Prudential delivered another strong performance in 2011, with continued growth across the key metrics of IFRS, new business profit and cash while maintaining a robust capital position. In line with our strategy of value optimisation and capital conservation, higher sales and higher profit in 2011 have been achieved while consuming less capital in both relative and absolute terms than in 2010.
For further information about our strategy and operating principles, go to page 9
International Financial Reporting Standards operating pro�t based on longer-term investment returns £1,941m £2,070m
• M&G’s institutional business was recognised for its strength and expertise at the industry flagship Financial News Awards for Excellence in Institutional Asset Management, where it was named Fixed Income Manager of the Year 2011 1 2010 comparative APE new business sales and new business profit exclude those for the Japanese insurance operations which ceased writing new business from 15 February 2010.
† If long-term business is considered separately from asset management and UK general insurance commission.
We have achieved two key milestones which emphasise the good progress that we have made towards these objectives.
Second, as a Group, we have enjoyed a track record of sales growth for a number of years. What is particularly pleasing in our 2011 performance is that our progress on cash has been as visible as our progress on our traditional growth agenda. All four of our business units have remitted significant amounts of cash to the Group. Achieving a balanced funding structure is one of our explicit strategic objectives, moving us away from an operating model that relied historically on our UK life business for cash generation. Our business units’ ability to generate cash is possibly the best evidence that they have navigated well through the financial crisis.
Group performance APE sales were up 6 per cent in life insurance in 2011 to £3,681 million (2010: £3,485 million3). New business profit increased by 6 per cent to £2,151 million (2010: £2,028 million3) at attractive new business margins which remained stable at 58 per cent (2010: 58 per cent). Net inflows in our asset management businesses were £4.5 billion (2010: £8.9 billion) following two years of exceptionally high performance. The inflows we have generated in 2011 remain an impressive result in what was a particularly challenging year for the asset management industry due to the weak and volatile performance of global stock markets.
Our life insurance business in Asia1 is now the biggest contributor to Group IFRS operating profit2, making it our largest business on both IFRS and EEV profitability measures.
Nicolaos Nicandrou ACA Chief Financial Officer Nic Nicandrou has been an executive director of Prudential and Chief Financial Officer since October 2009. Before joining Prudential, he worked at Aviva, where he held a number of senior finance 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 46.
Business review 16 Financial highlights 18 Chief Financial Officer’s review 24 Business unit review: • Insurance operations: Asia, US, UK • Asset management: M&G,
Eastspring Investments, US 56 Financial review 80 Risk and capital management 91 Other corporate information 95 Corporate responsibility review
Key performance indicators 1 2010 comparative APE new business sales and new business profit exclude those for the Japanese insurance operations which ceased writing new business from 15 February 2010.
2 Including Solvency II implementation costs, restructuring costs, Asia development costs, Asia Regional Head Office costs and in 2011, the impact of the RPI to CPI inflation measure change for defined benefit pension schemes.
Jackson • New business profit up 7 per cent to £815 million
• Top three provider of variable and total annuities in US
• Highest Customer Satisfaction by Industry award from Service Quality Measurement Group
M&G • Record operating profit up 22 per cent to £301 million
• M&G’s retail business has been awarded the prestigious Outstanding Investment House of the Year 2011 Award for the second year running at the OBSR Awards
• M&G’s institutional business was recognised for its strength and expertise at the industry flagship Financial News Awards for Excellence in Institutional Asset Management, where it was named Fixed Income Manager of the Year 2011 * Operating profit from long-term operations excluding Eastspring Investments, development costs and Asia regional head office costs.
Prudential plc is an international financial services group with significant operations in Asia, the US and the UK. We serve more than 26 million customers and have £351 billion of assets under management. We are listed on stock exchanges in London, Hong Kong, Singapore and New York.
Prudential uses long-term thinking to create long-term value. Through our strong financial performance and international strategy, we create financial benefits for our shareholders and investors and deliver economic and social benefits for the communities in which we operate.
Note 1 Excludes Japan which ceased writing new business in 2010.
160+ years of understanding and responding to our customers’ needs £351bn assets under management (at 31 December 2011)
M&G Asia 4 stock exchange listings – London, Hong Kong, New York and Singapore
Prudential’s Asian based asset management division, Eastspring Investments, is one of the region's leading fund managers and the largest onshore provider of mutual funds.
Jackson Jackson is one of the largest life insurance companies in the US, providing retirement savings and income solutions with more than 2.9 million policies and contracts in force.
Jackson is also one of the top three providers of variable and total 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 effective retirement solutions for their clients.
M&G M&G is Prudential’s UK and European fund management business with total assets under management of £201 billion (at 31 December 2011).
M&G has been investing money for individual and institutional clients for over 80 years. Today it is one of Europe’s largest active investment managers, as well as being a powerhouse in fixed income.
The Board has therefore recommended a final dividend of 17.24 pence per share, which brings the total dividend for the reporting period to 25.19 pence per share, 1.34 pence (5.6 per cent) higher than the 2010 total dividend. We are focused on delivering a growing dividend from the new higher base established at the year end 2010.
‘ �The�quality�of�our�people� and�their�commitment�to� customers,�the�excellence� of�our�products�and�our� proven�strategy�mean� that�we�can�be�confident� that�the�Group�will� continue�to�deliver� sustainable�value�in� the�years�to�come.’
In December 2011 I announced my intention to retire as Chairman in 2012 once a suitable successor has been found. As I said at the time, I felt it was important to give the Board good notice of my intentions so that the process of appointing a successor could get under way. It has been a great honour to serve as Chairman but my other commitments in the public, educational and philanthropic sectors deserve more of my time and energy. My tenure at Prudential has encompassed a period of great turmoil in the markets. It is testament to the Group’s strategy, the quality and experience of the Board and the efforts of the management team led by the Group Chief Executive, Tidjane Thiam, that we can say with confidence that Prudential has emerged from this period as one of the leading insurance companies in the world.
We aim to direct our community investment towards initiatives which tackle issues where we can make the most impact given our expertise. We have focused on areas such as financial literacy, education for young people and care for the elderly. Across the Group, we are currently increasing our commitment to education-related charities, while in the UK we are engaged in initiatives to tackle youth unemployment through apprenticeship schemes. We actively encourage employee engagement to support and deliver these initiatives, and many of our employees offer their experience and time to charities and their communities. For example, at Prudential UK 40 per cent of staff took part in volunteering to support good causes during 2011. Group-wide, many employees volunteer as part of the Chairman’s Challenge, our flagship volunteering programme, with more than 3,000 colleagues worldwide taking part last year, helping more than 25 projects.
I would like to take this opportunity to express my thanks to our employees around the world who have ensured that Prudential has continued to deliver value to our shareholders. The quality of our people and their commitment to customers, the excellence of our products and our proven strategy mean that we can be confident that the Group will continue to deliver sustainable value in the years to come.
On a statutory IFRS basis, our operating profit based on longer-term investment returns increased by 7 per cent in 2011 to £2,070 million (2010: £1,941 million). IFRS shareholders’ funds increased in 2011 to £9.1 billion, up 14 per cent compared to £8.0 billion as at 31 December 2010. On an EEV basis, Group operating profit based on longer-term investment returns increased by 8 per cent in 2011 to £3,978 million (2010: £3,696 million). Since 2008, we have been using free surplus as the primary indicator of our ability to generate cash and capital and at the end of 2011, free surplus increased to £3.4 billion (2010: £3.3 billion). Underlying free surplus generation was up 16 per cent to £1,983 million (2010: £1,714 million).
Second, we have focused on allocating capital to the highest return and shortest payback opportunities across the Group. This means that we focus our investment on writing new business in the areas of the market where our demanding return and payback criteria are met. In 2011, new business profit increased 6 per cent while investment in new business was £553 million (2010: £643 million1), 14 per cent lower. Since 2008, new business profit has increased 79 per cent while investment in new business has fallen 30 per cent over the same period, a material increase in capital efficiency.
Prudential Indonesia is now our largest business in Asia across virtually all metrics and is the clear market leader in a country where the opportunities for continued growth are significant. It is a market that has low insurance penetration, of just 1 per cent. It is the world’s fourth most populous country and a member of the G20. Indonesia has the largest Muslim population in the world; in Syariah products, which are compliant with Islamic law, we have a 54 per cent market share. With 142,000 licensed agents, we have the largest agency network in the country. We believe that the opportunities to further enhance our distribution scale there are significant.
In the more emerging markets, we continue to make good operational progress, and over time expect to see a steadily increasing contribution to growth and profits from our businesses in these territories. The Philippines provides a good illustration of these trends. Our business had excellent APE sales growth of 30 per cent, helping it leapfrog from third place to become this rapidly developing country’s largest life insurance provider in terms of new business, a very creditable achievement in this highly competitive market.
Central to our success in Asia is distribution. Agency continues to be our largest distribution channel, consistent with our customers’ preference for face-to-face contact when buying life, health and protection products. In addition, and in parallel, Prudential has a number of highly successful bancassurance partnerships across the region. Our distribution through bank branches complements well our agency distribution and gives us a broader and more diversified footprint. These partnership agreements include regional relationships with international banks such as Standard Chartered, which this year was extended to an eleventh country, the Philippines, and local banks such as E.Sun in Taiwan. 2011 has been the first full year in our relationship with UOB. We have already extended our relationship beyond the three original markets of Singapore, Thailand and Indonesia to include Malaysia and China. This partnership has contributed materially to our strong performance, notably in Singapore where APE sales were up 34 per cent, new business profit up 25 per cent and IFRS operating profit up 29 per cent.
Prudential Corporation Asia’s delivery of both profitable growth and cash has validated the central element of the Group’s strategy, to focus on the region as a means to deliver sustainable shareholder value.
Jackson National Life Insurance Company (Jackson) In the United States, the transition of the ‘baby boomer’ generation from employment to retirement which became visible around 2005 to 2006 is now firmly under way. Over the next 20 years, more than 10,000 people a day will reach retirement age in the US1 and these individuals will look to the insurance industry among others to help them convert their accumulated wealth into a steady stream of retirement income.
In the US, customers and distributors are attracted by Jackson’s track record of financial discipline and strong credit rating. We implemented a number of changes in 2010 and 2011 to proactively manage our sales levels, to comply with revised regulations, enhance risk management flexibility and increase profitability. Our monthly variable annuity sales declined from September 2011 onwards from the peak levels seen in the early summer as a result of, first, a number of proactive changes we made to manage the balance between growth, capital and profitability and second, the performance of US equity markets in the period. We have continued to write our business at attractive internal rates of return (IRRs) throughout the year.
Looking ahead, variable annuity sales volumes are likely to continue to show a good degree of correlation with the performance of the S&P 500 index and will also be impacted by our competitors’ behaviour. Our approach will continue to focus on profitability ahead of sales. Our disciplined approach to pricing will remain unchanged as we continue to manage conservatively the balance of risk and returns. Prudential shareholders are seeing the benefits of Jackson’s counter-cyclical expansion in variable annuities following the financial crisis as Jackson was able to remit £322 million in 2011, the largest net remittance it has ever paid to the Group.
At the end of 2010, the business announced a number of cost-saving initiatives to reduce costs by £75 million per annum by the end of 2013. We remain on track to achieve this objective.
Asset management Our asset management businesses have continued to perform well, with M&G IFRS operating profit exceeding £300 million. Our fund managers have a strong track record of outperforming their respective benchmarks and our performance track record has driven another good year for net inflows in what was a challenging environment for the industry. Over the last four years, M&G has risen from being the fifth largest player in the UK retail market in terms of funds under management to now being the second largest, and our UK retail assets have almost trebled over this period to over £35 billion.
Dividend In light of the continued strong performance of the business and our focus on a growing dividend, the Board has recommended a final dividend of 17.24 pence per share (2010: 17.24 pence), giving a full 2011 dividend of 25.19 pence (2010: 23.85 pence), representing an increase of 5.6 per cent over 2010.
We expect Jackson to continue to benefit from the opportunity created by the transition of the ‘baby boomers’ into retirement and to make significant remittances to the Group. Our UK life operations should continue in 2012 to deliver significant remittances to the Group and maintain their balance sheet strength. Our asset management businesses, M&G and Eastspring Investments should continue to support our strategy, providing both profitable growth and cash.
Group • All business units in aggregate to deliver cumulative net cash remittances of at least £3.8 billion over the period 2010 to end-2013
• Deliver £300 million of net cash remittance to the Group
United Kingdom • Deliver £350 million of net cash remittance to the Group
Business review 16 Financial highlights 18 Chief Financial Officer’s review 24 Business unit review: • Insurance operations: Asia, US, UK • Asset management: M&G, Eastspring Investments, US
56 Financial review 80 Risk and capital management 91 Other corporate information 95 Corporate responsibility review
At 1 Jan 2010 At 1 Jan 2011 At 31 Dec 2011
Payback period2 3 years 3 years 1 year 1 year 4 years 4 years 2 years 2 years Internal rate of return >20% >20% >20% >20% >20% >20% >20% >20%
7 Including short-term investments. 8 Operating profit after tax and non-controlling interests in (but including in 2010 exceptional tax credit of £158 million) as percentage of opening shareholders’ funds.
Notes 1 If long-term business is considered separately from asset management and UK general insurance commission.
Growth In life insurance, new business profit was up 6 per cent to £2,151 million (2010: £2,028 million2) on APE sales in 2011 of £3,681 million (2010: £3,485 million2) resulting in a new business margin of 58 per cent (2010: 58 per cent2). The growth in both sales and new business profit was achieved while investing 14 per cent less capital than last year, reflecting our disciplined approach to optimising the balance between value creation and capital utilisation, and our ongoing focus on those products and geographies with the highest returns and shortest payback periods.
Asia produced new business profit of £1,076 million (2010: £902 million2), and APE sales of £1,660 million (2010: £1,501 million2), up 19 per cent and 11 per cent respectively on the previous year. Our new business margin increased from 60 per cent to 65 per cent in 2011, driven by favourable country mix with a particularly strong performance in Indonesia, which is now the largest contributor to virtually all of our key financial metrics in Asia.
Across our life insurance businesses we grew our shareholder-backed policyholder liabilities by £11.3 billion in 2011 to £133.5 billion. This increase was driven by £9.0 billion of net inflows with the balance principally coming from foreign exchange and investment related movements.
In the US, long-term business IFRS operating profit was down 17 per cent in 2011 to £694 million (2010: £833 million). This reduction was due to the expected accounting impact of accelerated deferred acquisition cost (DAC) amortisation of £232 million (2010: £11 million), which masked an underlying improvement in earnings. Excluding this effect, Jackson’s earnings continued to grow during 2011 reflecting the rising asset base which generates both higher revenues and scale economies. Fee income increased by 34 per cent from £506 million in 2010 to £680 million in 2011 as a result of the strong growth in separate account asset balances which at 31 December 2011 were 23 per cent higher at £38 billion (2010: £31 billion) reflecting strong net inflows in variable annuities. Spread income (including the expected return on shareholders’ assets) was £813 million in 2011 (2010: £817 million) and the average spread margin that we earned on general account liabilities increased from 243 bps in 2010 to 258 bps in 2011. The general account closed the period with policyholder liabilities of £31 billion (2010: £29 billion). Jackson’s long-term EEV operating profit decreased by 2 per cent in 2011 to £1,431 million (2010: £1,458 million).
‘ We continue to see significant opportunities to grow both the size and the productivity of our distribution channels across South East Asia while maintaining good penetration of high margin health and protection insurance, and this should aid strong ongoing IFRS performance.’
Notes 1 Source: Fundscape. (Q4 issue, December 2011). The Pridham Report. Fundscape LLP.
‘ In 2011 we have continued to produce significant amounts of free capital, which we measure as free surplus generated.’
(ii) Business unit cash remittance objectives1: Asia to deliver £300 million of net cash remittance to the Group in 2013 (2009: £40 million); Jackson to deliver £200 million of net cash remittance to the Group in 2013 (2009: £39 million); and
UK to deliver £350 million of net cash remittance to the Group in 2013 (2009: £284 million2).
Cumulative net cash remittances from 2010 onwards 2,040 3,800 54 Cumulative underlying group free surplus generation (which is net of investment in new business) 3,697 6,500 57
‡ Net remittances from Jackson include £122 million in 2011 representing releases of excess surplus to Group.
In 2011 net remittances from business operations increased to £1,105 million. All of our businesses are now remitting considerable amounts of cash to Group and this is in line with our strategy as we seek to move away from the historical reliance on the UK. Jackson delivered the largest increase in net remittances during 2011, as we began to reap the rewards of our post-financial crisis expansion in variable annuities. It is testament to the quality of what Jackson has achieved in recent years that it can pay such a large remittance while financing growth and maintaining a strong RBC ratio, which at the end of 2011 was 429 per cent. Remittances from the UK life operations continue to be underpinned by the with-profits business but also reflect positive cashflows from the shareholder-backed business. M&G delivered a large increase in net remittances, reflecting its highly profitable growth and its ‘capital-lite’ business model that facilitates a high dividend payout ratio from its earnings. Asia’s remittances were also very strong in 2011 as it matures into an increasingly cash generative business, reaping the rewards of its significant growth and its health and protection product focus.
We continue to engage with rating agencies in order to provide insurance financial strength ratings for the Group’s insurance operations. Prudential’s senior debt is currently rated A+ by Standard & Poor’s, A2 by Moody’s and A by Fitch.
Shareholders’ funds In 2011, investment markets experienced considerable volatility and recorded drops in both the global equity market indices and in long-term interest rates. Despite these effects the Group’s EEV shareholders’ funds increased by 8 per cent during 2011 to £19.6 billion (2010: £18.2 billion). On a per share basis EEV at the end of 31 December 2011 stood at 771 pence, up from 715 pence at 31 December 2010. IFRS shareholders’ funds were also 14 per cent higher at £9.1 billion (2010: £8.0 billion).
‘ Our central cash resources amounted to £1.2 billion at the end of 2011, a strong position.’
The Asian Development Bank1 expects the Asian economies2 to grow by around 7 per cent in 2012, down from about 7.5 per cent in 2011 and 9 per cent in 2010, but still significantly higher than the rest of the world. Prudential is well placed to participate in this growth as one of the region’s leading providers of long-term savings and protection products.
