A d d itio n al in fo rm atio n 01 Prudential plc Annual Report 2013
report disclosures 4 Remuneration report 89–123 90 Annual statement from the Chairman of the Remuneration Committee 92 Our executive remuneration at a glance 94 Directors’ remuneration policy 107 Annual report on remuneration 120 Supplementary information 5 Financial statements 125–293 6 European Embedded Value (EEV) basis results 295–332 7 Additional information 333–374 334 Additional unaudited financial information 362 Risk factors 367 Glossary 371 Shareholder information 373 How to contact us 06 07Prudential plc Annual Report 2013 Group overview Prudential plc Annual Report 2013
Proactive risk management by our no-guarantees Elite Access variable annuity product, which delivered sales volumes of £2,585 million ($4,045 million) in 2013, three times those achieved in 2012. In the UK, we continue to focus on value over volume, with retail APE sales lower by 12 per cent as the market adjusts to the post-Retail Distribution Review environment, while retail new business profits were 3 per cent lower year-on-year, as we have partially offset the impact of lower volumes through pricing and product actions. M&G has delivered strong net inflows of £9.5 billion (2012: £16.9 billion including one institutional debt mandate of £7.6 billion) as it benefits from record levels of retail sales from Continental Europe, while Eastspring Investments, our Asia asset management business, reported stable net inflows5 of £1.6 billion (2012: £1.6 billion).
— At full year 2013, Asia delivered new business profits of £1,460 million, ahead of its objective of doubling 2009 new business profits to £1,426 million.
I am pleased to report a strong performance in 2013. This performance has enabled us to deliver all of our six 2013 ‘Growth and Cash’ objectives. Over the four-year period we gave ourselves to achieve these objectives, the Group’s performance has been transformed, with all our business units now making significant contributions to both earnings and cash generation from a starting point where in 2008 most of the Group’s earnings and cash were coming from our historic UK business.
The Group’s strategy remains unchanged and is focused on capturing three significant opportunities across our three geographic markets: (i) in Asia, the significant and growing protection needs of the emerging middle class, particularly in our ‘sweet spot’ markets of South-east Asia; (ii) in the US, the financial needs of the ‘baby-boomers’ as they transition into retirement; and (iii) in the UK, meeting the savings and retirement income needs of an ageing population. Our disciplined execution of this strategy has continued to drive profitable growth and higher cash generation, underlining our commitment to delivering both ‘Growth and Cash’.
Our strategy and operating principles 17 Prudential plc Annual Report 201316 Prudential plc Annual Report 2013 Strategic report
This has, in turn, transformed the capital dynamics of our Group: for example, the free capital generated from our existing life and asset management operations reached £3.1 billion in 2013 compared to £2.1 billion five years ago. This transformation enabled our business operation to remit £1,341 million to the Group, nearly double the level of remittance five years ago.
We aim to have clarity and consistency internally and externally in the performance indicators that drive our businesses. Alongside this we develop our financial disclosures to enable our external stakeholders to fairly assess our long-term performance. We have three objectives: To demonstrate how we generate profits under the different accounting regimes; for example, in the IFRS sources of earnings disclosures within the Chief Financial Officer’s report; To show how we think about capital allocation via a number of metrics that highlight the returns we generate on capital invested in new business, including internal rates of return, payback periods and new business profitability; and
To highlight the cash generation of our business, which over time is the ultimate measure of performance.
Skills and experience Paul Manduca was the Senior Independent Director prior to his appointment as Chairman. He was also a member of the Audit and Remuneration Committees from October 2010 to June 2012 and a member of the Nomination Committee from January 2011.
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 was appointed as their Chairman in July 2012. He is a member of the Council of the Overseas Development Institute (ODI) in London, a member of the Africa Progress Panel chaired by Kofi Annan and a sponsor of Opportunity International. 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 and has been a member of the European Financial Round Table (EFR) since January 2013. Tidjane was awarded the Légion d’honneur by the French President in July 2011 and the 2013 Grand Prix de I’Economie by the French newspaper Les Echos. In January 2014, Tidjane was appointed as a British Business Ambassador by invitation from the Prime Minister. Age 51.
Michael has been a Trustee of the Grosvenor Estate since October 2008 and was appointed as a non-executive director of Grosvenor Group Limited in March 2012. He has been a member of the Finance Committee of the MCC since October 2005. Age 52.
These objectives were achieved in a challenging global context, marked by volatile market conditions, an uncertain economic environment, heightened regulation and historically low interest rates. Low interest rates are not only a problem for us as an insurer, but also for many of our customers, particularly in the UK, where they have had a significant and negative impact on returns for savers. There are now signs that the world’s economy is recovering, but the picture is still not fully clear and we shall proceed, as ever, with care.
h airm an ’s statem en t appropriate challenge. We took a number of steps in 2013 to strengthen the Board and better position it to contribute to Prudential’s commercial success.
Philip Remnant CBE became Senior Independent Director on 1 January, replacing myself in that role. Anthony Nightingale CMG joined the Board on 1 June as a non-executive director and member of the Remuneration Committee, replacing Keki Dadiseth, who retired from the Board on 1 May after eight years of valuable service. I would like to thank Keki for his hard work and trusted advice during his time on the Board and for the insights he brought us on a very important region for our company, Asia.
On 10 June, Alice Schroeder joined as an independent non-executive director and member of the Audit Committee. Formerly a managing director and a senior adviser at Morgan Stanley, Alice is highly respected by the international investment community and brings considerable insight into all aspects of the global insurance industry.
Jackie Hunt succeeded Rob Devey. I would like to thank Rob for the contribution he has made to the positive progress of Prudential UK and Europe over the past four years.
On 31 August, Michael Garrett retired from the Board after almost nine years as an independent director. I would like to thank him for his long period of service to the Group, during which his international business experience was of considerable value.
Besides the significant benefits provided by our business activities, we undertake corporate responsibility programmes in partnership with charitable organisations in our communities, providing long-term funding and deploying the expertise of our people.
Many of our employees take part in the Chairman’s Challenge, our flagship volunteering programme, which encourages colleagues to participate in projects initiated by our global charity partners. Every year the projects supported by the Chairman’s Challenge increase in scope and quality and the 2013 programme has been a great success – from Age UK’s ‘Call in time’ telephone well-being service, which helps older people build confidence and remain in their homes for longer, to Plan International’s programme to develop financial and life skills for school children in ethnic communities in Chiangmai, Thailand.
In December 2013, we defined a new set of objectives that we aim to achieve by 2017. We are entering this new period with confidence in the prospects of the Group and the capacity of our teams across Asia, the US and the UK to execute. With our 2013 results, we have made a positive start towards our newly launched 2017 objectives.
(2012: £964 million), reflecting our focus on driving fee income from our variable annuity business and a full year’s contribution of insurance income from REALIC. UK life IFRS operating profit was broadly in line with the prior year at £706 million (2012: £703 million) despite lower business volumes. M&G delivered record operating profit of £395 million, an increase of 23 per cent, reflecting continued strong third-party net inflows combined with favourable market movements in the period, which together have increased external funds under management by £14 billion to £126 billion (2012: increase of £20 billion to £112 billion).
Proactive risk management by our no-guarantees Elite Access variable annuity product, which delivered sales volumes of £2,585 million (US$4,045 million) in 2013, three times those achieved in 2012. In the UK, we continue to focus on value over volume, with retail APE sales lower by 12 per cent as the market adjusts to the post-Retail Distribution Review environment, while retail new business profits were 3 per cent lower year-on-year, as we have partially offset the impact of lower volumes through pricing and product actions. M&G has delivered strong net inflows of £9.5 billion (2012: £16.9 billion including one institutional debt mandate of £7.6 billion) as it benefits from record levels of retail sales from Continental Europe, while Eastspring Investments, our Asia asset management business, reported stable net inflows5 of £1.6 billion (2012: £1.6 billion).
2013 ‘Growth and Cash’ objectives The Group has now delivered all six of the 2013 ‘Growth and Cash’ objectives we set out at our 2010 investor conference.
— Lastly, as announced at the investor conference in December 2013, the UK achieved its 2013 cash remittance objective of £350 million by remitting £355 million to the Group.
(iii) Group underlying free surplus generation of at least £10 billion cumulatively over the four-year period from 2014 to end-2017.
Operational highlights for 2013 reflect our continued focus on our ‘sweet spot’ markets, where the macro-economic, demographic, competitive and regulatory environments enable us to capitalise on our strengths and use multiple distribution channels to provide long-term savings and protection solutions to our customers. These same positive long-term drivers underpin our strong financial performance in 2013, with Asia IFRS operating profit up 16 per cent to £1,075 million (2012: £924 million2,3) and cash remitted to Group
Our other smaller ‘sweet spot’ markets have also delivered excellent results, with collective growth in APE sales of 39 per cent. In the Philippines we have grown agency activity by 49 per cent and in Vietnam we have improved productivity by 16 per cent. In Thailand, the Thanachart bancassurance relationship is progressing well, delivering £22 million of APE sales in the first eight months of its operations. In Cambodia, where we launched in January 2013, our new life business has made a good start and the relationship with our distribution partner ACLEDA Bank is working well. We have also opened a representative office in Myanmar.
Our joint ventures in China and India represent different opportunities in these two large, but quite different markets. In China our business remains small in the context of the market, but we are very encouraged by the progress being made, with APE sales growth of 48 per cent in 2013. We consider this business to have great potential over the medium to long term. In India, our joint venture continues to be the market leader in the private sector, but the market is continuously going through fundamental restructuring and we expect it to remain challenging for some time.
We have niche positions in the Taiwanese and Korean markets that have been structured to meet our operating and financial disciplines, particularly around products and profitability. Within this context, both businesses are performing well. On 16 July 2013, we announced our intention to sell our closed-book life insurance business in Japan for US$85 million (£51 million at 31 December 2013 closing exchange rate), subject to regulatory approvals.
Asia’s life new business profit grew by 15 per cent to £1,460 million (2012: £1,266 million), outpacing APE sales growth of 12 per cent. The beneficial impact of higher interest rates, primarily in Hong Kong, was offset by the weakening of some Asian currencies relative to UK sterling, primarily the Indonesian rupiah. There has clearly been downward pressure on some of our Asian currencies relative to UK sterling. We believe that the economic fundamentals of these economies remain very attractive in the long term and that the tensions observed currently will actually 2017 objectives
Cumulative Group underlying free surplus generation from 2014 to end-2017 N/A > £10bn
xecu tive’s rep o rt £2,843m EEV new business profit increase on 2012 £3,099m underlying free surplus generation increase on 2012 strongly positive at £8.0 billion (2012: £7.8 billion), reflecting the growth in new business sales and low, stable levels of policy surrenders. Combined with the additional positive impact of market appreciation, this increased separate account balances to £66 billion at 31 December 2013 (31 December 2012: £49 billion).
Fixed annuity APE sales of £55 million remained relatively flat compared to 2012, while fixed index annuity APE sales of £91 million decreased 17 per cent.
New business profit increased 24 per cent to £1,086 million, reflecting the benefits of our pricing and product actions, the contribution from Elite Access and the positive effects of higher long-term yields.
Jackson’s Risk Based Capital ratio at the end of 2013 was 450 per cent, compared to 423 per cent at the end of 2012. In 2013, statutory capital generation was driven by the strong operating performance. This capital generation enabled Jackson to remit £294 million (2012: £249 million) to Group, while supporting its balance sheet growth.
Total variable annuity APE sales increased to £1,338 million in 2013 (2012: £1,245 million). This growth was exclusively driven by the rapid progress of Elite Access, our variable annuity without guarantees launched in early 2012, which contributed £259 million of APE sales in the period (2012: £85 million). Excluding Elite Access, variable annuity sales were 7 per cent lower than in 2012, which is the direct result of our disciplined approach to the management of the economic cycle in the variable annuity market. The success of Elite Access has helped increase the diversification of our product mix, with 31 per cent of our 2013 variable annuity sales not featuring living benefit guarantees (2012: 17 per cent). As a percentage of total sales, variable annuities with living benefit guarantees are at their lowest since 2008. In addition, during the second half of 2013 Jackson implemented various product initiatives to continue to balance value, volume, capital and balance sheet strength. Net inflows for variable annuities’ separate accounts continue to be
During 2013, we commenced sales operations in Poland, one of Europe’s fastest-growing economies, which has an expanding middle class and high savings rates. We have made a good start to the business, building an agency sales network of 481 financial planning consultants across 12 branches. The agency sales network will continue to be rolled out to other major Polish cities and towns during 2014.
