the two long-term incentive plans offered to senior staff within Jackson. Mike Wells was awarded ADRs under the JNL US Performance Share Plan and cash-based awards under the JNL Long-Term Incentive Plan. Awards made under both plans have a performance period of four years and vesting is dependent on the achievement of shareholder value targets. Up to 150 per cent of the original number of ADRs awarded under the JNL Performance Share Plan may be released if stretch performance targets are achieved.
Executive directors should have a substantial shareholding to maximise the community of interest between them and other shareholders. This may be built up over a period of fi ve years following their appointment.
The level of the requirements which applied to executive directors in 2012 and the current holdings of directors are shown below. The shareholding guidelines have been increased as part of the review of remuneration architecture and full details of the revised guidelines are outlined on page 118. Shares earned and deferred under the Annual Incentive Plan are included in calculating the executive director’s shareholding for these purposes.
Note Benefi cial interest, based on the share price as at 31 December 2012 (£8.655). Calculated using base salaries on 31 December 2012.
Benefi ts All executive directors receive core health and security benefi ts, for example medical insurance and life assurance.
The 2012 remuneration table on page 134 sets out the cost of providing benefi ts in 2012.
No directors or other employees are provided with loans to enable them to buy shares.
Increase in transfer value less contributions made by directors during 2012
Notes 1 As required by the Companies Act remuneration regulations. 2 As required by Stock Exchange Listing rules. 3 The transfer value equivalent has been calculated in accordance with the M&G Group Pension Scheme’s transfer basis. 4 This table includes employer contributions to defined contribution plans totalling £71,124 (2011: £56,224). Supplements in the form of cash are included in the table on page 134.
5 Michael McLintock became a deferred member of the M&G defined benefit scheme on 5 April 2012. The amounts shown above as at 31 December 2012 are calculated as at this date.
Details of the service contracts of the executive directors are outlined below: Executive director Date of contract Notice period to the Company Notice period from the Company
Rob Devey 1 July 2009 12 months 12 months John Foley 8 December 2010 12 months 12 months Michael McLintock 21 November 2001 6 months 12 months Nic Nicandrou 26 April 2009 12 months 12 months Barry Stowe 18 October 2006 12 months 12 months Tidjane Thiam 20 September 2007 12 months 12 months Mike Wells note 15 October 2010 12 months 12 months
Chairman and non-executive directors’ letters of appointment and fees Non-executive directors’ letters of appointment Non-executive directors do not have service contracts but are appointed pursuant to letters of appointment with notice periods of six months without liability for compensation.
Under the terms of their letters of appointment, continuation of the non-executive directors’ appointment is contingent on satisfactory performance and re-election by shareholders. Non-executive directors are typically expected to serve two three-year terms from the date of their election by shareholders. Thereafter, the Board may invite the Director to serve for an additional period.
Details of the letters of appointment for the non-executive directors are outlined below: Non-executive director Appointment by the Board Initial election by shareholders at AGM Notice period Expiration of current term of appointment
Notes 1 Keki Dadiseth and Michael Garrett were reappointed in 2012 for one year. The Board will consider a further renewal term in May 2013. 2 Paul Manduca was appointed as Chairman of the Board on 2 July 2012. 3 Kathleen O’Donovan retired from the Board on 31 March 2012.
4 For Philip Remnant the table assumes initial election by shareholders at the 2013 AGM.
Chairman’s letter of appointment, fees and benefi ts Paul Manduca was appointed as a non-executive director on 15 October 2010 and became Senior Independent Director on 1 January 2011. On 2 July 2012, he was appointed Chairman. He is paid an annual fee of £600,000. A contractual notice period of 12 months by either party applies. Paul Manduca is provided with life assurance cover of four times his annual fees plus an additional sum to buy a dependants’ annuity, private medical insurance and the use of a car and driver. No pension allowance is paid and he is not a member of any Group pension scheme.
Non-executive directors’ fees Non-executive directors are not eligible to participate in annual bonus plans, long-term incentive plans or pension arrangements. Their fees are determined by the Board and refl ect their individual responsibilities, including chairmanship and membership of committees where appropriate. The Board reviews fees annually.
An increase of just under 3 per cent was made to the basic non-executive fee with effect from 1 July 2012. No increases were made to the additional fees paid to committee chairmen or members. The revised fees are: Annual fees
Basic fee 87,500 Audit Committee Chairman – additional fee 70,000 Audit Committee member – additional fee 25,000 Remuneration Committee Chairman – additional fee 50,000 Remuneration Committee member – additional fee 25,000 Risk Committee Chairman – additional fee 60,000 Risk Committee member – additional fee 25,000 Senior Independent Director – additional fee 50,000
Notes 1 No fee is payable for chairmanship or membership of the Nomination
Please see the table on page 134 for details of the fees received by individual non-executive directors during 2012.
Notes 1 Alistair Johnston was appointed to the Board on 1 January 2012.
6 Philip Remnant was appointed to the Board on 1 January 2013. 7 Part of Barry Stowe’s benefi cial interest in shares is made up of 207,963 ADRs (representing 415,926 ordinary shares) and 95,305 ordinary shares. 8,513.73 of these ADRs are held within an investment account which secures premium fi nancing for a life assurance policy). 8 Mike Wells’ benefi cial interest in shares is made up of 295,904 ADRs (representing 591,808 ordinary shares). In the table above, the fi gure for shares subject to performance conditions refl ects the maximum number of shares (150 per cent of the original number awarded) which may be released to Mike Wells under the JNL Performance Share Plan. This maximum number of shares may be released if stretch performance targets are achieved.
Value of anticipated releases from LTIPs in respect of performance periods ending 31 December 2012§
Total non-executive directors 1,019 1,019 1,019 * The value of benefi ts is the cost to the Company of providing core and additional benefi ts. † Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded fi gures. ‡ Pension benefi ts are described in the section on ‘Pensions benefi ts’ on page 129. § Value of anticipated long-term incentive plan releases is the total of cash paid plus, for shares released, the value of the released shares based on the average closing share price over the period 1 October 2012 to 31 December 2012. All executive directors participate in long-term incentive plans and the details of share releases from awards with a performance period ending 31 December 2012 are provided in the footnote to the tables on share awards on pages 137 to 139. This fi gure does not include releases from other share plans (detailed on pages 140 to 141) or all-employee share plans, (set out on page 142). Dividend equivalents will be released on these vested shares.
Notes 1 Paul Manduca was appointed as Chairman on 2 July 2012. The fi gures above include the fees he received as senior independent non-executive director prior to his appointment as Chairman.
6 Keki Dadiseth was paid allowances totalling £8,997 in respect of his accommodation expenses in London whilst on the Company’s business. 7 Kathleen O’Donovan retired from the Board on 31 March 2012.
Value of anticipated releases from LTIPs in respect of performance periods ending 31 December 2011‡
Executive directors Rob Devey 550 479 319 798 111 138 1,597 1,544 John Foley (note 1) 550 518 345 863 139 100 1,652 – Michael McLintock 350 779 279 1,058 93 96 1,597 6,005 Nic Nicandrou 550 507 338 845 84 138 1,617 2,020 Barry Stowe (note 2) 641 579 386 965 544 160 2,310 2,341 Tidjane Thiam 900 785 785 1,570 116 225 2,811 1,910 Mike Wells (notes 1 and 3) 624 1,660 711 2,371 64 – 3,059 1,369