Asia is also seeing a significant rise in the incidence of non-communicable diseases such as cancer, heart disease and diabetes as until comparatively recently people used to die from infectious diseases and malnutrition before ‘middle age’ ailments could arise. However, now ‘rich country diseases’ have very quickly become an issue in Asia. The World Health Organisation expects the number of deaths in South East Asia attributable to non-communicable diseases or critical illnesses to increase by 20 per cent over the next 10 years and the number of diabetics in China is expected to double by 2025. These critical illnesses not only have the potential to decimate individual families’ finances, they also impose a huge burden on the economy due to lost working time through sick leave and acquired skills exiting the work force. Raising awareness of lifestyle and related health issues together with the promotion of regular check ups, for example in relation to underwriting insurance policies, is becoming increasingly important as economies continue to develop.
Aligning to these developments, Asia is seeing a significant expansion of its savings and protection industry supported by governments and regulators. For example, regulators in China, Singapore and Malaysia have all recently stressed the importance of continuing to increase the rates of insurance penetration in their markets. Regulatory standards are also being raised with, for example, greater emphasis on ensuring that products are fit for purpose and that customers fully appreciate the features of their policies. Whereas compliance with the relevant regulations was always implicit in the way insurers ran their businesses, there is a trend towards a more explicit demonstration of this through documentation, audits and more formal management structures.
Prudential has a clear strategy in Asia focused on continuing to build high quality, multi-channel distribution that enables us to meet Asia’s fast growing savings and protection needs with a product portfolio centred on regular premium life insurance policies with protection riders.
Despite the attractiveness of these markets, the competitive environment in Asia has remained fairly constant over the past few years as barriers to entry remain high due to the material capital requirements combined with a shortage of the strategic and executional expertise needed for securing licences, establishing brands, building quality distribution and launching and administering products. Distribution in the region remains dominated by traditional tied agency forces, but banks are becoming increasingly significant distributors. The industry’s growth has typically been constrained by the pace at which the insurers can build out distribution and assemble the infrastructures needed to administer and manage the increasing volumes of premiums generated by the business.
Business performance Prudential has had operations in Asia since the 1920s, but began expanding its Asian business in 1994 as the Asian economic revolution was getting under way. Today Prudential is a leading international insurer in Asia with six of its 11 operations being market leaders in terms of new business scale. Prudential has established a high performance platform with multichannel distribution, a product portfolio based on regular premium savings policies with attached riders that provide additional protections and a well respected brand that is becoming increasingly well known as a champion of CSR initiatives including financial literacy.
Our strategy is focused on building high quality tied agency and complementary third party distribution channels, providing products that demonstrably meet customers’ savings and protection needs and strengthening and deepening customer relationships. It continues to be driven in a highly focused and disciplined way. While market outperformance in terms of new business growth is an indicator of success, Prudential prioritises quality of service, profitability, returns on capital and capital efficiency ahead of top-line growth.
APE sales1 Asia (excluding India) 1,559 1,313 19 1,313 19 India 101 188 (46) 178 (43)
At the country level the execution of the strategy varies depending on local conditions and objectives in each market. For example Prudential’s agency management competencies drive effective selection discipline and training designed to ‘fast start’ new agents and improve the skills and productivity of the more experienced ones in all markets. However, agency priorities are differentiated with the emphasis more on increasing scale in some markets, such as Indonesia and Vietnam and productivity improvements in more established markets such as Hong Kong and Singapore.
Prudential’s product mix is orientated around a core of regular premium policies with protection riders. The portfolio is regularly refreshed with new features and benefits that keep pace with evolving customer needs and also drive sales force activities.
In September 2011 Prudential launched a major new CSR initiative in collaboration with Turner Broadcasting in the form of a fictional band called Cha-Ching, who through episodes running on the Cartoon Network across Asia and a fully interactive website, teach children about the basics of financial planning.
New business sales APE for 2011 of £1,660 million was a record breaking high, representing an 11 per cent growth over 2010. Excluding India, where the market remains disrupted following the regulatory change in the third quarter 2010, APE growth was up 19 per cent. Prudential has now delivered 10 consecutive quarters where the APE is higher than the same quarter in the prior year and the average growth rate over this period was 19 per cent (including India). The fourth quarter APE at £513 million was also a record high, being up 18 per cent over prior year and 27 per cent higher than the third quarter of 2011.
Agency (excluding India) continues to be our largest distribution channel, generating 66 per cent of APE with a growth rate of 13 per cent over prior year. We ended the year with 228,000 agents (365,000 including India). However, although agency scale is important, management focus is also on further improving agent activity and productivity and we delivered a year-on-year increase in average active agents of 8 per cent, coupled with a 5 per cent increase in productivity.
New business profits of £1,076 million are 19 per cent higher than last year and average new business profit margins increased from 60 per cent to 65 per cent. The key driver for the increase in new business profit margin was a favourable change in country mix, in particular, a lower proportion of sales from India.
Operating profit on the IFRS basis grew strongly to £709 million, 32 per cent higher than last year. New business strain as a percentage of APE reduced during 2011 to 3.3 per cent compared to 3.7 per cent in 2010, driven by favourable product and country mix.
Underlying free surplus generated by the life operations grew by 26 per cent to £410 million as the emergence of profits from the in-force book is increasing at a faster rate than the investment in new business. The cash generating capacity of the life business is clearly demonstrated by net remittances of £239 million to the Group during 2011. This includes £6 million as Prudential’s share of the first dividend ever to be paid by a life insurance company in India since the industry was nationalised in the 1950s.
APE sales (Prudential’s 50 per cent share) 59 58 2 59 –
Prudential Hong Kong continues to deliver strong new business APE growth with an increase of 15 per cent over prior year to £331 million. Prudential remains the only leading player in Hong Kong to have a material presence in both the agency and bank distribution channels.
APE sales (Prudential’s 26 per cent share) 101 188 (46) 178 (43)
The Indian market has been through a significant period of change during 2011, particularly following the regulatory driven refocus on savings and protection products, which came into effect on 1 September 2010. These factors led to a fall in sales from £188 million in 2010 to £101 million in 2011. Our joint venture with ICICI continues to be a leader in the private sector and the fourth quarter 2011 APE of £28 million was up 33 per cent on prior year, demonstrating some recovery in this business.
Indonesia is rapidly becoming one of Asia’s fastest growing and highest potential economies and Prudential continues to be a clear market leader in the Indonesian life insurance sector.
The product mix remains predominantly regular premium unit-linked with protection riders and a new Early Stage Crisis Cover rider launched last year proved very popular with an attachment ratio of 35 per cent.
In Korea we continue to balance growth and profitability and do not compete in the low margin, capital-intensive guaranteed return segment of the market. Work undertaken over the past 24 months to refocus the business is now showing good results and our own agency force is generating the majority of new business. Sales in the fourth quarter, down 26 per cent on prior year, were impacted by equity market volatility depressing what had otherwise been a strong performance during the rest of the year. Nevertheless, sales in 2011 were 5 per cent higher at £101 million. Encouragingly new business profit margins increased from 31 per cent to 43 per cent reflecting the lower operating costs of the revamped business and an increased proportion of linked products in the mix.
Sales for 2011 were 23 per cent higher at £148 million. In particular Taiwan’s fourth quarter sales in 2011 of £53 million, were double those in the equivalent quarter last year, following successful marketing campaigns with SCB.
In Vietnam the depreciation of the local currency relative to sterling has made a strong underlying performance where new business APE in local currency is up 14 per cent, less visible in sterling terms. That strong performance has been driven primarily by an increase in agent numbers (38,000) and higher productivity. In Thailand, where we remain a relatively small player with market share of 2 per cent, volumes of new business were 4 per cent higher despite the disruption caused in the fourth quarter by the floods. Encouragingly, sales in December 2011 were 57 per cent higher than prior year. Philippines delivered excellent growth of 30 per cent driven by successes with partnership distribution and increased agency activity and productivity.
Japan As previously announced, PCA Life Japan ceased writing new business with effect from 15 February 2010. Sales for Japan in 2010 amounted to £7 million.
The United States is the world’s largest retirement savings market. Each year, many of the 78 million ‘baby boomers’1 reach retirement age. Jackson’s strategy focuses on capturing this opportunity while balancing value, volume, capital efficiency, cash generation, balance sheet strength and strict pricing discipline.
B u sin e ss rev iew 2.9m+ policies and contracts in force people reaching retirement age every day for next 20 years1 1 Source: US Census Bureau
During 2011, the US equity markets continued to be challenging for the financial services industry, with higher volatility returning during the second half of the year, along with a decline of interest rates to historically low levels. Despite a very volatile year, the S&P 500 index recovered from the large falls in the third quarter to finish flat for the year. Implied volatility ended the year higher than that at year end 2010. Overall, rates on 10-year treasuries reached new historical lows during the second half of 2011, finishing the year below 2 per cent, while AA corporate spreads widened from year end 2010 levels.
The uncertain environment continues to provide an advantage to companies with good financial strength ratings and a track record of financial discipline. Companies that were hardest hit by the market disruptions over the last few years still have to work to regain market share as customers and distributors seek product providers that offer consistency, stability and financial strength. Jackson continues to benefit significantly from this flight to quality and heightened risk aversion.
Our strategy focuses on balancing value, volume, capital efficiency, balance sheet strength and strict pricing discipline for both variable and fixed annuities. Fixed annuity sales have slowed as a result of the current interest rate environment.
Business performance Continue to drive positive net retail sales In 2011, Jackson achieved record APE retail sales of £1,251 million, an increase of 7 per cent over 2010. With the addition of modest institutional sales in 2011, total APE sales were £1,275 million, an increase of 10 per cent. Retail annuity net flows continued to benefit from increased sales and low levels of surrender activity, with an increase of 6 per cent from £8.0 billion in 2010 to £8.5 billion in 2011. Jackson’s strategy continues to focus on balancing value, volume and capital consumption for its various annuity products. Jackson’s product diversity allows the company to quickly adapt to changing market conditions and sustain appropriate sales levels in all phases of the business cycle. During the second half of 2011, sales slowed relative to the first half run rate due to proactive changes we made to our product offerings and shifts in the competitive environment. During the third quarter, Jackson implemented various product initiatives to enhance product diversity and margins and further optimise the balance between growth, capital and profitability.
Innovate around our key variable annuity product Jackson continues to innovate its product offerings, implementing various changes in 2011 to manage profitability, to comply with revised regulations and enhance risk management flexibility. Jackson continues to actively monitor its product offerings to ensure the company retains the appropriate pricing levels in current market conditions.
APE sales 1,275 1,164 10 1,121 14 NBP 815 761 7 734 11 NBP margin (% APE) 64% 65% 65% Total IFRS operating profit 694 833 (17) 803 (14)
‘ In 2011, for the sixth consecutive year, Jackson was rated as a ‘World Class’ service provider by Service Quality Measurement Group.’
Total spread income, including the expected return on shareholders’ assets, was £813 million in 2011, compared to £817 million in 2010. Excluding the expected return on shareholders’ assets, spread income was £730 million, an increase of £38 million over 2010. Spread income benefited by £113 million from swap transactions entered into to more closely match the overall asset and liability duration (2010: £108 million). This effect combined with the reduction in crediting rates has mitigated the downward pressures created by the lower interest rate environment.
Administration expenses increased to £412 million in 2011 compared to £344 million in 2010, with the increase due primarily to higher asset-based commissions paid on the larger 2011 separate account balance. These asset-based commissions paid upon policy anniversary dates are treated as an administration expense as opposed to a cost of acquisition and are offset by higher fees.
Jackson continues to actively manage its investment portfolio to mitigate investment risk. Jackson reported net realised gains on debt securities of £106 million in 2011 compared to £11 million in 2010. This comprises interest related realised gains during the period of £158 million (2010: £224 million), primarily due to sales of government and corporate debt, net recoveries on sales of previously impaired securities of £10 million (2010: losses of £89 million) and bond write-downs of £62 million (2010: £124 million). In addition to the net realised gains on debt securities described above, Jackson had write-downs of £28 million (2010: £12 million) on commercial mortgage loans. In 2011 and 2010, Jackson did not experience any defaults in its debt securities portfolio.
Jackson delivered record APE retail sales of £1,251 million in 2011, representing a 7 per cent increase over 2010 (12 per cent at constant exchange rates). Jackson has achieved these sales levels, while maintaining its pricing discipline, as it continued to write new business at aggregate internal rates of return (IRR) in excess of 20 per cent.
In 2011, record variable annuity (VA) APE sales of £1,091 million were 15 per cent higher than in 2010, as Jackson continued to benefit from its customers’ and distributors’ flight to quality. Although we do not target volume or market share, these market conditions allowed Jackson’s ranking to remain at third in variable annuity sales in the US for 2011, while increasing its market share to 11.4 per cent from 10.7 per cent for the full year 20101. Jackson ranks first among VA providers for adviser loyalty. Jackson also earned the top ranking for satisfaction with external and internal wholesaler support among VA providers2.
• Deliver £200 million of net cash remittance to the Group
Fixed index annuity (FIA) APE sales of £93 million in 2011 were down 15 per cent from 2010 as Jackson continued to focus its marketing efforts on higher margin VA products. Jackson ranked ninth in sales of fixed index annuities through the third quarter of 2011, with a market share of 4.6 per cent, down from sixth and a market share of 5.2 per cent in the full year 20104.
Jackson’s growth moderated during the latter part of the year, with full year total retail annuity net flows of £8.5 billion in 2011, an increase of 6 per cent compared to 2010. This modest increase was due to the impact of volatility in the S&P 500 experienced during the second half of the year, along with various product initiatives that were implemented during the third quarter. These initiatives were taken in order to optimise the balance between growth, capital and profitability. Retail annuity net flows continued to benefit from increased sales and continued low levels of surrender activity. Jackson remained the third largest seller of individual annuities in the United States through the third quarter of 2011, with a market share of 8.4 per cent, up from a market share of 8.0 per cent for the full year 20101.
EEV basis new business profit of £815 million was up 7 per cent on 2010, broadly in line with the 10 per cent increase in total APE sales. Total new business margin was 64 per cent, compared to 65 per cent achieved in 2010.
Total EEV basis operating profit for the long-term business in 2011 was £1,431 million, compared to £1,458 million in 2010. In-force profits were £81 million lower than 2010, partially offset by the £54 million increase in new business profit. The decline in in-force profits to £616 million (2010: £697 million) was driven largely by a lower contribution from the unwind of the discount on the opening embedded value, as a result of lower interest rates, and by lower positive operating experience variances than seen in 2010.
No. 86 – Accounting for Derivative Instruments and Hedging, Income Generation, and Replication (Synthetic Asset) Transactions
The UK life & pensions market is characterised by a concentration of wealth in the 45 to 74 age group. Prudential UK is well positioned to help these ‘baby boomers’ and subsequent generations meet their financial needs.
Business performance Strategic focus on core strengths Prudential UK has a strong individual annuity business, built on a robust pipeline of internal vestings from maturing individual and corporate pension policies. The internal vestings pipeline is supplemented by sales through intermediaries and strategic partnerships with third parties where Prudential is the recommended annuity provider for customers vesting their pensions at retirement.
Internal vestings sales of APE £122 million, were 2 per cent lower than in 2010, when a change in the minimum retirement age from 50 to 55 resulted in a temporary increase in sales, and a reduction in expected vestings in 2011. Sales of external annuities of APE £57 million were down 30 per cent on the same period last year, mainly due to the end of a partnership agreement in the second half of 2010, consistent with Prudential UK’s value over volume strategy.
Corporate pensions sales of APE £233 million were 5 per cent higher than in 2010, with strong sales to new members of existing private sector schemes in the first half of the year due in part to existing customers transferring members from their defined benefit schemes to defined contribution schemes. Prudential UK continues to focus on retaining and developing existing schemes, securing new members and incremental business.
Sales of other products, principally individual pensions, PruProtect, PruHealth and offshore bonds, of APE £122 million were 8 per cent below 2010. Within this, however, individual pensions sales (including income drawdown) of APE £72 million were 4 per cent above last year. Sales of the Flexible Retirement Plan, Prudential UK’s Retail Distribution Review (RDR)-compliant individual pension and income drawdown product, grew by 20 per cent to APE £27 million.
In the Wholesale market, Prudential UK’s aim is to continue to participate selectively in bulk and back-book buyouts using its financial strength, superior investment track record and annuitant mortality risk assessment and servicing capabilities. In line with this approach, Prudential UK signed two bulk annuity buy-in insurance agreements in 2011, totalling £33 million APE (2010: £93 million APE). Prudential UK will continue to maintain a strict focus on value and only participate in capital-efficient transactions that meet its return on capital requirements.
NBP margin (% APE) 35% 45% 45% Total IFRS operating profit 723 719 1 719 1 Total EEV operating profit 893 982 (9) 982 (9)
Launch of direct advice service In December 2011 Prudential UK launched a direct advice service, Prudential Financial Planning, to offer financial advice to existing customers who originally came to Prudential through its direct sales force. Starting with 25 advisers, the expectation is that this channel will grow further in 2012 to meet customer demand.
Enhancing customer service Prudential UK’s focus on delivering improved levels of customer service was recognised again at the 2011 Financial Adviser Service Awards, where it achieved two 5-Star ratings for excellent service in the Life & Pensions and Investment categories.
• Deliver £350 million of net cash remittance to the Group
Prudential UK continues to manage actively the retention of the in-force book. During 2011, the experience at an aggregate level was in line with long-term assumptions.
Prudential UK writes with-profits annuity, with-profits bond and with-profits corporate and individual pensions business in its Life Fund, with other products backed by shareholder capital. The weighted average post-tax IRR on the shareholder capital allocated to new business in the UK was in excess of 20 per cent and the undiscounted payback period on that new business was four years.
At half year 2010 Prudential announced that the UK business had achieved its cost savings target of £195 million per annum. At the end of 2010, the business announced a number of cost saving initiatives to reduce costs by a further £75 million per annum by the end of 2013. The business has made good progress towards this objective and remains on track to deliver these savings by the end of 2013.
M&G is the UK and European fund manager of the Prudential Group with responsibility for investments on behalf of both internal and external clients.
B u sin e ss rev iew £50.3bn funds under management – Eastspring Investments
Market overview M&G is the UK and European fund manager of the Prudential Group with responsibility for investments on behalf of both internal and external clients. M&G is an investment-led business whose aim is to generate superior long-term returns for its third-party investors and the internal funds of the Prudential Group.