It is still too early to offer a definitive assessment of the impact of the Retail Distribution Review, although we do concluded in February 2014 with the announcement that it was launching a further study to examine competition and choice in the retirement income market as a whole. We continue to support both regulatory and other initiatives to improve consumer experience and outcomes.
We continue to manage our UK business by focusing on our strengths in individual annuities and with-profits products. The combined financial strength and investment performance track record of Prudential’s UK with-profits fund provide a key source of differentiation in a competitive market. The performance of our with-profits fund in 2013 has allowed us to add an estimated £2 billion to with-profits policies in the year and policyholders will typically see year-onyear increases of between 5 per cent and 8 per cent in accumulating with-profits policy values over the past year. Total bonus payments are expected to top £2.0 billion in 2014.
The onset of the Retail Distribution Review has significantly impacted the timing of sales volumes in the UK retail investments markets over the last two years. For Prudential, this resulted in very strong sales of onshore bonds in 2012, due to heightened activity prior to the implementation of the Retail Distribution Review, while in 2013 volumes returned to levels consistent with 2011, the last ‘undisturbed’ year. Onshore bonds APE sales of £176 million were 23 per cent lower as a result, which contributed to an overall decrease in retail APE sales of 12 per cent, to £697 million (2012: £795 million).
Retail new business profit of £267 million in 2013 was 3 per cent below 2012, due to lower sales volumes, partly offset by the positive effects of product mix and proactive pricing actions. Overall, new business profits were 5 per cent lower year-over-year, reflecting lower bulk annuity volumes and lower retail new business profit.
Our direct advice service, Prudential Financial Planning, is seeing demand for advice from our existing direct customers. Adviser numbers grew to 196 advisers by the end of 2013, in line with our expectations.
Tidjane Thiam Group Chief Executive the Year, Fixed Income Manager of the Year and Real Estate Manager of the Year at both the Financial News Awards 2013 and European Pensions Awards 2013.
The business remains focused on delivering excellent investment performance and service to its clients while continuing to seek diversification by both asset class and geography. It is the commercialisation of this investment performance through the acquisition of new fund flows that produces attractive profits and cash flow for the Group.
Capital and risk management We take a disciplined approach to capital management and have continued to implement a number of measures over the last few years to enable us to make our capital work more efficiently and more effectively for the Group. Using the regulatory measure of the Insurance Groups Directive (IGD), our Group capital surplus position at 31 December 2013 was estimated at £5.1 billion, before allowing for the final dividend, equating to coverage of 2.8 times.
The Board applies strict affordability tests against a broad range of criteria before making its dividend recommendation. It is the result of these tests, combined with the Group’s exceptionally strong performance in the expect more focus in the market on price. In the past few weeks, platforms have begun to disclose their own service pricing and any special fund fees agreed with asset managers. Those managers with strong brands and a reputation for investment performance will be expected to better withstand any such pressures on asset management fees.
M&G has continued its efforts to diversify its fund range. During the year, 10 retail funds attracted net sales of at least £100 million each, with the majority of money continuing to go into the M&G Optimal Income Fund, a flexible bond portfolio, and into the M&G Global Dividend Fund. Total net retail sales for the year were £7.3 billion, including the contribution from M&G’s associate company in South Africa. This is the fourth time in five years that M&G has posted net retail inflows exceeding £7 billion. After this very strong period of sustained net sales, we expect business to return to less elevated levels in 2014. Total retail funds under management at 31 December 2013 were £67.2 billion, 22 per cent higher than at the end of 2012 and up 251 per cent since the end of 2008.
M&G’s institutional business recorded net inflows of £2.1 billion during 2013, mainly through increased sales of alternative credit and leveraged loan products. Net inflows of £9.0 billion in 2012, a record level, included a single low-margin mandate of £7.6 billion. Over the year, total institutional funds under management increased by 3 per cent to £58.8 billion, and have now more than doubled since the end of 2008.
Our property business, formerly known as PRUPIM, was rebranded M&G Real Estate during the year. During 2013 it completed £3.5 billion of property transactions, covering both acquisitions and disposals. It has also returned to the
UK residential property market for the first time in 30 years with a £105 million investment in London housing.
M&G’s operating profit rose by 23 per cent to £395 million, a new record. Underlying profits – excluding performance fees, carried interest and profits from our associate company – were up 20 per cent to £358 million. Over the past five years, underlying profits have grown at an annualised rate of 15 per cent, principally reflecting the consistent accumulation of external assets on the back of strong net sales.
M&G’s cost/income ratio remained unchanged at an historic low of 59 per cent, with higher fee income offsetting a larger cost base from increased headcount and ongoing investment in operational infrastructure.
M&G continues to provide capitalefficient profits and cash generation for the Group and remitted cash totalling £235 million during 2013, compared with £206 million in 2012.
Group Chief Executive’s report continued past five years, that has enabled the Board to take the unusual decision to recommend the rebase of the dividend in consecutive years, 2012 and 2013.
We remain focused on pursuing the three significant opportunities – the significant protection gap in the Asian middle class, the transition of US ‘baby-boomers’ into retirement and the need for savings and retirement income for an ageing population in the UK – that are core to our strategy.
Of these, Asia remains more than ever central to the long-term, profitable growth opportunities for the Group. The longerterm structural trends of a rapidly growing and wealthier middle class with significant unmet needs for savings and protection remain intact and underpin our prospects in the region. We fully recognise the challenges that some of the economies in the region must deal with and we are never complacent in managing our diversified
Notes 1 The comparative results shown above and elsewhere in this document have been prepared using an actual exchange rate (AER) basis except where otherwise stated. Comparative results on a constant exchange rate (CER) basis are also shown for the analysis of IFRS and EEV operating profit based on longer-term investment returns in the Chief Financial Officer’s report on our 2013 financial performance.
2 The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards as discussed in note A2 in the IFRS financial statements. In addition, following its reclassification as held for sale during 2013, operating results exclude the results of the Japan life insurance business. 2012 comparatives have been retrospectively adjusted on a comparable basis.
9 Asia 2012 IFRS operating profit of £924 million is based on the retrospective application of new and amended accounting standards, and excludes the one-off gain of £51 million from the sale of the Group’s holding in China Life Insurance Company of Taiwan.
10 Source: Q4 2013 ABI APE Market Data. 11 The methodology and assumptions used in calculating the economic capital result are set out in note II of Additional unaudited financial information. The economic solvency ratio is based on the Group’s Solvency II internal model which will be subject to Prudential Regulation Authority review and approval before its formal adoption in 2016. We do not expect to submit our Solvency II internal model to the Prudential Regulation Authority for approval until 2015 and therefore these economic capital disclosures should not be interpreted as outputs from an approved internal model.
portfolio of businesses. We believe that the strength of our franchise in Asia, with leadership positions across our ‘sweet spot’ markets of South-east Asia, including Hong Kong, and our multi-channel, multi-product platform position us well to profitably capture this multi-decade opportunity.
The disciplined execution of our strategy has enabled us to deliver all of the six challenging 2013 objectives following one of the worst financial crises in history. Our confidence in the future prospects of the Group and our ability to execute across our businesses in Asia, the US and the UK is encapsulated in the three new objectives for 2017 that we announced at our December 2013 investor conference.
We believe the Group is well positioned to continue to deliver good value to customers and attractive returns to shareholders while continuing to manage capital prudently.
Strategic rep o rt 13 Prudential plc Annual Report 2013 14 Who we are 15 How our business works 16 Our strategy 17 Implementing our strategy 18 Measuring our performance 20 Our businesses and their performance 20 Asia 25 US 28 UK 31 M&G 34 Chief Financial Officer’s report on our 2013 financial performance 46 Group Chief Risk Officer’s report on the risks facing our business and our capital strength 54 Corporate responsibility review
Prudential plc is an international financial services group serving around 23 million insurance customers and has £443 billion of assets under management. We are listed on stock exchanges in London, Hong Kong, Singapore and New York.
Jackson is one of the largest life insurance companies in the US, providing retirement savings and income solutions aimed at the 77 million ‘baby-boomers’. Founded over 50 years ago, Jackson has a long and successful record of providing advisors with the products, tools and support to design effective retirement solutions for their clients.
We provide protection and savings opportunities to our customers, social and economic benefits to the communities in which we operate, jobs and opportunities to our employees, and financial benefits for our investors. By offering security, pooling savings and making investments, we help to drive the cycle of growth.
We create financial benefits for our investors and deliver economic and social benefits for our customers, employees and societies in which we operate
Employees Providing an environment with equal opportunities, career potential and reward means that we have the best people to deliver our strategy employees worldwide
Investors Growing dividends and share price performance enhances shareholder value total shareholder return1 achieved in 2013
Invest customers’ savings in a way that reflects their personal needs and risk tolerance. Provide financial protection to customers for adverse events
Generate value for shareholders through being rewarded for managing customer savings and through insurance profits from the protection given to policyholders
Develop trusted brands and effective distribution channels that enable us to better understand and service customers’ savings and protection needs
Trusted brands, market span and strong distribution links help us to attract new monies and retain existing assets
Leverage asset management capabilities to generate value for our customers and shareholders
Note 1 Total shareholder return represents the growth in the value of a share plus the value of dividends paid, assuming that the dividends are reinvested in the
The US ‘baby boomer’ generation is the wealthiest demographic in the global economy. Over the next 20 years they will be retiring at a rate of 10,000 per day, creating significant demand for retirement services.
To create sustainable economic value for our shareholders we focus on delivering growth and cash while maintaining adequate capital.
IFRS operating profit2,7 IFRS operating profit is our primary measure of profitability. This measure of profitability provides an underlying operating result based on longer-term investment returns and excludes non-operating items.
EEV operating profit3,7 Embedded value reporting provides investors with a measure of the future profit streams of the Group’s long-term businesses and includes profit from our asset management and other businesses. It is provided as additional information to our IFRS reporting. As with IFRS, EEV operating profit reflects the underlying results based on longer-term investment returns.
Prudential takes a balanced approach to performance management across IFRS, EEV and cash. We aim to demonstrate how we generate profits under different accounting bases, to highlight the returns we generate on capital invested, and to highlight the cash generation of our business.
Notes 1 The comparative results shown above and elsewhere in this document have been prepared using actual exchange rates (AER) basis except where otherwise stated. Comparative results on a constant exchange rate (CER) basis are also shown for the analysis of IFRS and EEV operating profit based on longer-term investment returns in the Chief Financial Officer’s report. CAGR is Compound Annual Growth Rate.
2 The basis of IFRS operating profit based on longer-term investment returns is discussed in note B1.3 of the IFRS financial statements. The IFRS profit before tax attributable to shareholders has been prepared in accordance with the accounting policies discussed in note A of the IFRS financial statements.
5 Estimated. As disclosed in full year 2012 results, from March 2013 the basis of calculating Jackson’s contribution to the Group’s IGD surplus was changed. Further detail can be found in the section ‘Capital management – Regulatory Capital (IGD)’ of ‘Group Chief Risk Officer’s report on the risks facing our business and our capital strength’. The prior year comparatives are as previously reported and do not reflect the new basis.
6 Excludes subordinated debt issues that qualify as capital. 7 The comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards. In addition, following its reclassification as held for sale during 2013, operating results exclude the result of the Japan life insurance business. Comparatives have been retrospectively adjusted on a comparable basis.
10 Asia 2012 IFRS operating profit of £924 million is based on the retrospective application of new and amended accounting standards, and excludes the one-off gain of £51 million from the sale of the Group’s holdings in China Life Insurance Company of Taiwan.
In December 2013, the Group announced new objectives that reflect our determination to drive long-term value creation for our shareholders.
2 Asia life and asset management pre-tax IFRS operating profit to grow at a compound annual rate of at least 15 per cent over the period 2012 to 2017 (2012: £924 million10)
Group free surplus generation4,7 Free surplus generation is used to measure the internal cash generation by our business units. For the insurance operations it represents amounts maturing from the in-force business during the period less investment in new business, and excludes other non-operating items. For asset management it equates to post-tax IFRS operating profit for the period.
Compared to 2012, underlying free surplus has increased 18 per cent in 2013, driven by growth of the in-force portfolio.
u r bu sin esses an d th eir p erfo rm an ce 21 Prudential plc Annual Report 2013
B Successfully added major new distribution partner with Thailand’s Thanachart Bank
B Expanded Eastspring Investments’ platform with operation and approvals to distribute funds in Europe
Strong demand for savings and protection products As people move into the middle class, their increased wealth and higher income provide the opportunity to make financial plans. Typically the first stage is to provide protection for the family and establish a regular savings plan through a life insurance policy.
Traditionally Asians would have relied on their children to provide for them in their retirement, but increasingly people are making their own financial provisions and life insurance policies are a popular part of a retirement plan.
Once the savings and protection solutions are in place, there is the opportunity to invest. Single premium insurance policies are also important in more developed markets and it is also likely that customers will increasingly seek access to different asset classes through mutual funds as their wealth grows and their financial needs become more sophisticated.
Evolving regulatory environment Each Asian market has evolved its own regulatory regime depending on the heritage of the industry, experiences and developmental priorities.
Today Prudential Corporation Asia is focused on leveraging this platform to grow in a disciplined way for the benefit of our customers, shareholders and communities.
Market participation Each market is unique and our overarching regional strategy is very specifically tailored to opportunities that reflect the many differences in each country, including its stage of economic development, cultural preferences, regulation, the competitive landscape and our own risk appetite.
The life insurance markets in India and China, while attractive in terms of scale, are more challenging for non-domestic life insurers to participate in. Working within these constraints, Prudential Corporation Asia has two joint ventures with leading market shares in these countries and is very well placed as these markets continue to develop.
B Full year 2013 saw active agency numbers increase by 9 per cent and productivity increase by 10 per cent
B Fast growing bancassurance with Standard Chartered Bank, UOB and Maybank
B 32 per cent of industry’s agents; productivity increased by 16 per cent in full year 2013
B Full year 2013 saw 5 per cent increase in active manpower and a 30 per cent increase in productivity
B Successful partnership with Standard Chartered Bank now in 16th year
B 26 per cent7 market share of Takaful (Sharia compliant) life business
( ) Prudential’s rank in insurance market by new business APE. Based on formal (competitors’ results releases, local regulators, insurance associations) and informal (industry exchange) market share data. Thailand market position and market share are post-acquisition of Thanachart Life.
Over 90 per cent of our new business is regular premium.
Innovations in service are also important to customer satisfaction. Some are technology based such as e-submissions and automated underwriting, but another key component is innovation with the human touch such as Indonesia’s PRUhospital friend.
During 2013, Prudential extended its highly successful children’s financial literacy programme, ‘Cha-Ching’; for example, this has now been adopted in the Philippines as part of the school curriculum.
2 Excluding the 2012 one-off gain of £51 million from the sale of Group’s holding in China Life Insurance Company in Taiwan.
6 World Health Organisation – Global Healthy Expenditure Database (2011). For Hong Kong – Food and Health Bureau, Government of Hong Kong (2010). For Taiwan – data as of year 2006.
Cha-Ching – money-smart kids A financial literacy programme that includes three-minute cartoons to teach children four key money management concepts: earn, save, spend and donate.
B Cash remittance of £294 million exceeded 2013 cash objective of £260 million
B Continued strong returns on shareholder capital across all key financial metrics
B Elite Access sales of £2,585 million (US$4,045 million) in first full year after launch, making Jackson the most successful player in the non-guarantee variable annuity market
B Successfully managed sales of variable annuities with guarantees in line with risk appetite
‘Baby-boomer’ retirement opportunities The United States is the world’s largest retirement savings market with total assets in the annuity sector of over US$2.5 trillion2. Each year, many of the 77 million ‘babyboomers ’ reach retirement age, which is triggering a shift from savings accumulation to retirement income generation of more than US$10 trillion3 of accumulated wealth over the next decade. This demographic transition constitutes a significant opportunity for those companies that are able to provide the ‘baby-boomers’ with long-term retirement solutions.
US economic environment In 2013, the US economy began to see early signs of improvements, with unemployment rates steadily decreasing, and the housing market continuing to show signs of recovery. Reflecting this, the S&P 500 Index rose 30 per cent, its best performance since a 31 per cent jump in 1997, and longer-dated Treasury yields also began to climb in 2013 ahead of the reduction in the Federal Reserve’s quantitative easing programme. While interest rates remained well below historical averages at year end, an upward move in Treasury yields, if sustained, would be beneficial to the financial performance of the US insurance industry.
Competitive landscape We continue to see significant shifts in market share amongst the larger annuity participants. Jackson’s market share of annuities with living benefits has remained relatively steady, while some larger players have consciously pulled back and others are now re-entering the market. We have also seen a general trend of product changes in this market that have reduced investment flexibility and/or increased fees for optional benefits. Several insurers with challenging legacy blocks of variable annuity business continue to implement policy changes to help mitigate the risk of their back book of business, including fee increases on older benefits, changes to the availability of investment options, subsequent premium restrictions on in-force contracts and buy back offers to their existing policyholders. Despite positive demographic trends, these activities have the potential to lead to overall contraction in the industry, and likely further market share adjustments, as customers and distributors seek insurers that offer consistency, stability and financial strength.
Jackson’s long-term strategy consists of capitalising on the profitable growth opportunities created by the demands for retirement income products due to the demographic transitions within the world’s largest retirement market. Jackson takes a disciplined approach to this opportunity by leveraging its distinctive distribution capabilities and asset liability management expertise to offer prudently priced annuity products aligned with our risk appetite. We continue to see strong consumer demand for our products and will continue to drive product innovation as a way of meeting the needs of customers and generating shareholder value. With a long-term focus on balancing the needs of multiple stakeholders, Jackson has forged a solid reputation among advisers for financial stability, innovative products and market leading wholesale support. Our relentless pursuit of excellence has earned us a leading position within the industry.
protection while still being able to invest in a broad range of assets, as well as the benefit of tax deferral on the investment growth within the product. The breadth of our product offering, strength of our distribution relationships, and our ability to maintain financial stability through the crisis and remain as a consistent presence within the market, have resulted in Jackson being the number one4 writer of variable annuities in the US.
Additionally, Jackson developed and launched Elite Access in March 2012. Elite Access is a variable annuity without guarantees, offering customers tax deferred growth and access to a wide range of alternative investments. In less than two years after its launch, Elite Access is the eighth best-selling variable annuity product in the US. As of third quarter of 2013, Jackson offers three of the top 10 best-selling variable annuity products across the industry.
The success of Elite Access has helped increase the diversification of our product mix with 31 per cent (2012: 17 per cent) of our 2013 variable annuities sales not featuring living benefit guarantees. As a percentage of total sales, variable annuities with living benefit guarantees are at their lowest since 2008.
Distribution capabilities Our distribution teams set us apart from our competitors within the markets in which we compete. Jackson’s wholesaling force is the largest in the industry, supporting thousands of advisers across multiple channels and distribution outlets. Our wholesalers provide extensive training to these advisers and in 2013 focused training efforts around its newest product, Elite Access, with a total of 374 Elite Access meetings and over 10,000 advisers in attendance. Training topics included alternative investments, economic updates and tax and trusts education.
National Planning Holdings, an affiliate of Jackson, is the seventh5 largest independent broker-dealer network in the country. Leveraging the collective strength of the four broker-dealers within the network, National Planning Holdings is able to meet the specific needs of three key distribution channels: independent representatives, financial institutions, and tax and accounting professionals. We offer registered representatives and investment advisers access to industryleading mutual fund/asset management companies, insurance carriers, and to thousands of brokerage products. National Planning Holdings provides significant benefits for Jackson by being an outlet for Jackson products and providing market intelligence.
Curian is Jackson’s retail asset management arm, distributing investment solutions which include separate accounts, mutual funds, mutual fund wraps and exchange traded funds through an online platform. Curian gives financial advisers efficient access to a broad range of investment solutions that are developed with institutional-level investment manager due diligence, portfolio construction and asset allocation resources.
Operational efficiencies We support our industry-leading distribution teams with award-winning customer service. Jackson was awarded by Service Quality Measurement Group, Inc. ‘World Class Certification’ in customer satisfaction and received the ‘Highest Customer Satisfaction by Industry’ award, achieving the top rating for the financial industry, for the eighth consecutive year.
Our hedge philosophy has not changed in 2013. Jackson is able to aggregate financial risks across the company, obtain a unified view of our risk positions, and actively manage net risks through economically-based hedging programmes. A key element of our core strategy is to protect the company from severe economic scenarios while maintaining adequate regulatory capital. We benefit from the fact that the competitive environment continues to favour companies with good financial strength ratings and a strong track record of financial discipline, both key elements of our long-term strategy.
2 According to LIMRA, US Individual Annuities Survey Participant’s Report Q3 2013.
5 Investment News Broker-Dealer Rankings – April 2013 (as reported at the 2013 Investor Conference).
The strategy in the UK business continues to be one of ‘focus’: B Selective participation; B Capital discipline; B Sustainable cash generation; B Delivering value through cost and persistency management; and
B Two ‘Five Star’ ratings for excellent service1, achieved for third consecutive year
B Launch of Prudential Polska – 12 branches and 481 financial planning consultants
The changing face of saving in the UK The UK market is characterised by an ageing population and a concentration of wealth in the 50+ age group, many of whom have built up substantial pension funds in employersponsored schemes and require help to convert their wealth into sustainable lifetime income. In contrast, the next generation of savers is typically under-funded as the responsibility for retirement provision has shifted substantially away from government and employers, and towards the individual. These customers, and helping them accumulate savings, constitutes a significant opportunity for long-term savings and retirement income providers at a time when the ability of the state to intervene is significantly diminished.
In the UK we focus on those areas of the market where we are able to bring superior value to our customers and where we enjoy a competitive advantage, primarily in with-profits and annuities.
These new developments represent major changes to the way business is conducted in a number of areas of the markets in which we operate in the UK, and impact not only insurance and investments providers, but also distributors and consumers.
We continue to focus on meeting customer needs: — Offering a range of ways to do business with us through intermediaries, through our Prudential Financial Planning partners providing advice to customers in their homes, or by telephone and internet; — Innovative products such as our Income Choice Annuity which provides an alternative to the traditional fixed income annuity and is especially attractive in a low-interest rate environment; — Our market leading PruFund investment range with optional guarantees to suit customers’ attitude to risk; and
Strong product capability Prudential is a leader in its chosen markets, benefiting from a strong investment track record, a financially strong with-profits fund and a recognised reputation for developing innovative products such as PruFund and Income Choice Annuity.
In Corporate Pensions, we continue to focus on securing new members and incremental business from our current portfolio of customers and on additional voluntary contribution plans within the public sector, where we now provide schemes for 69 of the 99 public sector authorities in the UK.
Prudential has a solid track record and the core capabilities to succeed in the bulk annuity marketplace. Our ability to develop structures and bespoke solutions puts us at a distinct competitive advantage to develop our participation in a market that has around £1 trillion of liabilities where trustees are likely to be keen to de-risk their balance sheets.
We are selective in the transactions undertaken based on strict return on capital hurdle rates. Our preferred participation segment is at the large premium end of the market, where the added complexity and greater focus on financial strength is better suited to our strengths.
Prudential Polska, our new life company, opened for business in March 2013. Poland is one of Europe’s fastest growing economies with an expanding middle class. Headquartered in Warsaw, the business now has 12 branches across the country and 481 financial planning consultants. The agency sales network will continue to be rolled out to more major Polish cities and towns during 2014.
3 UN Population Statistics, Prudential analysis. 4 Old Age Dependency Ratio = (Population Above the Age of 65)/(Population within the age bracket of 15 to 64)*100.
5 HMRC UK Personal Wealth Statistics based on 2008-2010 ONS Wealth and Asset Survey WAVE 2, and ONS Population data statistics.
6 Liquid wealth consists of the wealth held in cash, banks, building societies or shares; the 18 to 54 segment also includes liquid wealth not attributed to any particular age bracket.