This is achieved by creating an environment that is attractive to investment talent. Our investment performance has been robust in the face of ongoing macroeconomic instability. Over the three years to 31 December 2011, 25 retail funds representing approximately 76 per cent of retail funds under management (FUM), delivered first and second quartile investment performance. The performance of our actively managed external institutional fixed income mandates also remains very strong with all of the mandates meeting or outperforming their benchmarks over the three years to 31 December 2011.
In the retail market, M&G’s aim is to operate a single fund range and to diversify the distribution base by accessing a wide variety of channels and geographies. In recent years, this has resulted in significantly increased sales of UK-based funds in European and other international markets.
Market context Following considerable uncertainty over sovereign debts on both sides of the Atlantic and concerns over the lack of global economic growth, the third quarter of 2011 saw the FTSE 100 suffer its worst quarter for nine years, falling 14 per cent. Markets rebounded over the fourth quarter with the index rising by 9 per cent. M&G’s FUM has proved resilient in the face of the market volatility experienced over the second half of the year. From a FUM level of £194.4 billion at the end of 30 September 2011, M&G’s FUM increased to £201.3 billion by 31 December 2011. This included external funds under management, representing 46 per cent of total FUM, of £91.9 billion (quarter to 30 September 2011: £87.3 billion).
Gross new business wins for the fourth quarter to 31 December 2011 totalled £6.2 billion, compared to £6.4 billion for the previous quarter. Outflows totalled £4.4 billion (quarter to 30 September 2011: £6.7 billion), resulting in net inflows for the quarter of £1.8 billion. This was a positive turnaround on the total net outflow of £288 million experienced in the quarter to 30 September 2011.
Revenue 702 612 15 612 15 Other income 4 3 33 3 33 Staff costs (285) (263) (8) (263) (8)
Funds under management 201bn 198bn 2 198bn 2 £201bn Funds under management
Retail As announced previously, volatile market conditions and reduced investor confidence led to a considerable worsening of the sales environment in the overall market during the second half of 2011, in both Europe and the UK, and particularly for equity products.
M&G’s UK Retail business has been number one for gross and net retail sales over 13 consecutive quarters based on data to 31 December 20112. The strength of our UK distribution channels has helped to offset the difficult conditions encountered in mainland Europe, where risk-averse investors have been withdrawing money from funds. M&G’s European Retail distribution business did make up lost ground over the fourth quarter with positive net inflows being received. M&G continued to expand its distribution capabilities, registering its OEIC fund range in Finland, Norway and Denmark in the fourth quarter. By retail net sales, M&G ranked ninth out of 48 cross-border groups in 20113. M&G-managed retail FUM sourced outside of the UK now stand at £8.2 billion, the equivalent of almost one-fifth of the total retail external funds managed by M&G.
In product terms, retail fund flows across the industry, affected by the eurozone crisis, have seen muted demand for equity products in aggregate as bond products continue to remain the default choice for risk-averse investors. However, flows into some of M&G’s flagship equity products have remained robust in spite of stock market conditions, with investor appetite for our global equity and emerging market products continuing. M&G’s Property Portfolio Fund has also benefited from a consistent level of net sales over the full year. It is a core pillar of M&G’s business performance that it is able to benefit from changing investor preferences as a result of its diversified product offering. No fewer than 14 of M&G’s retail funds, representing all of the main asset classes, achieved net sales in excess of £50 million over the full year.
Notes 1 Source: Lipper FMI (February 2012, data as at December 2011). FundFlash. Thomson Reuters 2 Source: Fundscape. (Q4 issue, February 2012). The Pridham Report. Fundscape LLP
Awards Our expertise and strong performance have been recognised by independent authorities within the industry and we have won an array of awards for our funds and as a group. These include M&G being awarded the prestigious 2011 Old Broad Street Research Outstanding Investment House Award for the second year running. The strength of M&G’s performance in the institutional market is evidenced by the award of Fixed Income Manager of the Year 2011 at the Financial News Awards for Excellence in Institutional Asset Management. Indeed, M&G’s flagship institutional UK corporate bond fund, with over £3.5 billion of FUM at 31 December 2011, has outperformed its benchmark1 by 2.0 per cent2 a year since the onset of the credit crisis in December 2008.
Financial performance M&G continues to execute against its strategy and deliver strong performance for both clients and its shareholder, the Prudential Group. M&G’s 2011 financial performance continues the momentum from the strong full year results recorded in 2010. Revenues have continued to improve steadily, rising £90 million (15 per cent), while costs remain under control, increasing by only £40 million (10 per cent). As a result, operating profits grew by 22 per cent during the year to a record level of £301 million, surpassing the previous best of £246 million set in 2010. M&G’s operating margin increased to 40 per cent (year to 31 December 2010: 37 per cent)1. M&G’s very strong profit performance reflects in particular the transformation in net sales experienced by the business since the beginning of 2009, particularly from the Retail business. We continue to seek operational efficiencies across the M&G Group to support the scalability of our business model. This cost discipline, combined with the rise in FUM has generated a cost/income ratio2 of 60 per cent for the full year, an improvement on the 2010 result of 63 per cent.
Given the ongoing strength of its financial performance, M&G continues to provide capital-efficient profits and cash generation for the Group. This is in addition to the strong investment returns generated on the internally managed funds. M&G remits a substantial proportion of its post-tax profits to the shareholder, which in 2011 amounted to £213 million (2010: £150 million).
Prudential Capital manages the Group’s balance sheet for profit by leveraging Prudential’s market position. This business has three strategic objectives: to provide professional treasury services to the Prudential Group; to operate a first-class wholesale and capital markets interface; and to realise profitable opportunities within a tightly controlled risk framework. Prudential Capital generates revenue by providing bridging finance, managing investments and operating a securities lending and cash management business for the Prudential Group and its clients.
Prudential Capital has a diversified earnings base derived from its portfolio of secured loans, debt investments and the provision of wholesale markets services. Despite the continued difficult market conditions, IFRS operating profit was £56 million in 2011 (2010: £38 million). In 2011 a total of £67 million was remitted to the Group.
‘ M&G continues to provide capital- efficient profits and cash generation for the Group.’
Notes 1 Excluding performance-related fees. 2 Excluding performance-related fees and carried interest on private equity investments.
u sin e ss rev iew Business review | Asset management | Eastspring Investments
Market overview Prudential’s asset management business in Asia manages investments for Asian third-party retail and institutional clients in addition to investments of Prudential’s Asian, UK and US life companies.
Markets remained challenging in 2011, with overall net outflows seen in the Asia (excluding Japan) onshore funds market. Equity markets struggled to gain traction driven by poor investor sentiment in the face of weak macroeconomic signals. Japan was also impacted by the natural disaster which occurred earlier in the year.
Eastspring Investments In November 2011, Prudential announced that its Asian Fund Management operations would be rebranded Eastspring Investments. The new brand, which was officially launched in February 2012, will enable the business to establish a cohesive regional presence thereby penetrating the offshore segment more effectively. It also supports distribution to new markets beyond Asia.
Net inflows from third parties (excluding MMF) were £633 million compared to net inflows of £1,837 million during 2010. This is attributed to lower bond fund returns and to Japan, where significant inflows from the launch of the Asia Oceania equity fund in 2010 were not repeated in 2011. Clearly the environment in Japan was not conducive to product launches in the first half of 2011. This situation was partially mitigated by net inflows from corporate and institutional clients in Korea, together with new institutional mandates.
Financial performance IFRS profits of £80 million are a record and were up 11 per cent on prior year as a result of higher average funds under management and disciplined management of costs.
Gross investment inflows (excluding MMF) 7,824 11,973 (35) 11,959 (35) Net investment inflows (excluding MMF) 633 1,837 (66) 1,882 (66) Money Market Funds (MMF) net outflows (512) (2,052) (75) (1,954) (74) Funds under management 50.3bn 51.9bn (3) 51.3bn (2)
The new brand, which was officially launched in February 2012, will enable the business to establish a cohesive regional presence thereby penetrating the offshore segment more effectively. It also supports distribution to new markets beyond Asia.
Financial performance IFRS operating profit in 2011 was £4 million, compared to £10 million in 2010, due to the non-recurrence of the 2010 performance related fees.
At 31 December 2011, funds under management of £55 billion were as follows: AER
Gross investment flows 1,684 1,361 24 1,312 28 Revenue 51 39 31 37 38 Costs (45) (38) 18 (36) 25 Total IFRS operating profit 6 1 500 1 500 Total funds under management 4.7bn 3.5bn 34 3.5bn 34
Business performance At 31 December 2011, Curian had total assets under management of £4.7 billion, compared to £3.5 billion at the end of 2010. Curian generated record deposits of £1,684 million in 2011, up 24 per cent over 2010. Curian continues to benefit from its prior investment platform expansions and its significant expansion in 2011 of the firm’s wholesaling team and new distribution territories.
NPH continues to grow the 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 efficiently. At the same time, through its relationship with NPH, Jackson continues to benefit from an important retail distribution outlet, as well as receive valuable insights into the needs of financial advisers and their clients.
Profit after tax attributable to equity holders of the Company £1,490m £1,431m Basic earnings per share 58.8p 56.7p Shareholders’ equity, excluding non-controlling interests £9.1bn £8.0bn
Operating profit based on longer-term investment returns* 2,070 1,941 Short-term fluctuations in investment returns on shareholder-backed business (148) (123) Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 21 (10) Costs of terminated AIA transaction – (377) Gain on dilution of Group holdings – 30
Operating earnings per share* (reflecting operating profit based on longer-term investment returns after related tax and non-controlling interests)(i) 63.9p 62.0p
Asian operations 1,839 1,518 US operations 1,455 1,480 UK operations: UK insurance operations 893 982 M&G 357 284 Other income and expenditure (536) (494) RPI to CPI inflation measure change on defined benefit pension schemes 45 – Restructuring and Solvency II implementation costs (75) (74)
Under the EEV basis, where additional profit and loss effects arise, operating profit based on longer-term investment returns also excludes the mark to market value movements on core borrowings and the effect of changes in economic assumptions. After adjusting for related tax and non-controlling interests, the amounts excluded from operating profit based on longer- term investment returns are included in the calculation of basic earnings per share, based on total profit attributable to the company’s equity holders.
IFRS basis operating profit based on longer-term investment returns AER CER
Other income and expenditure (483) (450) 7 (449) 8 RPI to CPI inflation measure change on defined benefit pension schemes(i) 42 – n/a – n/a Solvency II implementation costs (55) (45) 22 (45) 22 Restructuring costs (16) (26) (38) (26) (38)
Note (i) During 2011 the Group altered its assumptions for future statutory increases to pension payments for its UK defined benefit pension schemes.
Hong Kong, Indonesia, Singapore and Malaysia, Prudential’s largest markets in Asia, continue to see profits grow strongly, with operating profits from long-term business2 up 27 per cent from £434 million in 2010 to £552 million in 2011. The growth in Indonesia operating profit2 has been particularly strong, up 35 per cent from £157 million to £212 million, reflecting the organic growth of that business over recent years. Hong Kong’s operating profit2 increased 35 per cent to £69 million (2010: £51 million), reflecting the continued growth of the portfolio. Singapore increased by 29 per cent to £167 million2 (2010: £129 million) and Malaysia increased by 7 per cent from £97 million to £104 million2. Other territories contributed operating profits of £119 million before non-recurring items (2010: £83 million), an increase of 43 per cent, and have all made positive contributions to this metric for the first time.
Notes 1 Excludes Japan which ceased writing new business in 2010.
The US long-term business operating profit decreased by 17 per cent from £833 million in 2010 to £694 million in 2011 and is, after charging £232 million (2010: £11 million) of accelerated DAC amortisation, as anticipated. This charge, which is not expected to recur, arises as a result of market movements and their interaction with the mean reversion methodology. It has the effect of masking an underlying improvement in the earnings of the US business, reflecting higher fees from variable annuity business following the growth of separate account balances in recent years. The benefit of higher fees is partially offset by administration expenses which have also increased broadly in line with the scale of business.
Life business in the UK (excluding the impact of the bulk annuity transactions), contributed operating profits of £660 million in 2011, 8 per cent higher than the £610 million generated in 2010. The contribution from with-profits business was lower at £293 million (2010: £310 million). Operating profit from non-profit annuity and other life business was £67 million higher at £367 million, reflecting higher annuity profits. Profit from UK general insurance commission were lower at £40 million (2010: £46 million) following the expected decline of the in-force policy numbers as the business matures.
Following the UK government’s decision to change the basis of indexation from RPI to CPI, the Group altered its assumptions for future statutory increases to pension payments for its UK-defined benefit pension schemes. This resulted in a one-off credit to operating profit of £42 million in 2011 and will not recur going forward.
Spread income 1,065 57,417 185 1,013 53,894 188 988 53,056 186 Fee income 870 68,298 127 688 56,822 121 669 56,303 119 With-profits 331 93,056 36 342 89,693 38 342 90,060 38 Insurance margin 736 592 582 Margin on revenues 1,425 1,212 1,211 Expenses Acquisition costs (ii) (1,783) 3,681 (48)% (1,645) 3,492 (47)% (1,612) 3,439 (47)% Administration expenses (1,043) 125,715 (83) (924) 110,716 (83) (910) 109,359 (83) DAC adjustments 280 518 498 Expected return on shareholder assets 200 242 237
unallocated surplus. For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the period, as this is seen as a good proxy for average balances throughout the year. Given the volatility in the year, the calculation of average liabilities has been refined for Jackson in two ways: (i) the average for both the general and separate account balances is now derived from month-end balances throughout the year as opposed to opening and closing balances only, and (ii) liabilities held in the general account for variable annuity living and death guaranteed benefits have been excluded from the calculation of the average, as no spread income is earned on these balances. The 2010 balances for Jackson have been amended for consistency, albeit impacts are minimal.
Spread income has increased by £52 million to £1,065 million, an increase of 5 per cent, broadly in line with the growth in average liabilities. The margin secured has fallen from 188 bps in 2010 to 185 bps in 2011, principally due to 2010 benefiting from higher bulk annuity sales. Spread income in the US has increased by £38 million, with 2011 continuing to benefit from transactions to more closely match asset and liability duration, as well as lower amounts credited to policyholders on fixed annuities.
Insurance margin has increased by £144 million to £736 million in 2011, driven in part by the continuing growth in the in-force book in Asia, which has a relatively high proportion of risk-based products.
Margin on revenues principally comprises amounts deducted from premiums to cover acquisition costs and administration expenses. The margin has increased by £213 million from £1,212 million in 2010 to £1,425 million in 2011, with Asia accounting for £181 million of the increase. This principally reflects higher premium income.
Acquisition costs have increased in absolute terms to £1,783 million, broadly in line with the increased new business sales. Expressed as a percentage of new business APE, 2011 has seen a marginal increase from 47 per cent in 2010 to 48 per cent in 2011.
DAC adjustments are a net benefit to the result as the deferral of current years acquisition costs exceed the amortisation of previously deferred costs. This net benefit decreased by £238 million in 2011 relative to last year, primarily as a result of the acceleration of DAC amortisation in the US of £232 million. This represents the reversal of the benefit received in 2008 from the mean reversion formula, together with the impact of lower than assumed separate account returns in the year.
IFRS basis results – margin analysis of asset management pre-tax IFRS operating profit based on longer-term investment returns by driver
Operating income* 632 191 88 229 1,140 Operating profit based on longer-term investment returns 246 72 38 22 378
Operating profit based on longer-term investment returns 2,070 1,941 Short-term fluctuations in investment returns: Insurance operations (28) (148)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 21 (10) Costs of terminated AIA transaction – (377) Gain on dilution of Group holdings – 30
Effective tax rates The effective rate of tax on operating profit based on longer-term investment returns was 22 per cent (2010: 11 per cent). For 2010, adjusting the reported tax rate to exclude the exceptional tax credit of £158 million which primarily relates to the impact of a settlement agreed with the UK tax authorities, the underlying tax rate operating profit was 19 per cent.
EEV basis operating profit based on longer-term investment returns AER CER
Insurance business Asia 1,764 1,450 22 1,438 23 US 1,431 1,458 (2) 1,406 2 UK 853 936 (9) 936 (9)
pension schemes. This reflects the UK government’s decision to change the basis of indexation from RPI to CPI.
EEV basis operating profit based on longer-term investment returns continued The contribution to operating profit from life in-force business increased by 4 per cent to £1,897 million. In-force profit comprises £1,447 million from the unwind of the discount on the opening embedded value and other expected returns (2010: £1,492 million) and £450 million from the effect of operating assumption changes, experience variances and other items (2010: £325 million). The unwind of discount and other expected returns is £45 million lower than 2010 with the growth in the business, being offset by the effect on this profit measure of lower interest rates. We estimate that the fall in long-term interest rates during 2011 adversely impacted the unwind and other expected returns by around £200 million.
UK life in-force profit was also higher at £593 million (2010: £571 million). The reduction in 15-year gilt yields reduced the contribution from the unwind of the discount on the opening embedded value and return on net worth relative to last year by £65 million to £485 million. Disciplined management of the in-force book has enabled the business to outperform the expected returns, generating profits from experience and operating assumption changes of £108 million (2010: £21 million). Included in both years are the beneficial effects on future profits arising from the reduction in UK corporation taxes enacted in both years; in 2011 this amounted to £79 million, while in 2010 this amounted to £41 million.
Operating profit from the asset management business and other non-long-term businesses increased to £501 million, up 18 per cent from £424 million in 2010.
In our US business, short-term fluctuations in investment returns were negative £491 million (2010: negative £678 million), principally reflecting the effect on fee income of the actual separate account return in 2011 of negative 0.5 per cent being lower than the longer term expected level of 5.4 per cent on projected future fees.
Mark to market movement on core borrowings The mark to market movement on core borrowings was a negative £14 million in 2011, lower than the negative £164 million reported in 2010 when there was a more significant narrowing of credit spreads as the 2008 market dislocation unwound.
EEV basis profit after tax and non-controlling interests continued Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes The shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes on the EEV basis comprises the IFRS charge attributable to shareholders, and the shareholders’ share of movements in the scheme assets and liabilities attributable to the PAC with-profits fund. On the EEV basis there was a gain of £23 million (2010: charge of £11 million) mainly reflecting favourable experience in the year in respect of the Scottish Amicable scheme combined with the impact of assumption changes, primarily from lower inflation and expected salary increases, applied to the liabilities of both the Scottish Amicable and M&G schemes.
Effective tax rates The effective rate of tax on operating profit based on longer-term investment returns was 26 per cent (2010: 23 per cent). For 2010, adjusting the reported tax rate to exclude the exceptional tax credit of £158 million which primarily relates to the impact of a settlement agreed with the UK tax authorities, the underlying tax rate on 2010 operating profits was 27 per cent.
The effective rate of tax at the total EEV profit level was 27 per cent (2010: 17 per cent). Adjusting the rate in 2010 to exclude the exceptional tax credit of £158 million gives an underlying tax rate at the total profit level of 22 per cent.
At the operating profit level, the effective underlying tax rate is lower in 2011 than in 2010, reflecting reduced UK corporation tax rates. At the total profit level, the underlying effective tax rate is higher than in 2010 reflecting the absence of favourable one-off adjustments in the US tax rate, partly offset by reduced UK corporation tax rates.
Basic EPS based on operating profit after tax and non-controlling interests
Dividend per share Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved by shareholders. The final dividend for the year ended 31 December 2010 of 17.24 pence per ordinary share was paid to eligible shareholders on 26 May 2011 and the 2011 interim dividend of 7.95 pence per ordinary share was paid to eligible shareholders on 22 September 2011.
In light of the continued strong performance of the business and the Group’s focus on a growing dividend, the Board has recommended a final dividend of 17.24 pence per share (2010: 17.24 pence), giving a full 2011 dividend of 25.19 pence (2010: 23.85 pence), representing an increase of 5.6 per cent over 2010.
The 2011 final dividend of 17.24 pence per ordinary share will be paid on 24 May 2012 in sterling to shareholders on the principal register and the Irish branch register at 6.00 pm BST on Friday, 30 March 2012 (the ‘Record Date’), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30 pm Hong Kong time on the Record Date (HK Shareholders). Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about five days after the payment date of the dividend to shareholders on the principal register. The final dividend will be paid on or about 31 May 2012 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte.) Limited (CDP) at 5.00 pm 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 2012. 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 £439 million of shareholders’ funds.
The Board will maintain its focus on delivering a growing dividend, which will continue to be determined after taking into account our Group’s financial flexibility and our assessment of opportunities to generate attractive returns by investing in specific areas of the business. The Board believes that in the medium-term a dividend cover of around two times is appropriate.
Operating profit based on longer-term investment returns 2,070 1,941 3,978 3,696 Items excluded from operating profit (127) (480) (1,056) (589)
Total profit before tax 1,943 1,461 2,922 3,107 Exceptional tax credit – 158 – 158 Tax and non-controlling interests (453) (188) (780) (692)
Profit for the period 1,490 1,431 2,142 2,573 Exchange movements, net of related tax (100) 251 (158) 693 Unrealised gains and losses on Jackson securities classified as available-for-sale(a) 312 478 – – Dividends (642) (511) (642) (511) New share capital subscribed 17 75 17 75 Other 9 36 71 104
Notes (a) Net of related changes to deferred acquisition costs and tax. (b) The increase in free surplus of £91 million from 31 December 2010 arises primarily from £1,100 million being generated by the long-term
(i) Including goodwill of £1,230 million for 31 December 2011 and 2010.
(e) EEV shareholders’ funds excluding goodwill attributable to shareholders at 31 December 2011 is £18,172 million (2010: £16,741 million).
At 31 December 2011, the embedded value for our Asian long-term business operations was £8.5 billion, with £7.1 billion (up £1.1 billion from 2010) being in the South East Asia countries of Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam together with Hong Kong. For Prudential’s other Asian markets, the embedded value was £1.4 billion in aggregate, unchanged from 2010.
The total movement in free surplus net of tax in the year can be analysed as follows: Free surplus generation Expected in-force cash flows (including expected return on net assets) 2,335 2,139 Life operations 1,972 1,829 Asset management operations 363 310 Changes in operating assumptions and experience variances 168 220 RPI to CPI inflation measure change on defined benefit pension schemes(i) 33 –
Underlying free surplus generated in the period from in-force business 2,536 2,359 Investment in new business (553) (645)
Underlying free surplus generated in the period 1,983 1,714 Market related items (531) (94)
Free surplus generated in the period from retained businesses 1,452 1,620 Net cash remitted by the business units (1,105) (935) Other movements and timing differences (264) 122
Free surplus generation Sources and uses of free surplus generation from the Group’s insurance and asset management operations Group free surplus at the end of the period comprises free surplus for the insurance businesses, representing the excess of the net worth over the required capital included in the EEV results, and IFRS net assets for the asset management businesses excluding goodwill. The free surplus generated during the period comprises the movement in this balance excluding foreign exchange, capital movements, and other reserve movements. Specifically, it includes amounts maturing from the in-force operations during the period less the investment in new business, the effect of market movements and other items.
Market-related movements of negative £531 million in 2011 (2010: negative £94 million) include negative £432 million from the US, principally reflecting the adverse impact on free surplus of the equity volatility experienced in 2011. It also includes negative £49 million in Asia, in part reflecting a fall in equity markets in Taiwan, negative £26 million in the UK and negative £24 million from our asset management businesses.
Investment in business in Japan in 2011 was £nil (2010: £2 million).
Pre-tax new business profit for the year 1,076 – 1,076 815 260 2,151 2,151
Net worth invested in new business (194) (2) (196) (30) 42 (182) (184)
Post-tax new business profit for the year 671 (1) 670 477 266 1,414 1,413
Pre-tax new business profit for the year 900 (1) 899 734 365 1,999 1,998
New business sales (APE) 1,491 1,491 1,121 820 New business margins (% APE) 60% 60% 65% 45% Internal rate of return* >20% >20% >20% >20%
* The internal rate of return (IRR) is equivalent to the discount rate at which the present value of the post-tax cash flows 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.
In Asia, investment in new business was £297 million, a 7 per cent increase over the £278 million1 invested in 2010. This contrasts to an 11 per cent increase in new business sales (APE) in the period. For each £1 million of free surplus invested we generated £2.7 million of post-tax new business contribution to embedded value (2010: £2.4 million), the improvement being driven by geographic and product mix changes. The average free surplus undiscounted payback period for business written in 2011 was three years (2010: three years).
In the UK, investment in new business was lower, at £54 million compared to £65 million last year. This investment generated APE sales which were 9 per cent lower at £746 million in 2011. For each £1 million of free surplus invested we generated £3.6 million of post-tax new business contribution to embedded value (2010: £4.1 million), with 2010 benefiting from the relatively low capital utilisation of the profitable bulk annuity business written in the last quarter of 2010. The average free surplus undiscounted payback period for shareholder-backed business written in 2011 was four years (2010: four years).
Net cash remitted by business units: UK Life fund paid to the Group 223 202 Shareholder-backed business: Other UK paid to the Group 116 275 Group invested in UK (42) (57) Total shareholder-backed business 74 218
UK net 297 420 US paid to the Group 322 80 Group invested in US – –
Asia net 206 233 M&G paid to the Group 213 150 PruCap paid to the Group 67 52
Net remittances to the Group from business units 1,105 935 Net interest paid (282) (231) Tax received 181 185 Corporate activities (139) (146) Solvency II costs (56) (34)
Operating holding company* cash flow before dividend 809 709 Dividend paid (net of scrip in respect of 2010) (642) (449)
Operating holding company* cash flow after dividend 167 260 Issue of hybrid debt, net of costs 340 – Repayment of subordinated debt (333) – Costs of terminated AIA transaction – (377) Bank loan reorganisation – 120 Other cash payments (205) (276)
Asia continues to be cash positive, with its remittances to the Group during 2011 at £206 million (2010: £233 million). 2010 benefited from a one-off remittance of £130 million from Malaysia, representing the accumulation of historic distributable reserves. Excluding this amount Asia has doubled its net remittances in 2011. Asia remains on track to meet its objective of £300 million net remittances in 2013.
The UK insurance operations remitted £297 million in 2011 (2010: £420 million). Total shareholder-backed business net remittances in 2011 were £74 million (2010: £218 million) with 2010 including £120 million as a result of one-off release of surplus and net financing payments during that year. Cash from the annual with-profits transfer to shareholders increased from £202 million to £223 million in 2011. The UK remains on track to deliver £350 million of cash to the Group in 2013.
Central outflows and other movements Central outflows increased to £296 million in 2011 (2010: £226 million). Lower corporate activities spend in 2011 was offset by increased net interest payments, following the additional debt raised in 2011, and higher Solvency II implementation spend as we draw closer to the date that this regime comes into effect.
Outside of the normal recurring central cash flow items we incurred £205 million of other cash payments in 2011. These comprise the first instalment to the UK tax authorities following the settlement reached last year on historic tax issues and the prepayment of fees in relation to new distribution agreements in Asia. A further amount relating to the settlement with the UK tax authorities of £135 million will be paid evenly over the course of 2012 and 2013.
The overall holding company cash and short-term investment balances at 31 December 2011 was broadly level with the balance held at the end of 2010 at £1.2 billion. The company seeks to maintain a central cash balance in excess of £1 billion.
Less: Liabilities Policyholder liabilities 227,075 214,727 Unallocated surplus of with-profits funds 9,215 10,253 236,290 224,980 Less: Shareholders’ accrued interest in the long-term business (10,520) (10,176)
Financial instruments The Group is exposed to financial risk through its financial assets, financial liabilities, and policyholder liabilities. The key financial risk factors that affect the Group include market risk, credit risk and liquidity risk. Information on the Group’s exposure to financial risk factors, and our financial risk management objectives and policies, is provided both in the Risk and Capital Management section and the financial statements. Further information on the sensitivity of the Group’s financial instruments to market risk and its use of derivatives is also provided in the financial statements.
The Group’s investments are discussed in further detail in the Risk and Capital Management section B.1.b ‘Credit risk’.
u sin e ss rev iewPolicyholder liabilities and unallocated surplus of with-profits fund
At 1 January 17,716 60,523 43,944 122,183 100,061 Premiums 3,807 12,914 3,575 20,296 19,584 Surrenders (1,735) (4,270) (1,970) (7,975) (6,724) Maturities/Deaths (233) (820) (2,262) (3,315) (3,165)
Net cash flows 1,839 7,824 (657) 9,006 9,695 Investment related items and other movements (909) 136 2,761 1,988 9,249 Acquisition of UOB Life Assurance Limited – – – – 464 Dilution of holding in PruHealth – – – – (27) Foreign exchange translation difference (377) 706 – 329 2,741
Policyholder liabilities and unallocated surplus of with-profits fund Policyholder liabilities related to shareholder-backed business grew by £11.3 billion from £122.2 billion at 31 December 2010 to £133.5 billion at 31 December 2011.
Other movements include positive foreign exchange movements of £329 million (2010: £2,741 million) together with investment related and other items of £1,988 million. Investment related and other items fell from £9,249 million in 2010 to £1,988 million in 2011 principally as a result of the weaker equity markets.
During 2011, the unallocated surplus, which represents the excess of assets over policyholder liabilities for the Group’s with-profits funds on an IFRS basis, reduced by 10 per cent from £10.3 billion at 31 December 2010 to £9.2 billion at 31 December 2011.
Holding company total 3,201 187 3,388 3,267 177 3,444 Prudential Capital 250 – 250 250 – 250 Jackson surplus notes (Lower Tier 2) 160 17 177 159 13 172
Total 3,611 204 3,815 3,676 190 3,866 Less: Holding company cash and short-term
Net core structural borrowings of shareholder-financed operations 2,411 204 2,615 2,444 190 2,634
In January 2011, the Company issued US$550 million 7.75 per cent Tier 1 subordinated debt, primarily to retail investors. The proceeds, net of costs, were US$539 million (£340 million) and financed the repayment of the ¤500 million Tier 2 subordinated notes in December 2011.
After adjusting for holding company cash and short-term investments of £1,200 million, net core structural borrowings at 31 December 2011 were £2,411 million compared with £2,444 million at 31 December 2010. The decrease of £33 million represents the net fall in borrowings of £65 million, reflecting the debt repayment and issue described above together with foreign exchange movements in the year, offset by a £32 million fall in holding company cash and short-term investments.
The financial strength of PAC is rated AA by Standard & Poor’s, Aa2 by Moody’s and AA by Fitch.
Defined benefit schemes in the UK are generally required to be subject to a full actuarial valuation every three years, in order to assess the appropriate level of funding for schemes in relation to their commitments. The last completed actuarial valuation of PSPS was as at 5 April 2008, demonstrating the scheme to be 106 per cent funded, but additional funding akin to deficit funding was agreed by the Trustees in recognition of the fall in value of the scheme’s investments between 5 April 2008 and the completion of the valuation in 2009. This additional deficit funding is apportioned in the ratio of 70/30 between the PAC with-profits fund and shareholder-backed operations, reflecting the company’s historic rate of contributions over many years. The total contributions being currently made by the Group into the scheme, representing the annual accrual cost and deficit funding, are £50 million per annum. This amount will continue until the next valuation as at 5 April 2011 is finalised later in 2012 and the future level of company contributions is agreed with the Trustees. The valuation basis under IAS 19 for the Group financial statements differs markedly from the full triennial actuarial valuation basis. In particular, for PSPS, where constraints in the trust deed prevent the Group access to any surplus in the scheme, the IAS 19 surplus, measured on an economic basis net of related tax relief, of £1,391 million at 31 December 2011 (2010: £421 million) is not recognised.
Financial strength of the UK Long-term fund On a realistic valuation basis, with liabilities recorded on a market consistent basis, the free assets were valued at approximately £6.1 billion at 31 December 2011, before a deduction for the risk capital margin. The value of the shareholders’ interest in future transfers from the UK with-profits fund is estimated at £2.0 billion. The financial strength of PAC is rated AA by Standard & Poor’s, Aa2 by Moody’s and AA by Fitch Ratings.
As a provider of financial services, including insurance, the management of risk lies at the heart of our business. As a result, effective risk management capabilities represent a key source of competitive advantage for our Group.
The Group’s risk framework includes our appetite for risk exposures as well as our approach to risk management. Under this approach, we continuously assess the Group’s top risks and monitor our risk profile against approved limits. Our main strategies for managing and mitigating risk include asset liability management, using derivatives to hedge relevant market risks, and implementing reinsurance and corporate insurance programmes.
Liquidity: the objective is to ensure that the Group is able to generate sufficient cash resources to meet financial obligations as they fall due in business as usual and stressed scenarios.
Our risk appetite framework forms an integral part of our annual business planning cycle. The Group Risk Committee is responsible for reviewing the risks inherent in the Group’s business plan and for providing the Board with input on the risk/ reward trade-offs implicit therein. This review is supported by our Group Risk function, which uses submissions by business units to calculate the Group’s aggregated position (allowing for diversification effects between business units) relative to the limits contained within the risk appetite statements.
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 Definition
Credit risk • The risk of loss for our business or of adverse change in the financial position, resulting from fluctuations in the credit standing of issuers of securities, counterparties and any debtors in the form of default or other significant credit event (eg downgrade or spread widening).
Liquidity risk • The risk of the Group being unable to generate sufficient cash resources or raise finance to meet financial obligations as they fall due in business as usual and stress scenarios.
Non-financial risks Operational risk • The risk of loss arising from inadequate or failed internal processes, or from personnel and systems, or from external events.
In the US, where we are a leading provider of variable annuities, there are well-understood risks associated with the guarantees embedded in our products. We provide guaranteed minimum death benefits (GMDB) on substantially all policies in this class, guaranteed minimum withdrawal benefits (GMWB) on a significant proportion of the book, and guaranteed minimum income benefits (GMIB) on only 5 per cent. To protect the shareholders against the volatility introduced by these embedded options, we use both a comprehensive hedging programme and reinsurance. The GMIB is no longer offered, with existing coverage being reinsured.
The Jackson IFRS shareholders’ equity and US statutory capital are sensitive to the effects of policyholder behaviour on the valuation of GMWB guarantees, but to manageable levels. For example, at 31 December 2011, on two severe stress test scenarios: • A halving in lapses of significantly ‘in the money’ policies would have given rise to indicative reductions of £200 million in IFRS shareholders’ equity and £235 million on US statutory capital; or
• A 10 per cent increase in utilisation by all policyholders would have given rise to indicative reductions of £100 million on IFRS shareholders’ equity and £240 million on US statutory capital.
In the US, there is interest rate risk across the portfolio. The majority of Jackson’s fixed 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 influence the level of reserves held for certain guaranteed benefits. With its large fixed annuity and fixed 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.
The exposure to interest rate risk arising from guarantees in Asia is at modest levels: for some non-unit-linked investment products it may not be possible to hold assets which will provide cash flows to match exactly those relating to policyholder liabilities. This results in a mismatch due to the duration and uncertainty of the liability cash flows and the lack of sufficient assets of a suitable duration. While this residual asset/liability mismatch risk can be managed, it cannot be eliminated.
b Credit risk In addition to business unit and Group-wide operational limits on credit risk, we monitor closely our counterparty exposures at Group level, highlighting those that are large or of concern. Where appropriate, we will reduce our exposure, purchase credit protection or make use of collateral arrangements to control our levels of credit risk.
Insurance operations UK 47.6 6.2 24.2 78.0 74.3 US – – 27.0 27.0 26.4 Asia 9.6 2.7 5.4 17.7 14.1 Asset management operations – – 1.8 1.8 1.6
US The most significant area of exposure to credit risk for the shareholders is Jackson in the US. At 31 December 2011 Jackson’s fixed income debt securities portfolio consisted of: Corporate and government security and commercial loans: Government 2,163 2,440 Publicly traded and SEC Rule 144A securities 16,281 14,747 Non-SEC Rule 144A securities 3,198 3,044
Of the £19.5 billion of corporate debt, 95 per cent is investment grade. Concentration risk within the corporate debt portfolio is low, with the top ten holdings accounting for approximately 4 per cent of the portfolio. Our largest sector exposures in the investment grade corporate debt portfolio are Utilities and Energy each at 15 per cent. We actively manage the portfolio and will sell exposures as events dictate.
The CMBS portfolio of £2.2 billion is performing strongly, with 35 per cent of the portfolio rated AAA and only 2 per cent rated below investment grade. The entire portfolio has an average credit enhancement level of 30 per cent. This level provides significant protection, since it means the underlying collateral has to incur a 30 per cent loss, net of recoveries, before our holding is at risk.