7 Prudential, Financial Express. All figures to 31 December 2013. The with-profits gross performance is gross of tax, charges and the effects of smoothing. Cumulative returns for company A, B and C have been calculated internally based on annual returns gathered from publicly available sources; these may differ from figures quoted by the company.
8 Financial Services Authority December 2011 estimates and December 2012 figures.
u r bu sin esses an d th eir p erfo rm an ce 31 Prudential plc Annual Report 2013
M&G European retail funds under management £5.0bn £9.0bn £8.2bn £14.4bn £23.7bn
The pillars of M&G’s business that support this strategy are: B People – an environment that attracts, fosters and retains talented individuals; B Performance – an investment-led business focused on the delivery of long-term returns through active investment management; Prudential has a strategy of optimising the value of M&G’s asset management capabilities by allowing the business to focus on the generation of superior long-term returns for investors.
Through its proven ability to convert investment performance into significant fund flows, M&G is able to increase its exposure to rising markets and so maximise revenue from the long-term stock of funds under management.
The European asset management market is the second largest in the world with total assets of £5.8 trillion2. Demand for asset management services is expected to continue to grow as governments and employers increasingly pass the responsibility for retirement planning and other long-term savings to individuals. Asset managers with records of strong investment performance and wellregarded brands are in a good position to attract flows of new money.
The UK asset management industry, M&G’s core market, is the second2 largest national market in the world with £770 billion3 of assets and is a global centre of excellence for investment management and a major source of funding for the UK economy.
As in previous years, M&G has a strong pipeline of institutional business still to fund. Products designed to help fill the gap left by the decline in long-term commercial bank loans continue to attract considerable interest, while opportunities to lend to medium-sized companies and infrastructure projects are improving.
Regulators across Europe are seeking to improve the quality of investment products and advice, mainly by bringing greater transparency to the industry. In the UK the Retail Distribution Review has led to clearer disclosure of investment charges, as well as ensuring that customers rather than providers pay for advice by outlawing commissions for new business. The full consequences of this guidance, which is not fully effective until April 2014, are still unclear. European policymakers are considering similar changes and some countries have already followed the UK’s lead on commissions, such as The Netherlands.
M&G’s retail market position Retail fund markets are highly fragmented, with no single company dominating. This reflects the competitive nature of the business and the multiplicity of providers.
Markets backdrop over the past year Equity markets in developed countries rose to pre-crisis levels during 2013, while bond markets remained relatively flat. Emerging markets, however, suffered a series of setbacks as concerns about slowing economic growth in China and the tapering of quantitative easing in the US weighed heavily on investor sentiment.
M&G has been managing money on behalf of investors for more than 80 years. We have long believed that our active approach to investment – selecting stocks on a conviction basis rather than following a market index – produces superior returns over the longer term.
In the retail market M&G operates a range of UK domiciled funds which are now distributed across Europe and Asia. Today, clients outside the UK account for more than a third of M&G’s retail assets under management.
Today M&G is an international asset manager with operations in 18 countries and retail products which are distributed in 20 jurisdictions.
u r bu sin esses an d th eir p erfo rm an ce 33 Prudential plc Annual Report 2013
M&G funds under management £31bn £39bn £104bn £47bn £42bn £44bn £109bn £48bn £57bn £59bn £67bn £174bn £198bn £201bn £228bn £244bn £55bn £118bn
People Our investment edge is our people. We employ more than 1,700 people operating from offices across Europe, Asia and in Southern Africa. We take pride in attracting, developing and retaining people of the highest calibre. In return, they are committed to working with us to deliver high performance in serving the long-term needs of our customers. Our investment teams are primarily based in our headquarters in London, where they benefit from the provision of high-quality support staff and investment infrastructure: from analysts and dealers to operations, risk and compliance. Reflecting the need for local expertise in real estate, we have specialist real estate teams in Paris, Frankfurt, Luxembourg, Singapore, Seoul and Tokyo in addition to London.
M&G has a strong investment brand, built over decades and based on a reputation for honesty, innovation and a commitment to building long-term wealth for our investors.
Equities: our fund managers have the freedom to develop their own investment approaches. Their main strength lies in stock selection, focusing on fundamental company analysis. M&G’s size and standing enables our fund managers to develop an effective dialogue with the management teams of the companies in which they invest.
Real estate: M&G Real Estate is a leading global property investor and manager covering all major real estate sectors. We actively manage our assets, drawing on our long heritage of expertise and knowledge and our extensive network of contacts. This approach enables the business to identify and capitalise on attractive investment opportunities. During 2013 M&G returned to the UK residential property market for the first time in 30 years with a £105 million investment in London housing.
Diversification M&G has pursued business diversification across: — Asset class: expertise across equities, fixed income, real estate and mixedasset strategies; — Client type: retail customers and institutional clients including pension funds, sovereign wealth funds, and Prudential’s own long-term insurance funds; — Investment strategy: Over 60 pooled retail funds covering domestic, global and emerging market strategies, 13 of which have funds under management of over £1 billion. Institutional clients benefit from a wide range of pooled and/or segregated fixed income, equity and real estate strategies; and
Notes 1 Excludes Prudential Capital. 2 Source: Lipper FMI Fund File as at 3 Source: Investment Management Association as at 31 December 2013.
‘The delivery of profitable growth is predicated on our ability to accumulate assets through new business flows and strong retention, with a strict preference for products that offer high returns and rapid monetisation of profits to cash.’
in an cial O ffi cer’s rep o rt o n o u r 20 13 fi n an cial p erfo rm an ce 35 Prudential plc Annual Report 2013 income securities. The impact of these collective short-term movements in investment values, reported outside the operating result, gave rise to a lower profit before tax1 attributable to shareholders on an IFRS basis of £1,635 million in 2013 (2012: £2,747 million). On an EEV basis, which recognises the economic benefit of movements in investment markets, profit before tax1 attributable to shareholders increased 14 per cent to £5,664 million (2012: £4,957 million). In the remainder of my report, my comments on the Group’s operating performance exclude these short-term market effects.
Another feature of 2013 was the volatility in the world’s currency markets. Following the US Federal Reserve’s statements in 2013 implying its intention to taper asset purchases, currencies in some of our key Asian markets, such as Indonesia in particular, saw significant depreciation in the second half of the year. The US dollar also depreciated against UK sterling as the strength of the economic recovery in the UK brought forward expectations of a UK interest rate increase. As the assets and liabilities of our overseas businesses are translated at year-end exchange rates, the effect of these currency movements has been incorporated within the end-2013 reported shareholders’ equity. However, the results of our overseas businesses are translated using average exchange rates for the year, as this is a reasonable approximation of the rates prevailing at the dates that our normal trading transactions have taken place in these markets. Accordingly, the full impact of the currency movements on the operating results of 2013 is more muted. Year-on-year growth rates in financial metrics are shown both in UK sterling terms and on a constant exchange rate basis to assist understanding of reported and underlying trends.
The delivery of profitable growth is predicated on our ability to accumulate assets through new business flows and strong retention, with a strict preference for products that offer high returns and rapid monetisation of profits to cash. As a result, we have focused on the financial reporting measures of IFRS operating profit and free surplus generation that most reflect this emphasis. During 2013, IFRS operating profit1 increased 17 per cent to £2,954 million and underlying free surplus generated1 was up 18 per cent to £2,462 million.
As part of the benefits we provide to our customers, some of our products guarantee the value of the funds they hold with us to protect them against declines when markets fall. To protect ourselves from the downside risks to the Group’s financial position associated with these guarantees, we hold derivatives and other instruments to mitigate these exposures. In times of rising equity markets these will generally generate negative investment variances. In addition, while higher interest rates are beneficial to the long-term performance of our business, they do give rise to negative value movements on our holdings of fixed 2013 has seen Prudential maintain its disciplined approach to value creation, combining a focus on cash generation with strict capital allocation, a robust balance sheet and conservative risk management. In doing so, 2013 has been another year of progress, delivering a strong financial performance in volatile investment markets and achieving all of the 2013 financial objectives we set in 2010. In addition, we continue to improve the quality and balance of our earnings and the resilience of our business to external shocks, through our bias for less volatile sources of income and increasing diversification by product, distribution and geography.
Asset management business: Total operating profit based on longer-term investment returns 2,954 2,520 17 2,509 18
Asia life operating profit was up 10 per cent on a reported basis, and up 13 per cent after adjusting for the translational impact of currency movements. Excluding the 2012 one-off gain of £51 million on the sale of our holdings in China Life Insurance Company of Taiwan, underlying growth in Asia’s life operating profit was 17 per cent (20 per cent at constant currency). US life operating profit increased by 29 per cent, including the first full year of REALIC following its acquisition in 2012. Excluding REALIC, profit was increased by 24 per cent, reflecting strong growth in variable annuity fee income. UK life operating profit was in line with 2012. M&G (including Prudential Capital), our UK-based asset management business, and Eastspring Investments, our Asia asset manager, delivered growth of 19 per cent and 7 per cent respectively.
IFRS operating profit1 from our life insurance operations in Asia, the US and the UK increased 15 per cent to £2,950 million (2012: £2,573 million). The increase in the profitability of our life operations reflects the growth in the scale of our life business, driven primarily by positive business flows. We track the progress that we make in growing our life book of business by reference to the scale of our obligations to our customers, which are referred to in the financial statements as the policyholder liabilities. Each year these liabilities increase as we collect premiums and decrease as we pay claims. The overall scale of these policyholder liabilities is relevant in evaluating our profit potential, in that it is reflective of our ability to earn fees on the unit-linked element and it sizes the risk that we carry on the insurance element, for which Prudential needs to be rewarded.
Focusing on the business supported by shareholder capital, which accounts for the majority of the life profits, in the course of 2013 we have increased policyholder liabilities from £163.0 billion to £180.1 billion, equivalent to an 11 per cent rise. The consistent addition of high-quality new business and proactive management of the existing in-force portfolio underpin this increase, resulting in positive net liability flows5 of £10.9 billion in 2013 in policyholder liabilities. Favourable investment market and other movements (including corporate transactions) have contributed a further £10.6 billion to the increase, offset by a £4.4 billion negative foreign currency translation effect.
Our Asia life insurance business continues to benefit from the growth of the in-force portfolio and our focus on building the proportion of our business that comprises health and protection, with IFRS operating profit1 of £1,001 million (2012: £906 million), up 10 per cent. Adjusting for the 2012 one-off gain on the sale of our holding in China Life Insurance Company in Taiwan, and currency movements, underlying growth was 20 per cent. The principal driver of our profitability in the region is our health and protection business, which delivered 68 per cent or £679 million (2012: £589 million) of total life profits. Indonesia IFRS operating profit, our largest market on this measure, was up by 23 per cent at constant exchange rates, reflecting increased insurance and fee income from the high level of regular premium health and protection and unit-linked sales in recent years. Our other large established markets of Hong Kong, Malaysia and Singapore also showed collective double-digit growth in IFRS operating profit, driven by higher insurance margin and, in the case of Hong Kong, higher bonus rates on with-profits business. There was encouraging progress in our smaller, fast-growing South-east Asia businesses in Thailand, the Philippines and Vietnam. Their combined IFRS operating profit of £125 million has increased by 166 per cent during 2013, and now accounts for 12 per cent of the Asia life total compared to 5 per cent in 2012. In Thailand, the inclusion of profits since May 2013 from the acquired Thanachart in-force portfolio, together with profits on new business written through our exclusive partnership with Thanachart Bank, contributed IFRS operating profit of £30 million.
UK long-term business IFRS operating profit was in line with 2012 at £706 million (2012: £703 million). The comparative result included a £31 million profit from writing wholesale contracts, compared with £25 million for 2013. Excluding these contracts, UK retail IFRS operating profit increased 1 per cent, and included the £27 million positive impact of a longevity swap entered into this year to further optimise the capital position of the business. Consistent with our focused product strategy in the UK, the operating result is driven by profits from shareholderbacked individual annuities and with-profits business, which accounted for 92 per cent of the retail IFRS operating profit.