The impairment process reflects a rigorous review of every bond and security in our portfolio. Our accounting policy requires us to book full mark to market losses on impaired securities through our balance sheet. However, we would expect only a proportion of these losses eventually to turn into defaults, and some of the impaired securities to recover in price over time.
Jackson’s net unrealised gains from debt securities was positive £2,057 million at 31 December 2011, compared to positive £1,210 million at 31 December 2010. The gross unrealised loss position was £246 million at 31 December 2011 (31 December 2010: £370 million). Gross unrealised losses on securities priced at less than 80 per cent of face value totalled £158 million at 31 December 2011 compared to £224 million at 31 December 2010.
Asia Asia’s debt portfolio totalled £17.7 billion at 31 December 2011. Of this, approximately 70 per cent was in unit-linked and with-profits funds with minimal shareholders’ risk. The remaining 30 per cent is shareholder exposure and is invested predominantly (73 per cent) in investment grade bonds. For Asia, the portfolio has performed very well, and did not experience any default losses in 2011.
Asset management The debt portfolio of the Group’s asset management operations of £1.8 billion as at 31 December 2011 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.
ii) Group shareholder sovereign debt exposure Sovereign debt represented 16 per cent or £9.2 billion of the debt portfolio backing shareholder business at 31 December 2011. 43 per cent of this was rated AAA and 94 per cent investment grade. Of the Group’s holdings in Continental Europe of £690 million, 87 per cent was AAA rated. Prudential’s direct exposure to the eurozone is small in the context of our overall balance sheet. Shareholder exposure to the Eurozone sovereigns of Portugal, Italy, Ireland, Greece and Spain (PIIGS) is £44 million. The Group does not have any sovereign debt exposure to Greece, Portugal, Ireland or France.
The exposure of the Group’s shareholder and with-profits funds to sovereign debt (including credit default swaps that are referenced to sovereign debt) at 31 December 2011 is as follows.
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 Group Risk function also continually monitors the portfolio for emerging credit risks through various tools and processes.
United States – 1,378 1,378 396 278 674 2,052 Other, predominantly Asia 1 384 385 341 20 361 746
u sin e ss rev iew iv) Other possible impacts of a eurozone crisis Other knock on impacts of a eurozone crisis may represent some risk to the Group, both in terms of financial market impact and potential operational issues. These third order exposures are intrinsically more difficult to quantify. However, as well as the monitoring routines noted above, Prudential has also developed tools to identify the Group’s exposure to counterparties at risk (including contingent credit exposures), and has in place Group-wide processes to facilitate the management of such risks should they materialise.
In respect of operational risks, we have strong investment operations, counterparty risk and change management capabilities and we are confident in our ability to manage the transition to a new eurozone regime if events require us to do so.
v) Loans Of the total Group loans of £9.7 billion at 31 December 2011, the following are held by shareholder-backed operations.
Asia insurance operations(i) – 0.4 0.4 – 0.5 0.5 US insurance operations(ii) 3.6 0.6 4.2 3.6 0.6 4.2 UK insurance operations(iii) 1.1 – 1.1 1.0 – 1.0 Asset management operations(iv) – 1.3 1.3 – 1.4 1.4
Total loans held by shareholder-backed operations 4.7 2.3 7.0 4.6 2.5 7.1
(iii) The majority of mortgage loans held by UK insurance operations are mortgage loans collateralised by properties. (iv) Relates to bridging loan finance managed by Prudential Capital.
vi) Counterparty credit risk The Group enters into a variety of exchange traded and over-the-counter derivative financial instruments, including futures, options, forward currency contracts and swaps such as interest rate swaps, cross-currency swaps, swaptions and credit default swaps.
We continue to conduct rigorous research into longevity risk using data from our substantial annuity portfolio. The assumptions that Prudential makes about future expected levels of mortality are particularly relevant in its UK annuity business. The attractiveness of reinsurance is regularly evaluated. It is used as a risk management tool where it is appropriate and attractive to do so.
Risk and capital management d Liquidity risk The parent company has significant internal sources of liquidity which are sufficient to meet all of our expected requirements for the foreseeable future without having to make use of external funding. In aggregate the Group has £2.1 billion of undrawn committed facilities, expiring between 2013 and 2017. In addition, the Group has access to liquidity via the debt capital markets. For example, Prudential plc issued US$550 million perpetual subordinated Tier 1 securities in January 2011. Prudential also has in place an unlimited commercial paper programme and has maintained a consistent presence as an issuer in this market for the last decade. Liquidity uses and sources have been assessed at the Group and at a business unit level under base case and stressed assumptions. The liquidity resources available and the subsequent Liquidity Coverage Ratio (LCR) have been assessed to be sufficient under both sets of assumptions.
With regard to operational risk, the Group is dependent on processing a large number of complex transactions across numerous diverse products, and is subject to a number of different legal and regulatory, including tax, regimes. Prudential also has a significant number of third-party relationships that are important to the distribution and processing of our products, both as market counterparties and as business partners. This results in reliance upon the operational performance of these outsourcing partners.
With regard to business environment risk, the Group has a wideranging programme of active and constructive engagement with governments, policymakers and regulators in our 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. Where appropriate, the Group provides submissions and technical input to officials and others, either via submissions to formal consultations or through interactions with officials.
With regard to strategic risk, both business units and the Group Head Office are required to adopt a forward-looking approach to risk management by performing risk assessments as part of the annual strategic planning process. This supports the identification of potential threats and the initiatives needed to address them, as well as competitive opportunities. The impact on the underlying businesses and/or Group-wide risk profile is also considered to ensure that strategic initiatives are within the Group’s risk appetite.
C. Capital management C.1 Regulatory capital (IGD) Prudential is subject to the capital adequacy requirements of the European Union (EU) Insurance Groups Directive (IGD) as implemented by the Financial Services Authority (FSA) in the UK. The IGD capital adequacy requirements involve aggregating surplus capital held in our regulated subsidiaries, from which Group borrowings, except those subordinated debt issues that qualify as capital, are deducted. No credit for the benefit of diversification is permitted under this approach.
Our capital position remains strong. We have continued to place emphasis on maintaining the Group’s financial strength through optimising the balance between writing profitable new business, conserving capital and generating cash. We estimate that our IGD capital surplus is £4.0 billion at 31 December 2011 (before taking into account the 2011 final dividend), with available capital covering our capital requirements 2.75 times. This compares to a capital surplus of £4.3 billion at the end of 2010 (before taking into account the 2010 final dividend).
In addition to our strong capital position, on a statutory (Pillar 1) basis, the total credit reserve for the UK shareholder annuity funds also protects our capital position in excess of the IGD surplus. This credit reserve as at 31 December 2011 was £2.0 billion. This credit risk allowance represents 33 per cent of the bond portfolio spread over swap rates, compared to 43 per cent as at 31 December 2010.
We also use an economic capital assessment to monitor our capital requirements across the Group, allowing for realistic diversification benefits and continue to maintain a strong position. This assessment provides valuable insights into our risk profile.
C.2 Solvency II The European Union (EU) is developing a new solvency framework for insurance companies, referred to as ‘Solvency II’. The Solvency II Directive, which sets out the new framework, was formally approved by the Economic and Financial Affairs Council in November 2009 and is anticipated to be transposed into local regulations and take effect for supervisors from 2013, with implementation currently anticipated from 2014. The new approach is based on the concept of three pillars – minimum capital requirements, supervisory review of firms’ assessments of risk, and enhanced disclosure requirements.
There remains significant uncertainty regarding the outcome from this process. In particular, the Solvency II rules relating to the determination of the liability discount rate and to the treatment of US business remain unclear and Prudential’s capital position is sensitive to these outcomes. With reference to the liability discount rate, solutions to remove artificial volatility from the balance sheet have been suggested by policymakers as the regulations continue to evolve. These solutions, along with transitional arrangements for the treatment of the US business, are continuing to be considered by the European Parliament as part of the process to reach agreement on the Omnibus II Directive. There is a risk that the effect of the final measures could be adverse for Prudential, including potentially that a significant increase in capital may be required to support its business and that Prudential may be placed at a competitive disadvantage to other European and non-European financial services groups. Prudential is actively participating in shaping the outcome through our involvement in industry bodies and trade associations, including the Chief Risk Officer and Chief Financial Officer Forums, together with the Association of British Insurers (ABI) and Insurance Europe (formerly known as the Comité Européen des Assurances).
C.3 Capital allocation Prudential’s approach to capital allocation takes into account a range of factors, especially risk adjusted returns on capital, the impact of alternative capital measurement bases (accounting, regulatory, economic and ratings agency assessments), tax efficiency, and wider strategic objectives.
We use 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.
Products and drivers of insurance operations’ profits Overview of the Group’s principal activities Prudential plc is the holding company of the Prudential Group. The principal activity of our subsidiary operations is the provision of financial services to individuals and businesses in Asia, the US and UK. We offer a wide range of retail financial products and services, and asset management services, throughout these territories. The retail financial products and services principally include life insurance, pensions and annuities as well as collective investment schemes.
Fixed annuities are used for asset accumulation in retirement planning and for providing income in retirement and offer flexible payout options. The contract holder pays us a premium, which is credited to the contract holder’s account. Periodically, interest is credited to the contract holder’s account and administrative charges are deducted. The interest rate may be reset on each contract anniversary, subject to a guaranteed minimum, in line with state regulations. When the annuity matures, the contract holder is paid either the amount in the contract holder account or staggered payments in the form of an immediate annuity – similar to a UK annuity in payment.
Policyholder behaviour is relevant when looking at profits for fixed annuity contracts. The relevant factors are the potential for surrenders when interest rates rise and, in a low interest environment, the influence of the minimum guarantees required by state law. Fixed annuity policies are subject to early surrender charges for the first six to nine years of the contract. In addition, the contract may be subject to a market value adjustment at the time of surrender. During the surrender charge period, the contract holder may cancel the contract for the surrender value. Our profits on fixed annuities come primarily from the spread between the return earned on investments and the interest credited to the contract holder’s account, less expenses.
GMWBs provide a guaranteed return of the principal invested by allowing for periodic withdrawals that are limited to a maximum percentage of the initial premium. One version of the GMWBs provides for a minimum annual withdrawal amount that is guaranteed for the contract holder’s life without annuitisation. Variations of the GMWBs are offered whereby the guaranteed base can be increased, either through step-ups to a more recent market value of the account, or through bonuses offered if withdrawals are delayed for a particular number of years. Additional charges are assessed for these features. GMABs generally provide a guarantee for a return of a certain amount of principal after a specified period. This benefit was eliminated from Jackson’s product offerings in 2011. GMIBs provide for a minimum level of benefits upon annuitisation regardless of the value of the investments underlying the contract at the time of annuitisation. Jackson stopped offering GMIBs in 2009, with existing coverage being reinsured with an unaffiliated reinsurer.
With-profits policies are supported by a with-profits sub-fund and can be single premium (for example, Onshore Bonds or Flexible Investment Bonds) or regular premium (for example, certain pension products). Prudential UK’s primary with-profits sub-fund is part of The Prudential Assurance Company Limited’s (PAC) long-term fund. The return to shareholders on virtually all with-profits products is in the form of a statutory transfer to PAC shareholders’ funds. This is analogous to a dividend from PAC’s long-term fund, and is dependent upon the bonuses credited or declared on policies in that year. Prudential’s with-profits policyholders currently receive 90 per cent of the distribution from the main with-profits sub-fund as bonus additions to their policies, while shareholders receive 10 per cent as a statutory transfer.
The Defined Charge Participating Sub-Fund (DCPSF) forms part of the PAC long-term fund. It is comprised of the accumulated investment content of premiums paid in respect of the defined charge participating with-profits business issued in France and the defined charge participating with-profits business reassured into PAC from Prudential International Assurance plc and Canada Life (Europe) Assurance Ltd. It also includes the portfolio of with-profits annuity policies acquired from Equitable Life in 2007. All profits in this fund accrue to policyholders in the DCPSF.
The change in value is typically analysed into the following components: • the value added from new business sold during the year,
• the change in value from existing business already in place at the start of the year,
• change in the time value of cost of options and guarantees and economic assumption changes,
• other items (for example, profit from other Group operations, tax, foreign exchange, exceptional items), and
The value added from new business – defined as the present value of the future profits arising from new business written in the year – is a key metric used in the management of our business. The change in value of business in-force at the start of the year demonstrates how the existing book is being managed. Together, these metrics provide management and shareholders with valuable information about the underlying development of the Group’s business and the success or otherwise of management actions.
Creating social and economic value As a business that provides savings, income, investment and protection products and services we create social value through our day-to-day operations. First, we provide customers with ways to help manage uncertainty and build a more secure future. Second, by playing a key role in financial markets, we provide long-term capital that finances businesses, builds infrastructure and fosters growth in both developed and developing countries.
At Prudential we aim to be sustainable in the broadest sense – financially, socially and environmentally. Sustainability is integral to the way we do business. We have long-term liabilities and investments, and our commitments to our customers and our employees, as well as our support for communities and our responsibility towards the environment, are rooted in our aim of continuing to deliver strong financial performance sustainably.
We believe that CR is best managed on the ground by those closest to the customer and local stakeholders. Underpinning this approach are our four global CR themes (see panel below).
Our customers Today we serve more than 26 million customers in diverse markets where people’s specific savings, investment and protection needs are different. However, what is common among all our customers is that the financial decisions they make are among the most important of their lives.
We do not underestimate how important these decisions are for our customers, nor do we take for granted the trust they place in us to deliver for them over the long term. Our customers have made a choice to purchase from us, and we value highly their decision and their loyalty.
We want our customers to stay with us for the long term. We know this means we must constantly listen to them to understand their changing needs, and that we must provide them with fair and transparent products – and customer service – that maintains their trust and faith in our business.
Our Customer Charter, which is available on the Prudential plc website at www.prudential.co.uk/prudential-plc/cr/ cr-principles/customer-charter/ highlights our commitments to our customers. These commitments, together with our customer insights research and ongoing dialogue with our customers, help us to shape the products we develop and the service we deliver.
Prudential Corporation Asia ‘Best in Achieving Total Customer Satisfaction in Life Insurance Category’, Indonesia Customer Satisfaction Awards 2011 – SWA Magazine
‘Best Contribution in Investor Education and Category Enhancement – Mutual Fund’, The Bloomberg UTV Financial Leadership Awards 2011 in India
Jackson ‘World Class’ customer service by Service Quality Measurement Group. This marked the sixth consecutive year in which the company has received both the ‘World Class’ designation for call centre customer satisfaction and a ‘Highest Customer Satisfaction by Industry’ award, achieving the highest rating in financial services1
Professional Adviser Awards 2011, ‘Best Fixed Interest Group (UK and International)’
PCA – serving growing societies In Asia we serve more than 16 million customers with a mix of life insurance, pensions, mutual funds, consumer finance, asset management and health and protection products.
Health care is one example of where protection continues to be increasingly important in many markets across Asia, and in 2011 we further evolved our health-related cover with the launch of PRUearly stage crisis cover.
Beyond health, we recognise the importance of providing practical information and training to help educate young people in the region about the need to prepare for their financial future. We have also introduced new products that help to cater to this need, and PRUlife ready, introduced in 2011, is one example. This is a savings product for young adults, which rewards policyholders as they reach different phases of their lives, including marriage, childbirth and purchasing a home.
Across the region we have a highly trained tied agency force, and we provide ongoing training to both new and experienced agents so that they can deliver the best possible service for our customers. For example, in Indonesia our fully licensed agents receive training at Prudential training centres and accredited institutions, such as the University of Indonesia, to enhance their skills and gain professional qualifications.
Note 1 Service Quality Measurement Group benchmarks more than 450 North American contact centres annually, and has evaluated customer satisfaction for contact centres since 1996.
Throughout 2011, Prudential Corporation Asia also continued to provide a range of tools to help financial advisers and service representatives identify and meet consumers’ needs. For example, an iPad application was launched in Hong Kong integrating advice, sales and service. In Malaysia and Singapore, we continued to develop PRUway, a tool which helps advisers to tailor financial solutions based on an analysis of their customers’ needs.
Jackson – providing security in uncertain times Founded over 50 years ago, Jackson National Life is one of the largest life insurance companies in the United States, providing retirement savings and income solutions, with more than 2.9 million policies and contracts in force.
The economic downturn and demographic changes have led many people to be unprepared as they approach retirement. In 2011 Jackson continued to implement its educational programme, Retirementology, which is designed to help people understand how better to prepare for their financial future.
As well as Jackson’s reputation for financial stability, the company is widely recognised as one of the leading providers of variable annuities, which provide greater security to customers in times of economic uncertainty.
Jackson’s products are sold through banks and broker dealers and last year we continued to increase the number of advisers selling our variable annuity products to more than 140,000 – up 10,000 from 2010 – to make them more widely available to customers.
Jackson also maintained its reputation as a customer service leader last year when it was rated a ‘World Class’ customer service provider – for the sixth consecutive year – by Service Quality Measurement Group (SQM) in its latest benchmark study of North American contact centres. In the same study we also received the ‘Highest Customer Satisfaction by Industry’, achieving the highest rating in the financial services industry.
Prudential UK – helping customers through economic difficulties In the UK, continuing difficult economic conditions have led customers, more than ever, to seek financial products that offer them the highest level of security from companies they feel they can trust.
Annuities are a key product for Prudential UK and market rates were at a historic low during 2011. This means that it is more important than ever for customers looking to take income from their pensions to make informed choices.
2 Source: US Census Bureau. 3 The annual Cogent report is a key industry benchmark study surveying 1,643 advisers.
There is also a growing demand for face-to-face advice, especially for investment and retirement planning. In response, we have set up a new service – Prudential Financial Planning – which was piloted during 2011.
We actively review our operational processes, as we seek to continually improve the level of service we deliver. Some examples include: enabling advisers to submit and track new business applications online; continued reductions in the transfer times between annuity providers; streamlining of the claims payment process; earlier engagement with mortgage providers where we need to understand if they have any further legal interest in a forthcoming maturing, and better use of automated payment technology.
Our financial strength, longstanding commitment to building customers’ trust and listening to our customers have never been more important than during these difficult economic times. A core focus for Prudential UK in 2011 was monitoring the strength of trust in our brand and our understanding of customers’ needs. Independent tracking research – conducted in November 2011 by Opinion Research – identified us as one of the three most trusted life and pension providers in the UK.
Asset management – a history of trust M&G, Prudential’s UK and European asset management business, has served retail and institutional investors for over 80 years, investing customers’ money in equities, fixed income and real estate.
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
M&G’s institutional business also added to its stable of inflation- linked products for pension funds with a new UK social housing debt fund, in addition to £2 billion already invested in the sector.
The business also continues to advance into lending markets that were once the preserve of banks, notably in commercial mortgages and lending to companies.
In 2011, M&G’s UK Companies Financing Fund, set up in 2009 to help fill the lending gap left by banks in the wake of the financial crisis, lent £505 million to mid-cap UK companies.
‘ In 2011, M&G’s UK Companies Financing Fund, set up in 2009 to help fill the lending gap left by banks in the wake of the financial crisis, lent £505 million to mid-cap UK companies. ’
Engaging effectively with our employees is critical to building and sustaining a high-performing business and retaining talent within Prudential. We conduct surveys in our businesses to monitor levels of engagement with Prudential as an employer, identify the effectiveness of our organisation’s structures and practices and highlight areas for improvement. Our successful approach to employee engagement in our UK business was recognised at workingmums.co.uk’s Top Employer Awards in October 2011. We were also commended for our commitment and strategy enabling colleagues, at all levels, to provide feedback on policies such as flexible working, and a willingness to take this on board.
August 2011. 2 Source: TNS Tracking Research Dec 2011 – UK Private Investors.
The diversity of our employees across the Group is fundamental to the growth and success of the business. We believe that great companies not only accept diversity, but also recognise it as a source of innovation and competitive advantage.
At Group level the emphasis is on succession planning for senior roles and development of our overall leadership talent pipeline. Through periodical reviews, the Group Executive Committee ensures that we have a flow of suitable candidates to fill key roles across the organisation. In support of this we have a number of Group-wide programmes including: • Future Forum – which brings together key leadership talent from across the Group to network, develop their thinking and share ideas for application in the business; and
• Jackson: The Jackson University provides business-specific development activities for employees. Jackson’s senior management team play a key role in shaping the curriculum, ensuring it aligns to key corporate initiatives for the business. In addition, the LEAP programme, launched in January 2011 and targeted at senior leaders within Jackson, aims to accelerate their leadership potential and organisational impact.
• Prudential UK: Career development centres are held for middle managers, focusing on their career aspirations and the opportunities available to them.
• M&G: Participation in one of M&G’s Leadership and Talent Development Programmes is identified through the business succession planning process. The programmes are designed to create focused learning networks and active talent communities. Examples include: • The Cornerstone Programme: Focused on developing individuals with the potential to excel among senior management; • The Catalyst Programme: Aimed at more junior talent and focused on developing them into wider and more senior roles; • The Investor Development Programmes: Focused on enabling investment talent to drive investment and business success.
• Group Head Office: The ‘Enhance’ programme offers employees the opportunity to hone their skills for working effectively and includes development in areas such as cross-cultural awareness and building effective partnerships.
We believe it is important for our employees to have the opportunity to benefit 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 2011, 64 per cent of eligible employees participated in one or both of these plans. In Asia, we operate two SAYE schemes, similar to those in the UK. Almost a quarter of eligible employees and 18 per cent of eligible agents participated in these schemes in 2011.
The CRC includes a publicly available annual performance table, which ranks participants’ energy efficiency performance. Credits were awarded for installing automatic meter readers and complying with the BSI Kitemark Energy Reduction Verification scheme, approved by the Environment Agency. As a result of verified energy savings, we were ranked number 531 from 2,103 participants, and were placed well ahead of our peers in our industry.
Three of the funds managed by PRUPIM were awarded a ‘Green Star’ in the Global Real Estate Sustainability Benchmark (GRESB). Around 340 real estate funds with assets worth nearly US$1 trillion participated in the benchmark, covering around 21,000 assets. Only 65 funds were awarded a GRESB Green Star and, by achieving this on three funds, PRUPIM continues to demonstrate leadership by integrating sustainability into its fund management activities.
PRUPIM’s approach and progress can be found in its annual Responsible Property Investment report at www.prupim.com/rpi
All our businesses have community investment programmes in place, guided by committees that determine where funds are best spent.
Across the Group, our activities include a mix of charitable donations, employee volunteering schemes and charity partnerships, many of which we work with directly, on the ground, to develop and implement community projects. Our ethos is to establish long-term relationships with our charity partners to ensure that the projects we support are sustainable. We also work closely with our partners to ensure that our programmes continuously improve.
The diversity of our markets means that our programmes vary from country to country, but a common point of emphasis for our community investment is education. This includes mentoring by employees, financial education and support to improve social mobility.
Note 1 Data based on PRUPIM’s reporting year from April to March.
employees donated to charity through payroll giving schemes £9.1 m Group charitable donations – increase of over 21%
Aside from the Chairman’s Challenge, we also provide ongoing support to additional initiatives to help improve financial knowledge and understanding. In 2011, in response to the growing need for financial education for children across Asia, we launched Cha-Ching Money-Smart Kids, the first programme of its kind in the region, aimed at helping parents to instil money- smart skills in their children.
Following extensive research and working closely with Dr Alice Wilder, the award-winning researcher and child learning expert, we launched a series of three-minute musical animated short stories, broadcast on Turner Cartoon Network – the number one children’s channel in Asia – based on characters in a band and featuring financial education storylines. The episodes are shown daily, reaching over four million homes and seven markets in Asia.
Since 2007, Prudential has also partnered with the Chinese Ministry of Education, the Chinese Academy of Social Science and the Chinese Insurance Regulatory Commission on an insurance education curriculum in schools. The programme has reached more than 26,000 students from 28 schools across seven provinces.
Improving education and skills Another element of our education activity is Prudential UK’s partnership with Business in the Community, which includes the Business Class programme, for which we are a National Champion. Our three-year commitment involves working in partnership with local schools in Reading, Stirling and Westminster to develop a strategic plan to support them in areas such as leadership and governance, the curriculum and employability.
Supporting children beyond education As well as its education support through our global partnership with Junior Achievement, Jackson has a community fund that matches its employees’ donations to approved charities on a two-to-one basis, which includes donations to children’s causes around Jackson’s sites. In addition, in 2011 Jackson continued to partner with the Big Brother Big Sister – the oldest and largest youth mentoring organisation in the US – providing employee mentors for at-risk youth.
Shortlisted projects 2011 • Junior Achievement, Hong Kong: more than 1,700 students benefited from financial management workshops run by over 290 Prudential Assurance Hong Kong volunteers; • Junior Achievement, US: 176 Jackson employees dedicated 651 hours to educating young people in financial literacy skills; • Plan International, Thailand: 230 Prudential employees in Thailand conducted a variety of educational programmes on financial management and disaster relief, benefiting more than 300 students; and
• Prudential UK: 65 employees dedicated 1,884 hours to Age UK’s Call in Time programme, which supports over 500 isolated older people.
During 2011, 37 volunteers from 10 countries spent nine days in Japan supporting relief efforts following the earthquake and tsunami that struck the country in March. The team partnered with local NPO Project Yui, based in Ishinomaki, in the Miyagi prefecture, which was one of the worst-hit areas, assisting with logistics, clearing debris and mentoring children displaced by the tsunami. Prudential Corporation Asia’s Caring Fund also made a donation to the relief effort, and donations made by colleagues were matched by the business.
In 2011 the Group continued to be a partner of Save the Children through support for its Children’s Emergency Fund.
The cash contribution to charitable organisations from Prudential’s non-EU operations – Jackson National Life Insurance Company and Prudential Corporation Asia – amounted to £4.4 million.
It is the Group’s policy not to make donations to political parties nor to incur political expenditure, within the meaning of those expressions as defined in the Political Parties, Elections and Referendums Act 2000. The Group did not make any such donations or incur any such expenditure in 2011.
Accountability and governance The Board The Board discusses the Group’s CR performance at least once a year and also reviews and approves the Group CR Report and strategy on an annual basis.
Responsibility Committee Below the Board, the Responsibility Committee comprises senior representatives from relevant Group functions and each of our core businesses. This committee is responsible for monitoring the Group’s CR activities and reviewing CR policies.
Code of Business Conduct Consideration of environmental, social and community matters is integrated in our Code of Business Conduct. Our code is reviewed by the Board on an annual basis. Refer to page 129 for more information.
Local Governance In M&G, Jackson and Prudential UK there are governance committees in place – with senior management representation – which agree strategy and spend.
Payment policy It is Group policy to agree terms of payment when orders for goods and services are placed, and to pay in accordance with those terms.
o v e rn a n ce 108 Board of directors 113 Governance report: • Corporate governance • Risk governance • Corporate responsibility governance 130 Additional disclosures 131 Index to principal Directors’
Tidjane was previously Group Executive Director and Chief Executive Officer, Europe at Aviva where he worked from 2002 to 2008 and held successively the positions of Group Strategy and Development Director and Managing Director, Aviva International. Tidjane spent the first 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 Cote d’Ivoire and a cabinet member as Secretary of Planning and Development. Tidjane returned to France to become a partner with McKinsey
Tidjane was a non-executive director of Arkema in France until November 2009. He is a member of the Board of the Association of British Insurers (ABI) and a member of the Council of the Overseas Development Institute (ODI) in London. Tidjane is a member of the Africa Progress Panel chaired by Kofi Annan and a sponsor of Opportunity International. In January 2011, he was appointed to chair the G20 High Level Panel for Infrastructure Investment, which reported to the G20 Leaders at the G20 Summit in Cannes in November 2011. Tidjane is a member of the UK-ASEAN Business Council and of the Strategic Advisory Group on UK Trade and Investment. In January 2012, Tidjane was appointed to the Prime Minister’s Business Advisory Group. Tidjane was awarded the Légion d’Honneur by the French President in July 2011. Age 49.
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 43.
Barry Stowe Executive Director Barry Stowe has been an executive director of Prudential since November 2006, and Chief Executive, Prudential Corporation Asia since October 2006. He has been a member of the Board of Visitors of Lipscomb University since May 2009 and was a director of the Life Insurance Marketing Research Association (LIMRA) and the Life Office Management Association (LOMA) from October 2008 to October 2011. Previously, Barry was President, Accident & Health Worldwide for AIG Life Companies. He joined AIG in 1995, and prior to that was President and CEO of Nisus, a subsidiary of Pan- American Life, from 1992 to 1995. Before joining Nisus, Barry spent 12 years at Willis Corroon in the US. Age 54.
Michael Wells Executive Director Mike Wells has been an executive director of Prudential since January 2011 when he succeeded Clark Manning as President and CEO of Jackson National Life Insurance Company. 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 Officer 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 51.
Sir Howard Davies Independent non-executive director, Chairman of the Risk Committee and member of the Audit Committee Sir Howard has been an independent non-executive director of Prudential and Chairman of the Risk Committee since October 2010. He joined the Audit Committee in November 2010. Sir Howard was the Director of the London School of Economics and Political Science (LSE) from September 2003 to April 2011. Prior to joining the LSE, he was Chairman of the Financial Services Authority, the UK’s financial regulator. He is a Professor at the Institut d’Études Politiques (Sciences Po), a director of Morgan Stanley Inc, an external adviser to the Government Investment Corporation of Singapore and a member of the International Advisory Board of the China Banking Regulatory Commission. Age 61.
Michael Garrett Independent non-executive director and member of the Remuneration Committee Michael Garrett has been an independent non-executive director of Prudential and a member of the Remuneration Committee since September 2004. He worked for Nestlé from 1961, becoming Head of Japan from 1990 to 1993, and then Zone Director and Member of the Executive Board, responsible for Asia and Oceania. In 1996 his responsibilities were expanded to include Africa and the Middle East. Michael retired as Executive Vice President of Nestlé in 2005.
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 69.
Ann Godbehere FCGA Independent non-executive director, Chairman of the Audit Committee and member of the Risk Committee Ann Godbehere has been an independent non-executive director of Prudential since August 2007. She has been a member of the Audit Committee since October 2007, becoming its Chairman in October 2009, and joined the Risk Committee in November 2010. Ann began her
Non-Executive Directors 9 Keki Dadiseth FCA 10 Sir Howard Davies 11 Michael Garrett
o v e rn a n ce career in 1976 with Sun Life of Canada, joining Mercantile & General Reinsurance Group in 1981, where she held a number of management roles rising to Senior Vice President and Controller for life and health and property/ casualty businesses in North America in 1995. In 1996 Swiss Re acquired Mercantile & General Reinsurance Group and Ann became Chief Financial Officer of Swiss Re Life & Health, North America. In 1997 she was made Chief Executive Officer of Swiss Re Life & Health, Canada. She moved to London as Chief Financial Officer of Swiss Re Life & Health Division in 1998 and joined the Property & Casualty Business Group, based out of Zurich, as Chief Financial Officer on its establishment in 2001. From 2003 until February 2007, Ann was Chief Financial Officer of the Swiss Re Group.
Alexander (Alistair) Johnston CMG FCA Independent non-executive director and member of the Audit Committee Alistair Johnston has been an independent non-executive director of Prudential and a member of the Audit Committee since January 2012.
Director, a member of the Nomination Committee and Chairman of the Remuneration Committee of Morrisons. He previously chaired the Audit Committee and stepped down from the Board of Morrisons in March 2011. He is also Chairman of Aon Limited, a non-executive director and Chairman of the Audit Committee of KazmunaiGas Exploration & Production Plc, Chairman of Henderson Diversified Income Limited and Chairman of JPM European Smaller Companies Investment Trust Plc. Paul was a director 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. Paul was European CEO of Deutsche Asset Management from 2002 to 2005, global CEO of Rothschild Asset Management from 1999 to 2002 and founding CEO of Threadneedle Asset Management Limited from 1994 to 1999 when he was also a director of Eagle Star and Allied Dunbar. Paul is a member of the Securities Institute. Age 60.
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 and a member of the Governing Board of the Duke-NUS Graduate Medical School. Age 61.
Kathleen O’Donovan ACA Independent non-executive director and member of the Audit and Nomination Committees Kathleen O’Donovan has been an independent non-executive director of Prudential since May 2003. She has been a member of the Audit Committee since 2003 and was its Chairman from May 2006 until September 2009. Kathleen joined the Nomination Committee in November 2010. Kathleen is also a director and Chairman of the Audit Committee of Trinity Mirror plc, the Senior Independent Director and Chairman of the Audit Committee of ARM Holdings plc and Chairman of the Invensys Pension Scheme.
Lord Turnbull KCB CVO Independent non-executive director, Chairman of the Remuneration Committee and member of the Risk and Nomination Committees Lord Turnbull has been an independent non-executive director of Prudential since May 2006. He joined the Risk Committee and the Remuneration Committee in November 2010, and became Chairman of the Remuneration Committee and a member of the Nomination Committee in June 2011. From January 2007 to November 2010 he was a member of the Audit Committee. He entered the House of Lords as a Life Peer in 2005. In 2002 he became Secretary of the Cabinet and Head of the Home Civil Service until he retired in 2005. Prior to that he held a number of positions in the Civil Service, including Permanent Secretary at HM Treasury; Permanent Secretary at the Department of the Environment (later Environment, Transport and the Regions); Private Secretary (Economics) to the Prime Minister; and Principal Private Secretary to Margaret Thatcher and then John Major. He joined HM Treasury in 1970.
Lord Turnbull is Chairman of BH Global Limited and a non- executive director of Frontier Economics Limited and The British Land Company PLC, and was formerly 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 67.
The Board confirms that it has also complied with the HK Code throughout the period other than in respect of the Terms of Reference of the Remuneration Committee as regards making recommendations to the Board in respect of the remuneration of the non-executive directors. It would be inconsistent with the principles of the UK Code for the Remuneration Committee to be involved in setting the fees of non-executive directors.
Leadership Role of the Board The Board is collectively responsible for the success of the Group and provides leadership within a framework of effective controls, enabling appropriate risk management. The Board is responsible for setting strategic objectives and for ensuring the Group is adequately placed and resourced to achieve those objectives, and for ensuring obligations to its shareholders, and wider stakeholders, are met in a manner consistent with its statutory duties.
The executive directors are responsible for running the business operations and the non-executive directors for bringing independent judgement and scrutiny.
In performing its duties, the Board has direct access to the services of the Company Secretary who advises on corporate governance matters, Board procedures and compliance with applicable rules and regulations. Directors have the right to seek independent professional advice at the Company’s expense and copies of such advice are circulated to other directors where applicable and appropriate.
Senior Independent Director Paul Manduca has been the Senior Independent Director throughout the year. The role includes 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. Paul is accessible to all stakeholders who have concerns and where contact through the normal channels may have failed or would be inappropriate.
Meetings The Board held twelve meetings during 2011 and a separate strategy event. A detailed forward agenda has been in operation for a number of years. This is kept updated to reflect not only scheduled regular items of business but also any topical matters arising during the year.
At least one board meeting a year is usually held at a Group business operation in order to facilitate a fuller understanding of that business. In 2011, the Board held one meeting in Hong Kong and undertook two overseas visits, with board meetings in Nashville, USA and Hanoi, Vietnam. On each overseas visit, the directors met with senior members of the management teams in those countries and attended presentations on each of the businesses.
The Chairman met with the non-executive directors without the executive directors being present seven times during the year and the non-executive directors met once during the year without the presence of the Chairman. All directors in office at the time of the Annual General Meeting held on 19 May 2011 attended the AGM with the exception of Keki Dadiseth and Michael Garrett.
Number of meetings in a year 12 10 7 8 5
Executive directors Tidjane Thiam 12(12) – – – – Nic Nicandrou 12(12) – – – – Rob Devey 12(12) – – – – John Foley 12(12) – – – – Michael McLintock 12(12) – – – – Barry Stowe 12(12) – – – – Mike Wells 4 11(12) – – – –
Non-executive directors Keki Dadiseth 5 9(12) – 5(7) – – Howard Davies 12(12) 10(10) – – 5(5) Michael Garrett 12(12) – 7(7) – – Ann Godbehere 11(12) 10(10) – – 5(5) Bridget Macaskill 1 8(8) – 5(5) 2(3) – Paul Manduca 12(12) 10(10) 7(7) 7(8) – Kathleen O’Donovan 11(12) 8(10) – 7(8) – James Ross 2 4(4) – – 2(2) 0(1) Lord Turnbull 3 12(12) – 7(7) 6(6) 5(5)
Notes 1 Ceased to be Chairman of the Remuneration Committee and a member of the Nomination Committee on 14 June 2011, ceased to be a director on 2 Retired as a director and ceased to be a member of the Group Risk and Nomination Committees on 19 May 2011. 3 Appointed as Chairman of the Remuneration Committee and as a member of the Nomination Committee on 14 June 2011. 4 Was unable to attend one meeting due to a pre-existing commitment.