Our asset management businesses also had a successful year, collectively contributing 20 per cent higher operating profit at £574 million (2012: £479 million). Similar to the life operations, growth in our asset management overall operating profit also reflects the increased scale of this business. We measure growth by reference to funds under management, representing the sum of net monies received from external institutional and retail customers, monies managed on behalf of our life operations together with accumulated investment returns. External retail and institutional funds under management, which drive the majority of our profits, increased by 11 per cent during the year to £148.2 billion (£133.5 billion). The increase is driven by net new money inflows of £11.6 billion, reflecting the attractiveness of our broad fund offering measured by reference to the investment performance delivered for our customers. This is only the fourth time in our history that we have exceeded £10 billion net inflows in a year (the previous three being in 2009, 2010 and 2012) and our success is evident in the fact that we achieved positive external net flows for 11 years in a row. 2012 net flows of £18.5 billion included a single low-margin mandate into M&G of £7.6 billion. Excluding this amount, net flows in 2013 of £11.1 billion were marginally higher than £10.9 billion in 2012.
M&G’s IFRS operating profit increased 23 per cent to a new record level of £395 million (2012: £320 million). Underlying profits, excluding performance-related payments and earnings from associates, increased 20 per cent to £358 million (2012: £298 million), reflecting both a 13 per cent uplift in external funds under management following a period of strong net inflows and positive market movements, and also the positive mix effect from the growing proportion of higher-margin retail business. M&G’s average fee income across all the external and internal funds it manages was up slightly at 37 basis points (2012: 36 basis points), with higher income helping to absorb the current phase of increased headcount and infrastructure investment, maintaining a cost-income ratio at 59 per cent (2012: 59 per cent).
In the US, our asset management businesses, PPM America and Curian, and our broker-dealer network, National Planning Holdings, collectively generated IFRS operating profits of £59 million (2012: £39 million). Curian’s profit increased from £15 million in 2012 to £29 million in 2013 due to higher average assets under management, particularly reflecting the addition of assets managed for Jackson’s Elite Access product.
In Asia, the negative short-term fluctuations of £204 million primarily reflect net unrealised movements on bond holdings following rises in bond yields across the region during the year. Negative short-term fluctuations of £625 million in the US mainly represent the net unrealised value movement on derivatives held to manage the Group’s exposure to market movements following rises in equity values. Jackson hedges the guarantees offered under its variable annuity proposition on an economic basis and, thus, accepts a degree of variability in its IFRS results in the short term in order to achieve the appropriate economic result. The negative fluctuations of £254 million in the UK include net unrealised movements on fixed-income assets supporting the capital of the shareholder-backed annuity business.
Free surplus generation Our ongoing focus on disciplined capital allocation to new business opportunities that offer the most attractive mix of returns and short payback periods means we have continued to produce significant amounts of capital, which we measure by reference to free surplus generated. Free surplus generation is a financial metric we use to measure the internal cash generation of our business operations. For the insurance operations it represents amounts maturing from the in-force business during the period, net of amounts reinvested in writing new business, and for asset management it equates to post-tax IFRS profit for the year.
Total movement in free surplus 314 268 Free surplus at 1 January 3,689 3,421
Net cash remitted by business units 1,341 1,200 Net central outflows (315) (289)
Net movement in holding company cash 850 180 Holding company cash at 1 January 1,380 1,200
In 2013, our life in-force and asset management businesses generated £3,099 million of underlying free surplus before reinvestment in new business. This is 15 per cent higher than the £2,698 million generated in 2012, with higher contributions from all four of our business operations. For our life insurance businesses, the growth in underlying free surplus generated reflects the increased scale of our in-force portfolio, which is a clear indication of our continued success in capturing profitable new business flows in those markets where growth opportunities are most attractive, and highlights the benefits of targeting low-strain, high-return business with a fast payback profile.
We reinvested £637 million of the free surplus generated in the period into writing new business (2012: £618 million), equivalent to a re-investment rate of 21 per cent, which is in line with recent periods. The amount of free surplus we reinvested in Asia increased 6 per cent to £310 million (2012: £292 million), while new business profit increased 15 per cent. This reflects improvements in mix and pricing actions taken as a result of our strategic focus on more capital-efficient products and the impact of higher interest rates in the period. In the US, new business investment increased to £298 million (2012: £281 million), primarily due to higher volumes of new business and the increase in capital requirements from 235 per cent of the US Risk Based Capital Company Action Level to 250 per cent (see section ‘Capital management – regulatory capital (IGD)’ of the Group Chief Risk Officer’s report on the risks facing our business and our capital strength). Reinvestment levels in the UK remained low at £29 million (2012: £45 million), principally reflecting changes to business mix, with a higher proportion of withprofits APE sales.
Cash remitted to the Group in 2013 increased by 12 per cent to £1,341 million (2012: £1,200 million), with well-balanced contributions from across the Group. Asia’s remittances increased 17 per cent to £400 million (2012: £341 million), demonstrating the highly cash-generative nature of recent volume growth, driven by the focus on health and protection products. The 2013 remittance of £294 million from the US represents an increase of 18 per cent on 2012, reflecting both growth in the size of the in-force portfolio and an additional contribution from REALIC following its acquisition in 2012. The UK insurance operations have continued to make sizeable remittances at £355 million (2012: £313 million), supported by shareholder transfers from the with-profits fund. M&G net remittances increased 14 per cent to £235 million (2012: £206 million), reflecting its relatively capital-light business model that facilitates high dividend payouts to Group.
Net central outflows increased to £315 million in 2013 (2012: £289 million), with higher corporate costs and higher net interest payments offset by lower Solvency II costs and higher tax receipts.
in an cial O ffi cer’s rep o rt o n o u r 20 13 fi n an cial p erfo rm an ce 41 Prudential plc Annual Report 2013
Operating profit Long-term business: Long-term business operating profit 5,639 4,427 27 4,387 29
Asset management business: Total operating profit based on longer-term investment returns 5,580 4,313 29 4,272 31
Short-term fluctuations in investment returns: Insurance operations (792) 423 Other operations (27) 87
Profit before tax attributable to shareholders 5,664 4,957 Tax charge attributable to shareholders’ profit (1,306) (1,188)
Basic earnings per share based on operating profit after tax 165.0 124.9 32 33 Basic earnings per share based on total profit after tax 171.0 148.3 15 17
In Asia, EEV life operating profit was up 22 per cent to £2,385 million (2012: £1,951 million), with in-force profits up 35 per cent to £925 million (2012: £685 million), benefiting from increased scale and the recent rise in interest rates in some of our key territories. The contribution from operating experience and assumption changes was £81 million (2012: £97 million), driven by favourable persistency and claims experience in Hong Kong and Indonesia. Asia new business profit was 19 per cent higher at constant exchange rate, at £1,460 million, reflecting volume growth from the continued build-out of our agency and bancassurance distribution, with both channels growing their respective contribution to new business profit by over 20 per cent at constant currency, and management actions to improve product mix, geographic mix and pricing. Our seven ‘sweet spot’ ASEAN15 markets, including Hong Kong, continue to drive the growth in this metric, increasing their contribution to new business profit by 21 per cent, underpinned by a 17 per cent rise from health and protection in these markets, both on constant exchange rate. The impact of weakening Asian currencies relative to UK sterling, primarily the Indonesian rupiah, reduced the Asia overall reported growth rate to 15 per cent. We are particularly encouraged by the progress of some of our smaller businesses such as the Philippines (new business profit up 31 per cent), Thailand (up 90 per cent), Vietnam (up 19 per cent) and China (up 42 per cent), as well as further growth in our larger markets of Hong Kong (up 69 per cent, benefiting from higher interest rates as well as pricing actions) and Indonesia (up 11 per cent at constant currency, 1 per cent on actual exchange rate). The mechanics of our new business profit reporting are such that the rise in long-term interest rates has benefited Hong Kong’s new business profitability given the high proportion of with-profit products in the sales mix, and has depressed Indonesia’s profitability given the predominance of health and protection. When assessing the economics of all our new business using internal rates of return and payback periods, the returns achieved across all of Asia’s product and geographical locations remain attractive.
Jackson’s EEV operating profit increased by 38 per cent to £2,221 million (2012: £1,610 million) due to higher profits from our existing book as we continue to manage the business for value, and growth in new business profits. 2013 experience and operating assumption changes contributed positive £527 million towards in-force profits compared to £325 million in 2012. Within these amounts, swap transactions undertaken from 2010 to more closely match the overall asset and liability duration contributed enhanced profits with an overall spread gain of £274 million (2012: £205 million). Improved persistency contributed £134 million (2012: £66 million) to the life in-force total. US new business profit improved significantly, up 24 per cent to £1,086 million (2012: £873 million), reflecting the benefit of Jackson’s product and pricing actions, the contribution from sales of Elite Access and the favourable impact of the 130 basis points rise in 10-year Treasury yields since the end of 2012, the latter accounting for around two thirds of the overall increase. These effects more than offset the impact of Jackson’s deliberate steps to slow sales of variable annuities with guarantees, which declined 7 per cent in 2013.
The internal rates of return achieved on new business remain attractive at over 20 per cent across all of our business operations, and the average surplus undiscounted payback period for business written in 2013 was three years for Asia, two years for the US and two years for the UK.
EEV non-operating profit EEV operating profit is based on longerterm investment returns and excludes the effect of short-term volatility arising from market movements and the effects of changes from economic assumptions. These items are captured in non-operating profit which benefited the 2013 results by a net £84 million (2012: £644 million).
EEV short-term fluctuations Short-term fluctuations in investment returns reflect the element of nonoperating profit which relates to the difference between the actual investment returns achieved and those assumed in arriving at the reported operating profit.
Jackson’s Risk-Based Capital ratio at the end of 2013 was 450 per cent, having earlier in the year remitted £294 million to Group while supporting its balance sheet growth and maintaining adequate capital.
All of our subsidiaries continue to hold strong capital positions on a local regulatory basis. During 2013, Prudential completed the long-running project for approval to domesticate the Hong Kong branch business of the PAC with-profits fund, which has an effective date of 1 January 2014. The value of the estate of our UK with-profits fund as at 31 December 2013 is estimated at £8.0 billion prior to the effect of this transfer (2012: £7.0 billion). The value of the shareholders’ interest in future transfers from the UK with-profits fund is estimated at £2.7 billion (31 December 2012: £2.1 billion). Despite the continued volatility in financial markets, Prudential UK’s with-profits fund performed well, achieving a 10 per cent pre-tax investment return for policyholder asset shares during 2013.
With greater visibility on the potential outcome of Solvency II, we have for the first time published our economic capital position based on our Solvency II internal model. This result is based on an assumption of US equivalence, with no restrictions being placed on the economic value of overseas surplus, and the internal model on which these calculations are based has not yet been reviewed or approved by the Prudential Regulation Authority. Other key elements of the basis which are likely to be updated in future as Solvency II regulations become clearer relate to the liability discount rate for UK annuities, the impact of transitional arrangements and the credit risk adjustment to the risk-free rate. Therefore, the results represent an estimate of our Solvency II capital position, assessed against a draft set of rules, with a number of key working assumptions, and the eventual Solvency II capital position will change as we iterate both the methodology and the internal model to reflect final rules and regulatory feedback.
Shareholders’ borrowings in holding company 4,211 392 4,603 3,126 536 3,662
The increase in the holding company debt of £1,085 million primarily arises from the two debt issues that took place in 2013, raising £1,124 million of cash for the Group. In January 2013 Prudential issued a US$700 million (£429 million net of costs), 5.25 per cent perpetual Innovative Tier 1 hybrid under this programme, primarily to Asian retail investors, and in December 2013 issued a £700 million (£695 million net of costs) 5.7 per cent lower Tier 2 subordinated bonds.
Both these debt issuances were raised under our £5 billion medium term note programme, which covers both core borrowings as included in the table above, and non-core borrowings, which tend to be shorter in nature. Under this programme, at 31 December 2013 the outstanding subordinated debt was £1,535 million, US$2,000 million and ¤20 million.