John Foley and Mike Wells were appointed as executive directors on 1 January 2011. John became the Group Chief Risk Officer and Mike took over as President and Chief Executive Officer of Jackson National Life Insurance Company.
James Ross retired as a non-executive director at the conclusion of the 2011 Annual General Meeting on 19 May. He had been succeeded as the senior independent director by Paul Manduca on 1 January 2011. Bridget Macaskill stepped down as a director on 30 September 2011. She was succeeded as Chairman of the Remuneration Committee by Lord Turnbull on 14 June 2011. The biographies of all current directors are set out on pages 108 to 112.
Re-election Directors appointed to the Board since the 2011 Annual General Meeting will stand for election for the first time and, in accordance with the provisions of the UK Code, all other directors will offer themselves for re-election at the Annual General Meeting to be held on 17 May 2012.
The Board believes that the non-executive directors bring a wide range of business, financial and international experience to the Board and its committees. The executive directors, who head up the main businesses of the Group, each bring an in-depth understanding to the Board of their particular business, its markets and its challenges, ensuring coverage of the breadth and depth of the Group’s principal activities.
Independence The independence of the non-executive directors is determined with reference to the UK and HK Codes. Prudential is required to affirm annually the independence of the 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 conflicts of interest.
Keki Dadiseth and Barry Stowe serve as non-executive directors of ICICI Prudential Life Insurance Company Limited, an Indian company which is owned 26 per cent by Prudential. In addition, Keki serves, at Prudential’s request, as a non-executive director of ICICI Prudential Trust Limited, an Indian company which is owned 49 per cent by Prudential. The Board does not consider that these appointments in any way affect Keki’s status as an independent director of Prudential.
Induction and development The 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, among other things, the principal bases of accounting for the Group’s results, the role of the Board and its key committees and the ambit of the internal audit and risk management functions. In addition, they receive detailed briefings on the Group’s principal businesses, its product range, the markets in which it operates and the overall competitive environment. Other areas addressed include the directors’ obligations under the different listing regimes, legal issues affecting directors of financial services companies, the Group’s governance arrangements and its investor relations programme as well as its remuneration policies.
Throughout their period in office directors are regularly updated on the Group’s businesses and the regulatory and industry-specific environments in which it operates, as well as on their legal and other duties and obligations as directors where appropriate. These updates can be in the form of written reports to the Board, presentations by senior executives or by external advisers where appropriate. In order to enhance their knowledge and effectiveness throughout their term in office, non-executive directors serving on key committees are updated regularly on matters specific to the relevant committee and receive presentations from senior executives on topics of interest to them.
Ongoing professional development was undertaken by all directors during 2011. This included a number of sector-specific and business issues as well as legal, accounting and regulatory changes and developments. A number of business unit chief executive officers together with relevant senior executives gave presentations to the Board during the course of the year on the challenges and opportunities currently faced by their business unit. In addition, senior managers within certain head office functions presented to the Board on the key issues currently facing their function and directors received regular briefings on Solvency II. In addition, members of the Group Audit Committee have the option to attend meetings of the business unit audit committees to aid their understanding of topical matters of interest to them and how they are handled by the Group.
In addition, the performance of the non-executive directors and the Group Chief Executive is evaluated by the Chairman in individual meetings. The Chairman also leads the non-executive directors in a performance assessment of the executive directors and the Senior Independent Director leads the non-executive directors in a performance evaluation of the Chairman.
Conflicts of interest Directors have a statutory duty to avoid conflicts of interest with the Company. The Company’s Articles of Association allow the directors to authorise conflicts of interest and the Board has adopted a policy and effective procedures on managing and, where appropriate, approving conflicts or potential conflicts of interest. Under these procedures directors are required to declare all directorships or other appointments to companies which are not part of the Group, as well as other situations which could result in conflicts or could give rise to a potential conflict. The Nomination Committee, or the Board where appropriate, evaluates and approves each such situation individually where applicable.
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 conflicts of interest and any possible issues arising out of the time commitments required by the new role can be identified and addressed appropriately. The major commitments of our non-executive directors are detailed in their biographies set out on pages 110 to 112.
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 financial risks. Business units are also required to follow any additional processes necessary to comply with local statutory and regulatory requirements.
Further details on the procedures for the management of risk and the systems of internal control operated by the Group are given in the section on Risk Governance on pages 124 and 125. 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 Group Chief Executive has been delegated management authority by the Board and in turn grants authority to the executive, including the chief executive officers of each business unit who report to him for the management of that business unit. In addition, each of those chief executives has established a management board comprising the business unit’s most senior executives.
The chief executive and chief financial officer of each business unit, as well as the senior management in Group head office, annually certify compliance with the Group’s governance, internal control and risk management requirements. The risk management function reviewed any matters identified by the certification 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 identified and reported by other Group head office oversight functions and the findings 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 Group Audit Committee.
• Five non-executive directors *As at 12 March 2012. Kathleen O’Donovan will retire from the Board, the Group Audit Committee and the Nomination Committee on 31 March 2012.
Responsibilities The Committee’s principal business during the year consisted of the following: • Monitoring the integrity of the financial statements, including the review of half- and full-year results, the annual report and accounts and other significant financial announcements and reviewing the critical accounting policies and key judgmental areas contained therein; • Monitoring of the framework and effectiveness of the Group’s systems of internal control, including the Turnbull compliance statement and Sarbanes-Oxley procedures; • Monitoring auditor independence and the external auditor’s plans and audit strategy, the effectiveness of the external audit process, the external auditor’s qualifications, expertise and resources, and making recommendations for the re-appointment of the external auditor; • Reviewing the internal audit plan and resources, and monitoring the audit framework and effectiveness of the internal audit function; • Monitoring the effectiveness of compliance processes and controls, and performance against the Group Compliance Plan; • Reviewing the anti-money laundering procedures in place, as well as the review of procedures operated for handling allegations from whistleblowers; and
Membership The Committee is comprised of independent non-executive directors as set out below: • Ann Godbehere (Chairman)
The membership is selected to provide a broad set of financial, commercial and other experience relevant to meet the Committee’s objectives.
By invitation, the Chairman of the Board, the Group Chief Executive, the Chief Financial Officer, the Group General Counsel and Company Secretary, the Group-wide Internal Audit Director, the Group Chief Risk Officer and other senior staff from the group finance, internal audit, risk, compliance and security functions attended some of the meetings to contribute to the discussions relating to their respective areas of expertise. The lead and other partners of the external auditor also attended the meetings.
A detailed forward agenda has been in operation for a number of years and is reviewed and updated continually to ensure all matters for which the Committee is responsible are addressed at the appropriate time of year.
The Committee Chairman reported to the Board on matters of particular significance after each meeting and the minutes were circulated to all Board members. The Committee regularly reviews its Terms of Reference, which were last refreshed and recommended to the Board for approval in December 2011.
Effectiveness 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 specific 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 fulfilled its responsibilities under the terms. A memorandum summarising the findings of the review, as well as any action points, is compiled for each business unit audit committee.
• be put in the role of advocate for the Group.
Following its review of the external auditor’s effectiveness and independence, the Committee has recommended to the Board that KPMG Audit Plc be re-appointed as auditor of the Company and a resolution for the re-appointment of KPMG Audit Plc as auditor of the Company will be put to a shareholder vote at the Annual General Meeting on 17 May 2012.
Role of the Committee The Committee in consultation with the Board, evaluates the balance of skills, knowledge and experience of the Board, taking into account the Group’s business and with due regard for the benefits of diversity, including gender, identifies the roles and capabilities required to meet the demands of the business. Candidates are considered on merit against specific criteria and the Committee makes recommendations to the Board regarding suitable candidates for appointment to the Board.
Responsibilities The Committee’s principal business during the year consisted of the following: • Reviewing the size, structure and composition of the Board, including the skills, knowledge, experience and diversity of Board members, and making recommendations to the Board with regard to any changes; • Identifying and nominating candidates for appointment to the Board, based on merit and against objective criteria; • Making recommendations on the appointment and removal of any members of the audit, risk, remuneration and nomination committees in consultation with the Chairman of those Committees; and
During 2011, the Committee met on eight occasions and details of Committee members’ attendance is set out on page 114.
The Committee Chairman reported to the Board on matters of particular significance after each meeting.
The responsibilities of the Group Risk Committee (the ‘Committee’) and the activities it carried out during the year are set out below.
Role of the Committee The Committee provides leadership, direction and oversight in relation to the Group’s overall risk appetite and tolerance and the risk management framework. Oversight of the framework includes reviewing the Group’s risk policies and standards, supporting risk limits, methodologies adopted and the processes and controls in place for assessing the Group’s risks.
• Providing qualitative and quantitative advice to the Remuneration Committee on risk weightings applied to performance objectives incorporated in executive remuneration and evaluating whether the remuneration approach for senior executives was positioned within the Group’s overall risk appetite framework.
The Committee’s terms of reference, which are set by the Board and kept under regular review, are available on our website at www.prudential.co.uk/prudential-plc/aboutpru/corporate governance/ Alternatively, copies may be obtained by writing to the Company Secretary at the registered office.
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 Group Audit Committee and works closely with that Committee in fulfilling the Committee’s responsibilities.
During 2011, the Committee met on five occasions and details of Committee members’ attendance is set out on page 114.
The Committee was constituted in November 2010 and agreed the work plan for its first year of operation early in 2011. The Committee undertook a comprehensive analysis of the Group’s key risks and received presentations by the relevant managers in these areas. The Committee further received presentations from certain of the business units on the particular risks inherent in those businesses, as well as the systems and controls in place to monitor and manage those risks. The Group Chief Risk Officer briefed the Committee on the structure and organisation of the Group Risk function. The Committee worked closely with the Group Audit Committee to ensure any risk assurance relevant to financial reporting was referred to the Group Audit Committee and with the Remuneration Committee on providing risk adjustment measures for executive remuneration.
The Committee Chairman reported to the Board on matters of particular significance after each meeting and the minutes were circulated to all Board members.
Board-level Committees GEC Group Executive Committee BSCMC Balance Sheet & Capital Management Committee GERC Group Executive Risk Committee GCRC Group Credit Risk Committee GORC Group Operational Risk Committee STOC Solvency II Technical Oversight Committee (permanent successor to Technical Assurance Committee)
Material risks will only be retained where this is consistent with Prudential’s risk appetite framework and its philosophy towards risk-taking, that is: • the retention of the risk contributes to value creation; • the Group is able to withstand the impact of an adverse outcome; and
The Group has five objectives for risk and capital management: Framework: Design, implement and maintain a capital management and risk oversight framework consistent with the Group’s risk appetite and Risk-Adjusted Profitability model.
Business units review their risks as part of the annual preparation of their business plans, and review opportunities and risks against business objectives regularly with Group Head Office. Group Risk reviews and reports to Group Head Office on the impact of large transactions or divergences from the business plan.
Communication with shareholders As a major institutional investor, the Company is very aware of the importance of maintaining good relations with its shareholders. Discussions are held regularly with major shareholders and a programme of meetings took place throughout the year. In addition, Prudential also held an investor conference in November in Kuala Lumpur, Malaysia.
Board members regularly receive copies of the latest analysts’ and brokers’ reports on the Company and the sector to further develop their knowledge and understanding of external views about the Company. The Chairman and the non-executive directors provided feedback to the Board on topics raised with them by major shareholders. Should major shareholders wish to meet newly appointed directors, or any of the directors generally, they are welcome to do so.
At the 2011 Annual General Meeting the Company continued its practice of calling a poll on all resolutions. The voting results and all proxies lodged prior to the meeting were displayed at the meeting and published on the Company’s website. This practice provides shareholders present with sufficient information regarding the level of support and opposition to each resolution and ensures all votes cast either at the meeting or through proxies are included in the result.
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 identifies 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 sufficient requests to require the circulation are received prior to the financial year end preceding the meeting. Written shareholder requests should be addressed to the Company Secretary at the registered office.
Any change to the Articles must be approved by special resolution of the shareholders in accordance with the provisions of the Companies Act 2006. There were no changes to the Company’s constitutional documents during 2011.
Share capital On 31 December 2011, the Company’s issued share capital, which is set out in note H11 on page 337, consisted of 2,548,039,330 (2010: 2,545,594,506) ordinary shares of 5 pence each, all fully paid up and listed on the London Stock Exchange and the Stock Exchange of Hong Kong. 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 registers at 31 December 2011 was 63,338 (2010: 66,048). The Company 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’).
Rights and obligations The rights and obligations attaching to the Company’s shares are set out in full in the Company’s Articles of Association. There are currently no voting restrictions on the ordinary shares, all of which are fully paid, and each share carries one vote on a poll. If votes are cast on a show of hands, each shareholder present in person or by proxy, or in the case of a corporation, each of its duly authorised corporate representatives, has one vote except that if a proxy is appointed by more than one member, the proxy has one vote for and one vote against if instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution.
Where, under an employee share plan operated by the Company, participants are the beneficial 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.
Certain restrictions may be imposed from time to time by applicable laws and regulations (for example, insider trading laws) and pursuant to the Listing Rules of both the Financial Services Authority and the Stock Exchange of Hong Kong, as well as Prudential’s own share dealing rules, whereby directors and certain employees of the Company require the approval of the Company to deal in the Company’s ordinary shares.
Details of shares issued during 2011 and 2010 are given in note H11 on page 337.
Model code for securities transactions by directors The Company confirms that it has adopted a code of conduct regarding securities transactions by directors on terms no less exacting than required by Appendix 10 of the Hong Kong Listing Rules, and that the directors of the Company have complied with this code of conduct throughout the period.
In particular, in relation to the provisions of Section 302 of that Act, which covers disclosure controls and procedures, a Disclosure Committee has been established reporting to the Group Chief Executive, chaired by the Chief Financial Officer and comprising members of senior management. The objectives of this Committee are to: • assist the Group Chief Executive and the Chief Financial Officer in designing, implementing and periodically evaluating the Company’s disclosure controls and procedures; • monitor compliance with the Company’s disclosure controls and procedures; • review and provide advice to the Group Chief Executive and Chief Financial Officer with regard to the scope and content of all public disclosures made by the Company which are of material significance to the market or investors; and
The Corporate Responsibility team, which is located in our Group Head Office, develops Prudential’s corporate responsibility strategy and works closely with individual business units to provide advice. The team also assists with the development and adaptation of Group-wide initiatives so that they not only fit with our overall Group principles but are also adapted to meet local needs.
Going Concern After making enquiries the directors have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for the foreseeable future. In support of this expectation, the Company’s business activities, together with the factors likely to affect its future development, successful performance and position in the current economic climate are set out in the Business Review on pages 15 to 106. The risks facing the Group’s capital and liquidity positions and their sensitivities are referred to in the Chief Financial Officer’s Review. Specifically, the Group’s borrowings are detailed in note H13 on pages 340 to 342, the market risk and liquidity analysis associated with the Group’s assets and liabilities can be found in note G2 on pages 316 to 320, policyholder liability maturity profile by business units in notes D2, D3, D4 on pages 244, 266 and 275 respectively, cash flow details in the consolidated statement of cash flows and provisions and contingencies in note H14. The directors therefore have continued to adopt the going concern basis of accounting in preparing the financial statements.
Post-balance sheet events Important events affecting the Company after the end of the financial year are detailed in note I11 on page 370.
Essential contracts or arrangements There are a number of significant relationships with third parties, which have value to the business. No single relationship, however, is considered to be essential to the Group as a whole.
Compensation for loss of office None of the terms of employment of the Company’s directors includes provisions for payment of compensation for loss of office or employment that occurs as a result of a change of control. Terms applying on a termination of their office are set out in the Directors’ Remuneration Report. In the US senior executives participate on a discretionary basis in a plan which entitles them to compensation, in the event that their employment is terminated or adversely affected as a result of a change of control.
Customers The five largest customers of the Group constituted in aggregate less than 30 per cent of its total sales for each of 2011 and 2010.
Directors in office during the year Board of directors 108-112; 115
Future developments of the business of the Company Group Chief Executive’s report 14
Creditors – policy on payment and practice Corporate responsibility review 106
• To reward executives for delivering our business plans and generating sustainable growth and returns for shareholders.
In order to achieve the second of these aims, the Group’s reward arrangements are robustly connected to the achievement of its key financial objectives and support its approach to risk management. The Group believes that increasing new business profitability, IFRS profitability and cash generation simultaneously will create sustainable growth. The combination of measures used to determine annual bonuses rewards the achievement of all three of these objectives, attained whilst maintaining adequate levels of capital and adhering to the Group’s risk appetite. The performance measure for our Group long-term incentive plan is Total Shareholder Return (the combination of share price growth and dividends paid). This performance measure ensures that the interests of our executives are closely aligned with those of shareholders.
Our 2011 results built on the strong performance over recent years which has delivered significant value to our shareholders. Over the last three financial years, Prudential’s share price and dividend payments have grown; £1 invested in Prudential in January 2009 was worth more than £2 at the end of December 2011. This return for shareholders has significantly outperformed that produced by our peers in the international insurance industry. Since the growth of our share price and dividend payments relative to an index of our peers determines the vesting of Group Performance Share Plan awards, the awards made in 2009 will be released in full.
The UK Government has put forward proposals aimed at increasing the information available to shareholders in the remuneration report. We have anticipated the likely changes and, in the spirit of transparency, have included additional information on the compensation for our directors in 2012 in this year’s report. You will see that we are continuing to ensure that our total remuneration packages remain competitive. The structure of remuneration for 2012 is substantially the same as that in 2011 and it will reward the delivery of the Group’s business priorities and returns to shareholders.
I trust that you will support the policies outlined in our 2011 report.
The Remuneration Committee The Committee is responsible for: • Determining the remuneration policy for the Chairman and approving the remuneration of the executive directors of the Company; • Monitoring the remuneration of a defined leadership population and for individuals with the opportunity to earn over £1 million per annum.