Prudential manages the Group’s core debt within a target level consistent with its current debt ratings. At 31 December 2013, the gearing ratio (debt, net of cash and short-term investments, as a proportion of IFRS shareholders’ funds plus net debt) was 20 per cent, compared to 17 per cent at 31 December 2012. Prudential plc has strong debt ratings from
The financial strength of PAC is rated AA by Standard & Poor’s, Aa2 by Moody’s and AA by Fitch. Jackson National Life Insurance
Total profit before tax 1,635 2,747 5,664 4,957 Tax and non-controlling interests (289) (584) (1,306) (1,188)
Net (decrease) increase in shareholders’ funds (709) 1,795 2,413 2,806 Shareholders’ funds at beginning of the year 10,359 8,564 22,443 19,637
Shareholders’ funds at end of the year 9,650 10,359 24,856 22,443
Taking these non-operating movements into account, the Group’s EEV shareholders’ funds have increased by 11 per cent during 2013 to £24.9 billion (31 December 2012: £22.4 billion). On a per share basis EEV at 31 December 2013 stood at 971 pence, up from 878 pence at 31 December 2012.
Under IFRS, the effect of potential higher future returns will only be recognised as they are earned, meaning there is no offset available against short-term investment variances in the current period. IFRS shareholders’ funds at 31 December 2013 of £9.7 billion were, therefore, 7 per cent lower than at the previous year end (31 December 2012: £10.4 billion).
in an cial O ffi cer’s rep o rt o n o u r 20 13 fi n an cial p erfo rm an ce 45 Prudential plc Annual Report 2013
Acquisition of Thanachart Life On 3 May 2013, the agreement we entered into in November 2012 to establish an exclusive 15-year partnership with Thanachart Bank Public Company Limited (Thanachart Bank) to develop jointly their bancassurance business in Thailand was launched. At the same time, Prudential Thailand completed the acquisition of Thanachart Life Assurance Company Limited (Thanachart Life), a wholly-owned life insurance subsidiary of Thanachart Bank. This transaction builds on Prudential’s strategy of focusing on the highly attractive markets of South-east Asia and is in line with the Group’s multichannel distribution strategy.
Domestication of Hong Kong branch On 1 January 2014, the Group completed the process of domestication of the Hong Kong branch of The Prudential Assurance Company Limited. The branch was transferred on 1 January 2014 to two new Hong Kong-incorporated Prudential companies, one providing life insurance and the other providing general insurance – Prudential Hong Kong Limited and Prudential General Insurance Hong Kong Limited. On the Prudential Regulation Authority’s pillar 1 peak 2 basis, approximately £12.1 billion of assets, £12.0 billion of liabilities, net of reinsurers’ share (including policyholder asset share liabilities, and £1.2 billion of inherited estate) and £0.1 billion of shareholders’ funds (for the excess assets of the transferred non-participating business) have been transferred.
Dividend The Board proposes to rebase the full-year dividend upwards by 4.38 pence, due to the strong and sustained operational and financial performance of the Group, evidenced by the achievement of all our demanding 2013 ‘Growth and Cash’ objectives. The directors recommend a final dividend of 23.84 pence per share (2012: 20.79 pence), which brings the total dividend for the year to 33.57 pence, representing an increase of 15 per cent over 2012.
The Board applies strict affordability tests against a broad range of criteria before making its dividend recommendation. It is the result of these tests, combined with the Group’s exceptionally strong performance in the past five years, that has enabled the Board to take the unusual decision to recommend the rebase of the dividend in consecutive years, 2012 and 2013.
3 For basis of preparation see note 1(a) of Additional IFRS unaudited financial information.
4 Includes Group’s proportionate share of the liabilities and associated flows of the insurance joint ventures in Asia.
7 Net inflows exclude Asia Money Market Fund (MMF) inflows of £522 million (2012: net outflows £226 million). External funds under management exclude Asia MMF balances of £4,296 million (2012: £4,004 million).
9 Following its reclassification as held for sale during 2013, operating results exclude the results of the Japan life insurance business. 2012 comparatives have been retrospectively adjusted on a comparable basis.
10 The detailed Holding Company cash flow is disclosed in note IIIa of Additional unaudited IFRS financial information.
11 Refer to the EEV basis supplementary information – Operating profit based on longer-term investment returns and summarised consolidated income statement, for the breakdown of other income and expenditure, and other non-operating items.
12 The methodology and assumptions used in calculating the economic capital result are set out in note II of Additional unaudited financial information. The economic solvency ratio is based on the Group’s Solvency II internal model which will be subject to Prudential Regulation Authority review and approval before its formal adoption in 2016. We do not expect to submit our Solvency II internal model to the Prudential Regulation Authority for approval until 2015 and therefore these economic capital disclosures should not be interpreted as outputs from an approved internal model.
13 Net of related charges to deferred acquisition costs and tax.
14 Operating profit after tax and non-controlling interests as percentage of opening shareholders’ funds. For IFRS reporting purposes, the Group adopted amended accounting standards in 2013. Accordingly, the IFRS elements and EEV basis shareholders’ interest for the comparative results have been adjusted for the retrospective application of this adoption of IFRS accounting policies for the purpose of the calculation above as discussed in note A2 of the IFRS financial statements and in note 1 of EEV basis results. In addition, following its reclassification as held for sale during 2013, operating results exclude the results of the Japan life insurance business. 2012 comparatives have been retrospectively adjusted on a comparable basis. For the purpose of the calculation above, Japan has been removed from opening shareholders’ funds.
‘We generate shareholder value by selectively taking exposure to risks that are adequately rewarded and that can be appropriately quantified and managed.’
A s a provider of financial services the management of risk lies at the heart of our business, and effective risk management capabilities represent a key source of competitive advantage for the Group. We generate shareholder value by selectively taking exposure to risks that are adequately rewarded and that can be appropriately quantified and managed. We retain material risks only where consistent with our risk appetite and risk-taking philosophy, that is: (i) they contribute to value creation; (ii) adverse outcomes can be withstood; and (iii) we have the capabilities, expertise, processes and controls to manage them.
Risk taking and the management thereof forms the first line of defence and is facilitated through both the Group Executive Committee and the Balance Sheet and Capital Management Committee.
Prudential retains material risks only where consistent with our risk appetite and risk-taking philosophy, that is: B They contribute to value creation; B Adverse outcomes can be withstood; and
isk O ffi cer’s rep o rt o n th e risk s facin g o u r bu sin ess an d o u r cap ital stren gth 47 Prudential plc Annual Report 2013
Capital requirements: the limits aim to ensure that: a The Group meets its internal economic capital requirements; b The Group achieves its desired target rating to meet its business objectives; and c Supervisory intervention is avoided.
The two measures used are the EU Insurance Groups Directive (IGD) capital requirements and internal economic capital requirements. In addition, capital requirements are monitored on both local statutory and future Solvency II regulatory bases.
Financial risks Market risk The risk of loss for the Group’s business, or of adverse change in the financial situation, resulting, directly or indirectly, from fluctuations in the level or volatility of market prices of assets and liabilities.
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 other than those covered by business environment risk.
Exposure to forces in the external environment that could significantly change the fundamentals that drive the business’s overall strategy.
Risk policies (Audited) Risk policies set out specific requirements for the management of, and articulate the risk appetite for, key risk types. There are policies for credit, market, insurance, liquidity, operational and tax risk, as well as dealing controls. They form part of the Group Governance Manual, which was developed to make a key contribution to the sound system of internal control that we are expected to maintain under the UK Corporate Governance Code and the Hong Kong Code on Corporate Governance Practices. Group Head Office and business units confirm that they have implemented the necessary controls to evidence compliance with the Group Governance Manual.
The remuneration strategy at Prudential is designed to be consistent with its risk appetite, and the Group Chief Risk Officer advises the Group Remuneration Committee on adherence to our risk framework and appetite.
Key risks Market risk (i) Investment risk (Audited) In Prudential UK, investment risk arises from the assets in the with-profits fund. This risk impacts the shareholders’ interest in future transfers and is driven predominantly by equities in the fund as well as by other investments such as property and bonds. The fund’s large inherited estate – estimated at £8.0 billion as at 31 December 2013 (31 December 2012: £7.0 billion) – can absorb market fluctuations and protect the fund’s solvency. The inherited estate is partially protected against falls in equity markets through an active hedging policy.
In Jackson, investment risk arises in relation to the assets backing the policies. In the case of the ‘spread business’, including fixed annuities, these assets are generally bonds. For variable annuities business, these assets include equities as well as other assets such as bonds. In this case the impact on the shareholder comes from value of future mortality and expense fees, and additionally from guarantees embedded in variable annuity products. Shareholders’ exposure to these guarantees is mitigated through a hedging programme, as well as reinsurance. Further measures have been undertaken including re-pricing initiatives and the introduction of variable annuities without guarantees. Furthermore, it is our philosophy not to compete on price; rather, we seek to sell at a price sufficient to fund the cost it incurs to hedge or reinsure its risks and to achieve an acceptable return.
(iii) Foreign exchange risk (Audited) We principally operate in Asia, the US and the UK. The geographical diversity of our businesses means that we are inevitably subject to the risk of exchange rate fluctuations. Our international operations in the US and Asia, which represent a significant proportion of our operating profit and shareholders’ funds, generally write policies and invest in assets denominated in local currency. Although this practice limits the effect of exchange rate fluctuations on local operating results, it can lead to significant fluctuations in our consolidated financial statements when results are expressed in UK sterling.
The debt portfolio at our Asia business totalled £18.6 billion at 31 December 2013. Of this, approximately 66 per cent was in unit-linked and with-profits funds with minimal shareholders’ risk. The remaining 34 per cent is shareholder exposure and is invested predominantly (71 per cent) in investment grade bonds.
Credit risk arises in the general account of our US business, where £30.3 billion of fixed income assets back shareholder liabilities including those arising from fixed annuities, fixed index annuities and life insurance. Included in the portfolio are £2.3 billion of commercial mortgagebacked securities and £1.8 billion of residential mortgage-backed securities, of which £0.9 billion (52 per cent) are issued by US government sponsored agencies.
Further details of the composition of our debt portfolio, and exposure to loans, can be found in the IFRS financial statements.
(ii) Group sovereign debt and bank debt exposure (Audited) Sovereign debt1 represented 15 per cent or £10 billion of the debt portfolio backing shareholder business at 31 December 2013 (31 December 2012: 15 per cent or £10.2 billion). 44 per cent of this was rated AAA and 92 per cent investment grade (31 December 2012: 38 per cent AAA, 92 per cent investment grade). At 31 December 2013, the Group’s total holding in continental Europe shareholder sovereign debt1 was £531 million. 78 per cent of this was AAA rated (31 December 2012: 79 per cent AAA rated). Shareholder exposure to the Eurozone sovereigns of Italy and Spain is £54 million (31 December 2012: £52 million). We do not have any sovereign debt exposure to Greece, Cyprus, Portugal or Ireland.
Our bank exposure is a function of our core investment business, as well as of the hedging and other activities undertaken to manage our various financial risks. Given the importance of our relationship with our banks, exposure to the banking sector is a key focus of management information provided to the Group risk committees and the Board.
Insurance risk (Audited) The processes of determining the price of our products and reporting the results of our long-term business operations require us to make a number of assumptions. In common with other industry players, the profitability of our businesses depends on a mix of factors including mortality and morbidity levels and trends, persistency, investment performance, unit cost of administration and new business acquisition expenses.
Morbidity risk is mitigated by appropriate underwriting and use of reinsurance. Our morbidity assumptions reflect our recent experience and expectation of future trends for each relevant line of business.
Group Chief Risk Officer’s report on the risks facing our business and our capital strength continued facilities, expiring between 2015 and 2018. In addition, the Group has access to liquidity via the debt capital markets. We also have in place an unlimited commercial paper programme and have 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 are regularly monitored and we have assessed these to be sufficient.
Operational risk (Unaudited) We are exposed to operational risk through the course of running our business. We are dependent on the successful processing of a large number of transactions, utilising various legacy and other IT systems and platforms, across numerous and diverse products. We also operate under the ever-evolving requirements set out by different regulatory and legal regimes (including tax), as well as utilising a significant number of third parties to distribute products and to support business operations.
Our IT, compliance and other operational systems and processes incorporate controls that are designed to manage and mitigate the operational risks associated with our activities. Although we have not experienced a material failure or breach in relation to our legacy and other IT systems and processes to date, we have been, and likely will continue to be, subject to computer viruses, attempts at unauthorised access and cyber security attacks.
We have an operational risk management framework in place that facilitates both the qualitative and quantitative analysis of operational risk exposures. The output of this framework, in particular management information on key operational risk and control assessments, scenario analysis, internal incidents and external incidents, is reported by the business units and presented to the Group Operational Risk Committee. This information also supports business decision-making and lessons-learned activities, the ongoing improvement of the control environment, and determination of the adequacy of our corporate insurance programme.
Global regulatory risk (Unaudited) Global regulatory risk is considered a key risk and is classified as a business environment risk under the Group Risk framework risk categorisation.
The European Union (EU) is developing a new prudential regulatory 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 although its implementation was delayed pending agreement on a directive known as Omnibus II which, once adopted, will amend certain aspects of the Solvency II Directive. 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.
Specifically, Pillar 1 covers the quantitative requirements around own funds, valuation rules for assets and liabilities and capital requirements. Pillar 2 provides the qualitative requirements for risk management, governance and controls, including the requirement for insurers to submit an Own Risk and Solvency Assessment which will be used by the regulator as part of the supervisory review process. Pillar 3 deals with the enhanced requirements for supervisory reporting and public disclosure.
A key aspect of Solvency II is that the assessment of risks and capital requirements are intended to be aligned more closely with economic capital methodologies and may allow us to make use of our internal economic capital models if approved by the Prudential Regulation Authority.
Having assessed the requirements of Solvency II, an implementation programme was initiated with dedicated teams to manage the required work across the Group. The activity of the local Solvency II teams is coordinated centrally to achieve consistency in the understanding and application of the requirements. We are continuing our preparations to adopt the regime when it comes into force on 1 January 2016 and are undertaking in parallel an evaluation of the possible actions to mitigate its effects. We regularly review our range of options to maximise the strategic flexibility of the Group. This includes consideration of optimising our domicile as a possible response to an adverse outcome on Solvency II.
The movements in 2013 mainly comprise: — Net capital generation (net of market movements) mainly through operating earnings (in-force releases less investment in new business, net of tax) of £2.1 billion; and
— Negative impact arising from foreign exchange movements of £0.1 billion.
There is broad agreement that ultimately it would be beneficial to replace the IGD regime with a regime that is more risk-based. Solvency II aims to provide such a framework and is expected to be implemented on 1 January 2016. The structure of the Group and the approach we have taken to managing our risks, with a sizeable credit reserve in the UK annuity book, a strong inherited estate in UK with profits and the relatively low risk nature of our asset management and Asian operations, together with a high level of IGD surplus, means we have positioned ourselves well for future regulatory developments and stresses to our business. Our economic capital surplus, based on outputs from our Solvency II internal model, is shown below.
We continue to have further options available to manage available and required capital. These could take the form of increasing available capital (for example, through financial reinsurance) or reducing required capital (for example, through the mix and level of new business) and the use of other risk mitigation measures such as hedging and reinsurance. A number of such options were utilised through the last financial crisis in 2008 and 2009 to enhance the Group’s IGD surplus. One such arrangement allowed the Group to recognise a proportion of the shareholders’ interest in future transfers from the UK’s with-profits business and this remained in place, contributing £0.4 billion to the IGD at 31 December 2012. We are phasing this out in two equal steps, reducing the credit taken to £0.2 billion from January 2013 and we expect to take zero credit from January 2014.
In addition to its strong capital position, on a statutory (Pillar 1) basis, the total credit reserve for the UK shareholder annuity funds also protects its capital position in excess of the IGD surplus. This credit reserve as at 31 December 2013 was £1.9 billion. This credit risk allowance represents 47 per cent of the bond portfolio spread over swap rates, compared to 40 per cent as at 31 December 2012.
At 31 December 2013 the Group has an economic capital3 surplus of £11.3 billion (2012: £8.8 billion) and an economic solvency ratio of 257 per cent (2012:215 per cent) before taking into account the 2013 final dividend.
Between full year 2012 and full year 2013, the Group economic capital surplus increased by £2.5 billion from £8.8 billion to £11.3 billion. The total movement over the year was equivalent to a 42 percentage point increase in the Group economic solvency ratio, driven by: — Model changes of £0.1 billion: a positive impact to Group surplus arising from a number of modelling enhancements and refinements; — Operating experience of £2.1 billion: generated by in-force business, new business written in 2013, the beneficial impact of management actions taken during 2013 to de-risk the business, and small impacts from non-market assumption changes and non-market experience variances over the year; and
— Non-operating experience of £0.9 billion: mainly arising from positive market experience during 2013.
Offset by: — Other capital movements of £0.6 billion: a reduction in surplus from the acquisition of Thanachart Life and the preparation for sale of the Japanese life business, the negative impact of exchange rate movements, an increase in surplus from new subordinated debt issuances and a reduction in surplus due to dividend payments in 2013.
These results are based on outputs from our current Solvency II internal model, assessed against a draft set of rules and with a number of key working assumptions. Further explanation of the underlying methodology and assumptions is set out in note II of Additional unaudited financial
2 Jackson previously reported IGD on an intervention level set at 75 per cent of US Risk Based Capital Company Action level (CAL). In March 2013 it was agreed with the PRA that going forward Jackson’s IGD will be reported on an intervention level set at 250 per cent of CAL.
‘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 determination to continue delivering a strong, sustainable financial performance.’
Helping provide resources, such as clean water and shelter that are essential for health and a thriving future
Strengthening knowledge in numeracy and financial literacy, while improving employment training
Providing financial, physical and infrastructure support to help prevent disasters, and to deal with their impact
o rp o rate resp o n sib ility rev iew 55 Prudential plc Annual Report 2013
Our corporate responsibility approach As a business that provides savings, income, investment and protection products and services we create social value through our day-to-day operations. We provide customers with ways to help manage uncertainty and build a more secure future. In seeking to match the long-term liabilities we have towards our customers with similarly long-term financial assets, we provide capital that finances businesses, builds infrastructure and fosters growth in both developed and developing markets.
UK Annuities�remain�a�key�product� for�Prudential�UK,�and�in�2013�we�worked� closely�with�the�Association�of�British� Insurers�on�the�launch�of�the�Code�of� Retirement�Choices.�This�means�that�we� are�more�focused�than�ever�on�ensuring� that�customers�looking�to�take�income�from� their�pensions�make�informed�choices.�Our� UK�business�paid�out�£3�billion�in�income�to� UK�annuitants�in�2013.
Asia As�part�of�the�process�of�listening�and� understanding�our�customers’�needs,� Prudential�Corporation�Asia�launched�a� number�of�tailored�products�and�services�in� 2013.�Prudential�Hong�Kong�introduced� PRUmyhealth�crisis�multi-care,�which�offers� comprehensive�financial�protection�against� critical�illness.�It�is�the�only�all-in-one�product� in�Hong�Kong�to�offer�complete�protection� against�the�financial�impact�of�critical� illnesses�for�multiple�stages�and�multiple� incidences�of�major�illness,�covering�an� extensive�range�of�conditions.
Valuing our people At�Prudential,�we�foster�an�environment�in� which�our�people�find�value�and�meaning� in�their�work,�and�deliver�outstanding� performance�for�our�customers,� shareholders�and�communities.�This�is� achieved�through�our�focus�on�diversity�and� inclusion,�talent�development,�employee� engagement,�and�performance�and�reward.
Employee engagement An�array�of�initiatives�are�in�place�to�drive� employee�engagement.�These�include:� Prudential�Corporation�Asia�using� employee�survey�results�to�deliver�on� feedback�received�in�2012,�and�� Prudential�UK�utilising�an�online�‘health� manager’�tool,�an�employee�assistance� helpline,�occupational�health�support,�and� locally-organised�wellbeing�and�sporting� activities.�Group�Head�Office�also� convened�a�Wellbeing�and�Engagement� Forum,�where�colleagues�review,�develop� and�implement�various�engagement� initiatives.
The�success�of�our�engagement�efforts� has�been�recognised�internally�and� externally.�In�2013,�engagement�surveys�in� various�business�units�have�again�shown� excellent�results,�and�several�of�our� businesses�have�won�prestigious�awards.� For�example,�in�2013�our�Singapore� business�won�the�Asia�Best�Employer� award�and�the�Philippines�employee� engagement�programme�‘PRUblic�Service� –�All�the�Way’�received�an�Award�of� Excellence�at�the�Philippine�Quill�Awards.� PPMA�(one�of�our�US-based�indirect� subsidiaries)�was�awarded�the�‘#1�Top� Workplace�in�Chicago’�by�Chicago�Tribune� and�Workplace�Dynamics,�Prudential�UK� was�awarded�a�Business�in�the�Community� Big�Tick�for�our�focus�on�colleague� engagement,�and�M&G�was�once�again� named�as�one�of�the�best�places�to�work�in� the�City�by�the�website�‘Here�is�the�City� News’.�In�addition,�our�businesses�in�the� UK�have�a�long-standing�relationship�with� the�union�Unite.
There�are�several�initiatives�across�our� businesses�that�maintain�our�commitment� to�diversity�and�inclusion.�Examples� include:�pay�consistency�reviews,�engaging� with�recruitment�firms�to�mitigate�bias,� providing�training�for�managers�and� non-managerial�staff,�and�running� apprenticeship�schemes.�In�addition,�we� have�collaborative�partnerships�with� organisations�that�further�the�diversity�and� inclusion�agenda,�including�Diversity�and� Inclusion�in�Asia�Network,�and�Peckham,� an�American�non-profit�community� rehabilitation�organisation.
Talent development We�offer�a�range�of�programmes�that� enable�our�people�to�continue�to�grow� and�develop.�The�majority�of�these�are� managed�by�our�business�units,�while� Group�Human�Resources�focuses�on� tailored�programmes�for�senior�leaders� across�the�organisation,�succession� planning�for�senior�roles,�and�development� of�our�overall�leadership�talent�pipeline.
There�are�several�recognition�initiatives� running�across�our�businesses,�including� the�‘High�Five�Recognition�Program’�in� the�US,�which�allows�associates�to�choose� from�a�list�of�‘badges’�for�actions�such� as�teamwork,�innovation�and�inspiration,� to�formally�recognise�when�colleagues� have�gone�above�and�beyond� expectations.�Similarly,�at�Group�head� office�the�Prudential�Star�awards�are� made�to�individuals�nominated�by�their� colleagues�for�outstanding�examples� of�execution,�impact�and�engagement.
In�addition�to�engaging�children�through� television�and�online�platforms,�the�learning� concepts�have�been�integrated�into�tailored� programmes�for�schools�in�partnership�with� financial�education�focused�NonGovernment �Organisations�(NGOs)�like� Junior�Achievement.�The�Philippines� Department�of�Education�has�incorporated� Cha-Ching�into�the�curriculum�of�public� primary�schools�and�has�just�completed�its� first�year.�Prudential�is�exploring�ways�in� which�this�application�of�Cha-Ching�can�be� brought�to�other�markets.
The�Prudence�Foundation�has� supported�First�Read,�Save�the�Children’s� unique�programme�that�works�with�parents� of�pre-school�children�in�the�Philippines� and�Cambodia�to�provide�them�with� knowledge,�skills�and�materials�to�support� their�children’s�literacy�and�numeracy.� Over�three�years,�the�programmes�will� benefit�nearly�150,000�children�aged� 0�to�6�years�and�their�parents.�They�will�also� benefit�almost�850,000�community� members�indirectly�through�the�expected� sharing�of�knowledge�and�resources.