February 2011 • Review the requirements of the latest governance guidelines and consultations, including the FSA’s revised Remuneration Code; • Approve the 2010 Directors’ remuneration report; • Consider 2010 annual bonuses and the vesting of 2008 long-term incentive awards.
• Determine 2010 annual bonuses and the vesting of 2008 long-term incentive awards in light of audited financial results for 2010.
June 2011 • Consider the remuneration of the Group Leadership Team (comprising around 100 senior individuals including the Group Executive Committee), senior risk staff and of employees with a remuneration opportunity over £1 million per annum; • Consider trends in remuneration corporate governance and the competitive landscape; • Review current executive remuneration structures; • Note the dilution levels resulting from the Company’s share plans.
During 2011 Deloitte LLP were reappointed as the independent adviser to the Committee following a competitive tender process. Advice was also provided by PricewaterhouseCoopers LLP. Market data was sourced from Deloitte LLP, PricewaterhouseCoopers LLP, Towers Watson, McLagan Partners and LOMA. Linklaters, Norton Rose and Slaughter & May provided legal counsel, including advice on employment law and the operation of the Company’s share plans. Some of these firms also provided other services to the Company: Deloitte LLP and PricewaterhouseCoopers LLP in relation to Solvency II, taxation and other financial matters, Towers Watson in relation to actuarial advice and Slaughter & May and Norton Rose in relation to commercial, corporate and general legal advice.
• Reward arrangements are designed to be consistent with the Group’s risk appetite and minimise regulatory and operational risk.
Benchmarked against the relevant market for the role, taking into account the individual’s contribution and experience. Market position is compared with companies of similar size and complexity to Prudential in the relevant market(s) for the role.
The Committee reviews salaries annually. Changes in base salaries are generally effective from 1 January.
Deferral reinforces the need for annual results to be grounded in business performance which is sustained over the longer term.
Executive directors are required to defer between 30 per cent and 50 per cent of annual bonus (for Michael McLintock, 50 per cent of bonus over £500,000 is deferred) into Prudential shares for three years.
Encourage executives to build an interest in the Company’s shares and support alignment with shareholder interests.
The Group Chief Executive and Chief Executive of M&G are required to build up and hold shares equal to 200 per cent of base salary. Other executive directors are required to build up and hold shares equal to 100 per cent of base salary.
Offer all employees an opportunity to participate in the success of the Company.
Benefits Provide health and security benefits as part of the fixed element of remuneration.
It is the Company’s policy to provide efficient pension plans to allow executive directors to save for their retirement. The Company’s policy for all external appointments since June 2003 has been to provide a pension contribution as a fixed percentage of salary.
Base salary Cash bonus for 2011, paid in 2012 Deferred bonus for 2011, vesting in 2015 2011 LTIP Award, vesting in 2014 reward for our executive directors (average of executive directors): Superior performance
Base salary Cash bonus for 2011, paid in 2012 Deferred bonus for 2011, vesting in 2015 2011 LTIP Award, vesting in 2014
These performance measures have been selected because they recognise the importance of generating profit while maintaining cash flow and capital coverage. Please see the Financial Statements and the Risk and Capital Management section of the Business Review for full definitions of these measures. Michael McLintock’s annual bonus plan incorporated business unit measures including M&G investment performance and M&G IFRS operating profit (excluding PruCap). The performance measures for Mike Wells’ annual bonus included Jackson’s IFRS pre-tax operating income and EEV new business profit.
A portion of the annual bonus for each executive director is based on the achievement of personal objectives. These objectives include the executive’s contribution to Group strategy as a member of the Board and specific goals related to their functional and/or business unit role (for instance, project measures relating to the implementation of Solvency II requirements). In addition, all employees are required to comply with the regulatory, governance and risk management practices and policies as these relate to their role and business area. Specifically, all business units must act within the Group’s risk appetite.
Part of the annual bonus is deferred A proportion of each executive director’s annual bonus is not paid in cash and must be deferred. This portion is deferred for three years in the form of the Company’s shares. This deferral aligns the interests of our executive directors with our shareholders and helps to ensure a focus on the sustainable success of the Company.
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 160% 40% of total bonus 80% – 20% Barry Stowe 160% 40% of total bonus 20% 60% 20% Tidjane Thiam 180% 50% of total bonus 80% – 20% Mike Wells c.385%(note 2) 30% of total bonus 30% 60% 10%
Notes 1 Michael McLintock’s annual bonus and long-term incentive opportunities are based on M&G’s performance both in absolute terms and relative to its peers. In line with practice in the asset management sector, there is no specified maximum incentive award. Michael’s total remuneration (including long-term incentives) is subject to an overriding cap which requires that his total remuneration must not be greater than 3 per cent of M&G’s annual IFRS profit.
2 Mike Wells’ annual bonus figure and the weighting of measures comprise 160 per cent of salary and a 10 per cent share of the Jackson senior management bonus pool based on the target performance of Jackson.
Rewarding 2011 performance During 2011, the Group delivered growth in new business profits, IFRS profits and cash generation. In each of these three important areas, the Group exceeded both the performance achieved in 2010 and the stretching targets set by the Committee at the start of 2011, notwithstanding challenging global market conditions. All other financial targets set for the 2011 annual bonus plan were also exceeded, with achievement against most reaching or approaching the level required for maximum bonus payments. On the basis of this performance, the Committee approved the 2011 bonus payments set out on page 148.
Group Performance Share Plan All executive directors participate in the GPSP. Awards vest on the basis of the Group’s Total Shareholder Return (TSR) performance over a three-year period. Total Shareholder Return is the combination of the share price growth and the dividends paid. Prudential’s TSR performance over the performance period is compared with the TSR performance 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 benefits of simplicity and directness of comparison.
For any GPSP award to vest, the Committee must be satisfied that the quality of the Company’s underlying financial performance justifies the level of reward delivered at the end of the performance period. To ensure close alignment with our shareholders’ long-term interests, participants receive the value of reinvested dividends over the performance period for those shares which ultimately vest. If performance measures are not achieved in full, the unvested portion of any award lapses and performance cannot be retested.
Prudential TSR v peer group total returns index % over the three years to December 2011
For any BUPP award to vest, the Committee must be satisfied that the quality of underlying financial performance of the relevant business unit justifies the level of reward delivered at the end of the performance period. To ensure close alignment with our shareholders’ long-term interests, participants receive the value of reinvested dividends over the performance period for those shares which ultimately vest. If the performance conditions are not achieved in full, the unvested portion of any award lapses and cannot be retested.
Asia BUPP In 2009, 2010 and 2011 Barry Stowe was granted Asia BUPP awards with a performance measure based on the growth of the Shareholder Capital Value (SCV) of the Asian business. SCV represents shareholders’ capital and reserves on a European Embedded Value (EEV) basis for each business unit.
Over this period we redirected the key metrics so that the performance of the Asian business has been managed and measured based on three core metrics of new business profit, IFRS profit and cash remittance. Given the success of this approach, SCV has been de-emphasised in the way that we manage and measure the PCA business and the associated reward mechanisms.
On 31 December 2011, the performance period for the 2009 Asia BUPP award (which began on 1 January 2009) came to an end. Over the period, the new business profit, IFRS profit and cash remittance achieved by the Asian business meant that the Committee, having satisfied itself as to the quality of the business units’ underlying financial performance, confirmed vesting of 86.50 per cent of Barry Stowe’s 2009 Asia BUPP award (for reference, 30 per cent of Barry Stowe’s 2008 Asia BUPP award vested). Please see pages 151 and 152 for details.
M&G Executive Long-Term Incentive Plan In 2009, 2010 and 2011 Michael McLintock was granted M&G Executive LTIP awards. 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 profitability over the three-year performance period with profit and investment performance adjustments also applied: Profit growth The value of phantom shares vesting will be adjusted by a profit measure as follows: • No adjustment will be made if profits in the third year of the performance period are at least equal to the average annual profit generated over the performance period; • A loss or zero profit will result in the value of the award being reduced to zero, irrespective of investment performance; • Between these points, the value of phantom shares will be reduced on a straight line basis from no reduction to the complete elimination of the value of the award.
The number of phantom shares awarded depends on the performance of M&G and Michael McLintock’s individual contribution in the financial year prior to the year in which the award is made. Therefore, the number of phantom shares to be awarded in 2012 relates to M&G’s performance in 2011 and is calculated on the basis of the award’s expected value. The expected value of the award is determined by a third party (PricewaterhouseCoopers LLP). Based on 2011 performance, an award of 952,960 phantom shares with an anticipated value of £1,238,849 will be made to Michael McLintock in 2012. The ultimate value of the award will be determined with reference to the profit and investment performance of M&G over the three years from 1 January 2012 to 31 December 2014. Based on 2010 performance, an award of 1,318,148 phantom shares with an anticipated value of £1,779,500 was made to Michael McLintock in 2011.
Jackson Long-Term Incentive Plans 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% of the original number of ADRs awarded under the JNL Performance Share Plan may be released if stretch performance targets are achieved.
Outstanding awards made to Mike Wells before his appointment as an executive director will remain subject to the original performance conditions and vesting schedule. No further awards will be made to Mike Wells under these plans.
All-employee share plans It is important that all employees are offered the opportunity to own shares in Prudential, connecting them both to the success of the Company and to the interests of other shareholders. Executive directors are invited to participate in these plans on the same basis as other staff in their location.
Rob Devey 100% 146% John Foley 100% 423% Michael McLintock 200% 1,086% Nic Nicandrou 100% 195% Barry Stowe(note 2) 100% 274% Tidjane Thiam 200% 461% Mike Wells(note 2) 100% 449%
Mike Wells is eligible to participate in Jackson’s Defined Contribution Retirement Plan, a qualified 401(k) retirement plan, on the same basis as all other US-based employees. The Company provides matching contributions of 6 per cent of base salary (Mike Wells’ salary for pension purposes is limited to $245,000). He is also eligible to participate in the profit sharing element of the plan which provides eligible participants with an annual profit sharing contribution, depending on the financial results of Jackson for the plan year, to a maximum of an additional 6 per cent of pensionable salary. An annual profit sharing contribution equivalent to 5 per cent of pensionable salary was made in 2011 (in 2010, the profit share contribution was 5 per cent of pensionable salary). Mike Wells is provided with life assurance cover of two times salary.
Components of 2012 remuneration Prudential’s remuneration structures for 2012 are unchanged from those used in 2011, detailed in the preceding pages. A review of these structures will take place in 2012 for implementation in 2013, subject to shareholder approval (if required) at the 2013 AGM.
Barry Stowe Chief Executive, PCA • Towers Watson Asian Insurance Survey
Notes 1 Excludes Japan and Taiwan agency. 2 In 2010, the Group amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. The prior period comparatives for 2009 and 2008 have been amended accordingly. Excludes Taiwan agency.
In light of the Remuneration Committee’s compensation review and the Company’s sustained performance, changes were made to the remuneration for the executive directors for 2012.
Rob Devey Chief Executive, UK & Europe £600,000 160% 40% of total bonus 112.5% 112.5% 225.0%
Nic Nicandrou Chief Financial Officer £630,000 175% 40% of total bonus 225.0% – 225.0% Barry Stowe Chief Executive, PCA £641,000 160% 40% of total bonus 112.5% 112.5% 225.0% Tidjane Thiam Group Chief Executive £1,000,000 200% 50% of total bonus 400.0% – 400.0% Mike Wells President & CEO, JNL £655,000 note 2 30% of total bonus 230.0% 230.0% 460.0%
On a policy basis, the package for 2012 will offer the following proportions of fixed and variable and short- and long-term reward to executive directors (average of executive directors): Good performance
Base salary Cash bonus for 2012, paid in 2013 Deferred bonus for 2012, vesting in 2016 2012 LTIP Award, vesting in 2015
‘Good’ performance results in the payment of plan annual bonuses in respect of 2012 and 2012 long-term incentive awards vesting at the threshold level.
Service contracts Executive directors’ service contracts and letters of appointment The normal notice of termination that the Company is required to give executive directors is 12 months. Accordingly, in normal circumstances, a director whose contract is terminated would be entitled to one year’s salary and benefits in respect of their notice period. Additionally, outstanding awards under annual and long-term incentive plans may vest depending on the circumstances and according to the rules of the plans. When considering the termination of any service contract, the Remuneration Committee will have regard to the specific circumstances of each case, including the director’s obligation to mitigate his loss. Payments are phased over the notice period.
5 James Ross retired from the Board at the AGM on 19 May 2011.
Notes 1 No fee is payable for chairmanship or membership of the Nominations
Committee. 2 The Company may determine that additional fees should be paid if, in a particular year, the number of meetings is materially greater than usual.
Harvey McGrath will retire from the Board in 2012 when a successor has been found.
Directors’ shareholdings The interests of directors in ordinary shares of the Company are set out below. This includes shares acquired under the Share Incentive Plan (detailed in the table on page 155), deferred annual incentive awards and interests in shares awarded on appointment (detailed in the ‘Other Share Awards’ table on pages 153 to 155). All interests are beneficial.
Keki Dadiseth 30,655 32,196 32,196 Howard Davies 575 3,083 3,083 Rob Devey 78,261 126,006 126,006 John Foley 535,386 364,378 364,378 Michael Garrett 36,972 39,233 39,233 Ann Godbehere 14,628 15,914 15,914 Alistair Johnston (note 1) – – – Bridget Macaskill(note 2) 44,006 – – Paul Manduca 1,260 2,500 2,500 Harvey McGrath 299,540 300,636 300,636 Michael McLintock 604,390 595,363 595,363 Kaikhushru Nargolwala (note 3) – – 16,000 Nic Nicandrou(note 4) 133,555 167,655 167,724 Kathleen O’Donovan 23,484 24,425 24,425 James Ross(note 5) 21,190 – – Barry Stowe(note 6) 264,437 274,575 274,575 Tidjane Thiam 273,025 650,116 650,116 Lord Turnbull 15,589 16,624 16,624 Mike Wells(note 7) 293,842 438,718 438,718
5 James Ross retired from the Board on 19 May 2011. 6 Part of Barry Stowe’s interest in shares is made up of 77,724 ADRs
(representing 155,448 ordinary shares. 8,513.73 of these ADRs are held within an investment account which secures premium financing for a life assurance policy).
7 Mike Wells’ interest in shares is made up of 219,359 ADRs (representing 438,718 ordinary shares).
Chairman Harvey McGrath 500 – – – 82 – 582 – 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
Total non-executive directors 987 987 * Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and expatriate benefits.
Notes 1 John Foley and Mike Wells were appointed to the board on 1 January 2011. 2 Barry Stowe’s benefits relate primarily to his expatriate status, including costs of £184,489 for housing, £32,077 for children’s education, £35,093 for home leave and a £245,114 Executive Director Location Allowance.
3 Mike Wells’ bonus figure excludes a contribution of $12,250 from a profit sharing plan which has been made into a 401(k) retirement plan. This is included in the table on pension contributions on page 156.
Total non-executive directors 700 700 * Benefits include (where provided) the use of a car and driver, medical insurance, security arrangements and expatriate benefits. † Pension supplements that are paid in cash and contributions to the LTSP and/or the ARBS are included in the table. ‡ Value of anticipated long-term incentive plan releases is the total of cash paid plus, for shares released, the value of the released shares based on the share price at 31 December 2010.
Notes 1 Rob Devey elected not to receive his cash supplement for pension purposes in full during 2010. The Company made a request to the Trustees of the Alternative Retirement Benefit Scheme to accept a contribution equivalent to this supplement. The value of this contribution is included in the table above.
2 Nic Nicandrou elected not to receive his cash supplement for pension purposes in full during 2010. The Company made a request to the Trustees of the Long Term Savings Plan to accept a contribution equivalent to this supplement. The value of this contribution is included in the table above.
3 Barry Stowe’s benefits relate primarily to his expatriate status, including costs of £153,384 for housing, £47,639 for children’s education and £42,509 for home leave.
Payments and share releases in 2011 to past executive directors Mark Tucker The 2008 Directors’ remuneration report provided details of the remuneration arrangements which applied to Mark Tucker following his resignation as Group Chief Executive. These arrangements were implemented as intended by the Committee.
On 31 December 2010, the performance period for Mark Tucker’s 2008 GPSP award came to an end. His GPSP award was prorated for service (21/36ths) and its vesting remained dependent on TSR performance achieved over the three-year performance period. Since this condition was met in full, Mark Tucker’s prorated 2008 GPSP award vested and was released at the same time as for all other participants in the GPSP. This award was the last that Mark Tucker had outstanding under a Prudential long-term incentive plan.
The performance periods of Nick Prettejohn’s GPSP and UK BUPP awards for 2008 and 2009 ended on 31 December 2010 and 31 December 2011 respectively. Vesting was prorated based on service (ie 21/36ths and 9/36ths). Vesting remained dependent on performance achieved over the performance period and shares were released at the same time as for all other participants in these plans.
During 2011, Clark Manning received the following payments: • Salary and benefits were paid to Clark Manning until 31 December 2011; • Clark Manning had a prorated 2011 annual bonus opportunity (4/12ths) based on his length of service as Chairman of Jackson during 2011. On this basis, a cash payment of £725,389 will be made to him in 2012; • The deferred portion of the bonus awarded to Clark Manning in respect of performance in 2007 was released to him in March 2011. Other outstanding deferred bonus shares will be released to Clark Manning in July 2012.
• Achievement of the SCV performance measure attached to the 2008 JNL BUPP award was not achieved and so no part of the award vested.
The performance condition attached to the 2009 GPSP award was met in full and 100 per cent of the award will be released during 2012. Achievement of the SCV performance measure attached to the 2009 Jackson BUPP award was 11.5 per cent per annum (on a compound basis), so 93.75 per cent of the outstanding portion of this award will be released during 2012.
Payments and share releases in 2011 to newly appointed executive directors Shares awards made to Tidjane Thiam and Nic Nicandrou in connection with their appointment were released, as scheduled, during 2011. Details of these awards were originally set out in the Directors’ remuneration reports for 2008 and 2009. Please see the Other Share Awards table on pages 153 to 155 for details.
2 The awards for Mike Wells were all made in ADRs (1 ADR = 2 Prudential plc shares). The figures in the table are represented in terms of Prudential shares. 3 In 2009 and 2010 a scrip dividend equivalent and in 2011 a DRIP dividend equivalent was accumulated on these awards. 4 The table above reflects the maximum number of shares (150 per cent of the original awarded) which may be released to Mike Wells under the