We�support�the�educational�needs�of� Asian�families�and�have�continued�to� extend�our�long-standing�commitment�to� financial�literacy.�The�Prudence�Foundation� launched�Cha-Ching�in�2011�to�help� parents�instil�‘money-smart�skills’�in� children�aged�seven�to�12.�The�programme� has�gained�international�recognition�for� promoting�financial�literacy�and�won� several�industry�awards.�Over�the�past�year� it�has�grown�to�become�one�of�the�top-rated� children’s�television�programmes�in�Asia.�
� Disaster relief and preparedness Unfortunately�many�of�our�communities�in� Asia�are�exposed�to�approximately� 75�per�cent�of�the�world’s�natural�disasters.� For�many�years�we�have�supported�local� initiatives�to�aid�relief�efforts�following� disasters�and�we�also�maintain�a�disaster� relief�fund�which�can�be�activated�in� emergencies.�Our�commitment�to�disaster,� relief�also�often�goes�beyond�financial�aid,� with�our�people�helping�on�the�ground.�
example�is�the�‘Investing�in�Your�Future’� programme,�which�teaches�women�sound� money�management,�such�as�the�key� considerations�when�making�financial� decisions,�balancing�the�family�budget� and�how�to�plan�for�different�life�stages.� Female�volunteers�from�Prudential�donate� their�time�and�expertise�to�deliver�the� seminars�and�so�far�over�38,000�women� in�China,�India,�Indonesia�and�Vietnam� have�benefited.�
Jackson�employees�volunteered� approximately�9,000�hours�of�their�time� building�houses,�mentoring�children,� feeding�the�elderly�and�improving� communities.�In�2013,�the�JNCF�and� Jackson�in�Action�were�honoured�with�the� First�Place�award�for�the�US�President’s� Volunteer�Service�Awards�for�5,000� service�hours�with�Junior�Achievement.� In�addition,�Jackson�is�a�finalist�in�the� Nashville�Business�Journal’s�Corporate� Giving�Awards.
Chairman’s Challenge and employee volunteering Many�of�our�employees�play�an�active�role� in�their�communities�through�volunteering,� charitable�donations�and�fundraising.�In�the� UK,�US�and�in�Asia�we�offer�our�employees� the�opportunity�to�support�charities� through�payroll�giving.�
o rp o rate resp o n sib ility rev iew 59 Prudential plc Annual Report 2013
Charitable arts sponsorships Prudential�has�a�proud�tradition�as�a� supporter�of�the�arts.�In�the�UK,�we�support� a�number�of�charitable�institutions�including� the�Royal�Opera�House,�the�National� Theatre,�the�National�Gallery,�Holland�Park� Opera�and�the�British�Museum.�With�each� of�these�institutions�we�seek�to�focus�our� partnerships�on�education�and�access�to� the�arts�for�the�wider�community.�
1� �Reduced�CO2�emissions�at�UK�offices� and�shopping�centres�by�11�per�cent,� saving�occupiers�£430,000; 2� �Rolled�out�Green�Leases�to�our� managed�office�portfolios�and�worked� with�Marks�&�Spencer�to�include�Green� Lease�Memoranda�of�Understanding�at� their�stores;�and 3� �Submitted�76�per�cent�of�funds�under� management�to�the�Global�Real�Estate� Sustainability�Benchmark.
Reducing our direct impact: occupied properties We�monitor�energy�consumption�and� carbon�dioxide�emissions�globally�for�all� sites�where�we�have�operational�control.� We�also�measure�water�consumption,� waste,�paper�use�and�recycling�in�the�UK� and�at�Jackson’s�main�premises�in�North� America�in�Lansing,�Michigan;�Denver,�
Nationality: British Appointment date: October 2010 Chairman from July 2012 Committee membership: Chairman of the Nomination Committee (from July 2012)
Paul is the Chairman of Henderson Diversified Income Limited. Age 62.
Skills and experience Before joining Prudential, Nic Nicandrou 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 48.
Jackie is a non-executive director of National Express Group PLC. She was previously Chair of the Prudential Financial and Taxation Committee of the Association of British Insurers. Age 45.
Nationality: British Appointment date: January 2012 Committee membership: Audit Committee (from January 2012)
Nationality: Singaporean Appointment date: January 2012 Committee memberships: Remuneration Committee (from January 2012), Risk Committee (from January 2012)
Skills and experience Sir Howard is Chairman of the Phoenix Group, and a Professor at Institut d’Etudes Politiques (Sciences Po). He is also Chairman of the UK Government’s Airports Commission. He chairs the International Advisory Board of the China Securities Regulatory Commission and is a member of the International Advisory Board of the China Banking Regulatory Commission. In addition, Sir Howard is an independent director of Morgan Stanley Inc. and a director of the National Theatre. Age 63.
Kai is currently a non-executive director and lead independent director of Singapore Telecommunications Limited, a member of the Board of the Casino Regulatory Authority of Singapore, a non-executive director of PSA International Pte. Limited, Chairman of the Governing Board of the Duke-NUS Graduate Medical School and a director and Chairman of Clifford Capital Pte. Limited. Kai was appointed as a director of Credit Suisse Group AG in April 2013 and became a member of the Singapore Capital Markets Committee of the Monetary Authority of Singapore in January 2014. Age 63.
B o ard o f d irecto rs 67 Prudential plc Annual Report 2013
Nationality: British Appointment date: Committee memberships: Remuneration Committee (from January 2013), Audit Committee (from January 2013), Nomination Committee (from January 2013)
Skills and experience Barry Stowe is the Chief Executive of Prudential Corporation Asia, a position he has held since October 2006. Before joining Prudential, he 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. From October 2008 to October 2011, Barry was a director of the Life Insurance Marketing Research Association (LIMRA) and the Life Office Management Association (LOMA).
Skills and experience Philip Remnant was a senior adviser at Credit Suisse until December 2013. Philip was previously a Vice Chairman of Credit Suisse First Boston (CSFB) Europe and Head of the UK Investment Banking Department. Philip was seconded to the role of Director General of the Takeover Panel, which administers the UK’s code on takeovers and mergers, from 2001 to 2003, and again in 2010. He served on the Board of Northern Rock plc from 2008 to 2010, and from 2007 to 2012 was Chairman of the Shareholder Executive, which manages the relationships between the UK Government and the businesses in which it is a shareholder.
Alistair acted as a nonexecutive director of the Foreign & Commonwealth Office from 2005 to 2010 and chaired the audit committee until 2009. He was an Association Member of BUPA until January 2012.
Skills and experience Anthony Nightingale was Managing Director of the Jardine Matheson Group from 2006 to 2012. He joined that Group in 1969 and held a number of senior positions before joining the Board of Jardine Matheson Holdings in 1994. Anthony is now a nonexecutive director of Jardine Matheson Holdings and of other Jardine Matheson group companies. These include Dairy Farm, Hongkong Land, Jardine Cycle & Carriage, Jardine Strategic and Mandarin Oriental.
Nationality: American Appointment date: 10 June 2013 Committee membership: Audit Committee (from June 2013)
Alice is an independent board member of Cetera Financial Group and an independent director of WebTuner Corp. She is a member of the National Association of Corporate Directors, WomenCorporateDirectors and a board member of The Committee of 200 Foundation. Age 57.
Skills and experience Lord Turnbull was a member of the Remuneration Committee from November 2010, and a member of the Audit Committee from January 2007 to November 2010.
Lord Turnbull 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 a nonexecutive director of Frontier Economics Limited and The British Land Company PLC. He was formerly Chairman of BH Global Limited until January 2013 and a non-executive director of the Arup Group from 2006 to 2007. He also worked part-time as a Senior Adviser to the London partners of Booz and Co (UK) until February 2011. Age 69.
Board Role of the Board The Board is accountable for the long-term success of the Group and for providing leadership within a framework of effective controls. The control environment enables the Board to identify significant risks and apply appropriate measures to manage and mitigate them. The Board is responsible for setting strategic targets and for ensuring that the Group is suitably resourced to achieve those targets. In doing so, the Board takes account of its responsibilities to the Group’s stakeholders, including the Group’s employees, shareholders, suppliers and the communities in which Prudential operates.
The Board has delegated authority to a number of board committees which assist the Board in delivering its responsibilities and ensuring that there is appropriate independent oversight of internal control and risk management. Each of these committees has established terms of reference and is comprised of independent non-executive directors, with the exception of the Nomination Committee which, in keeping with the provisions of the UK Corporate Governance Code (‘UK Code’), is chaired by the Chairman. The terms of reference for the Board and its committees are regularly reviewed to ensure that they remain in line with best practice and the committees continue to have appropriate authority to fulfil their responsibilities, without creating unnecessary duplication of work.
The Board has also delegated authority for the operational management of the Group’s businesses to the Group Chief Executive for execution or further delegation by him in respect of matters which are necessary for the effective day-to-day running and management of the business. The chief executive of each business unit has authority for the management of that respective business unit and each has established a management board comprised of its most senior executives.
Roles and responsibilities The roles of the Chairman and Group Chief Executive are separate and clearly defined. The scope of these roles is approved and kept under regular review by the Board so that no individual has unfettered decision-making powers.
Chairman The Chairman is responsible for the leadership and governance of the Board, and ensuring that sufficient time is available for discussion of all agenda items. The Chairman facilitates the contribution of the non-executive directors and fosters constructive relationships between the non-executive and executive directors by promoting a culture of openness and debate.
Group Chief Executive The Group Chief Executive is responsible for the management of the Group and the implementation of the strategy and policy approved by the Board.
Senior Independent Director The principal responsibilities of the Senior Independent Director are to act as a conduit to the Board for the communication of shareholder concerns when other channels may be inappropriate and to lead the non-executive directors in carrying out the performance evaluation of the Chairman.
‘The composition of the Board remains key to achieving the Group’s strategic objectives.’
In a world of ever-increasing complexity and connectedness, governance requirements are continually developing. As well as complying with relevant codes, we are always well prepared for new developments, keeping abreast of upcoming changes and ensuring that our governance is adjusted accordingly.
The full biographical details of the directors, including the skills and experience they bring to the Board, can be found on pages 64 to 68.
Succession planning The Board is actively engaged in succession planning for both executive and non-executive roles to ensure that Board composition is regularly refreshed and that the Board retains its effectiveness at all times. This is delivered through an established review process applied across all businesses which covers both executive director and senior management succession and development, and also through the work of the Nomination Committee as described more fully on page 78. The Board considers annually the outcome of the review and any actions arising from the review are implemented as part of the management development agenda.
Board performance evaluation The 2013 performance evaluation of the Board and its principal committees was internally facilitated through the use of a questionnaire and carried out by the Chairman and Group Company Secretary. The findings were presented to the Board in February 2014 and an action plan is being agreed to address any areas identified by the review. In accordance with the UK Code, it is intended that the 2014 review will be carried out by external facilitators.
A summary of the Board’s progress against a number of actions arising from its 2012 effectiveness review can be found below: Theme Action taken
Improvements to Board papers continued with a view to streamlining and enhancing the flow of information to the Board and its committees facilitating effective decision making
Senior leadership Further opportunities for the Board to meet senior leadership across the Group were included in the programme of business for the Board and will continue to be included going forward
Delegation of authority The Board reviewed the delegations of its authority, confirming that these continued to be appropriate for the business carried out by the Group
Review of terms of reference A review of the terms of reference was carried out in order to ensure that these remained in line with best practice and that the committees continued to have appropriate authority to fulfil their responsibilities without creating duplication of activities
The governance framework principally relates to the operational management of the Group’s businesses and includes pre-determined authority limits, delegated by the Board, in respect of matters which are necessary for the effective day-to-day running and management of the business. The system is regularly reviewed and complies with the UK Code and Corporate Governance Code issued by the Hong Kong Stock Exchange (the ‘HK Code’), as well as the relevant provisions of the Sarbanes-Oxley Act. In complying with the UK Code, the Group follows the 2005 Turnbull Guidance relating to the sections of the UK Code dealing with risk management and internal control.
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 reviewed by the Audit Committee as described on page 75.
Internal control The Board reviewed the effectiveness of the system of internal control in February 2014, covering all material controls, including financial, operational and compliance controls, risk management systems and the adequacy of the resources, qualifications and experience of staff of the Group’s accounting and financial reporting function. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period and up to the date of this report, and confirms that the system remains effective.
Induction and development The Group Company Secretary supports the Chairman in providing tailored induction programmes for new directors and ongoing development for all directors. On appointment, all directors embark upon a wide-ranging induction programme covering, amongst other things, the principal bases of accounting for the Group’s results, the role of the Board and its key committees and the ambit of the internal audit and risk management functions. In addition, they receive detailed briefings on the Group’s principal businesses, its product range, the markets in which it operates and the overall competitive environment. These sessions are facilitated through meetings with executive management and other senior members of the management team. Other areas addressed include the directors’ obligations under the different listing regimes, legal issues affecting directors of financial services companies, the Group’s governance arrangements and its investor relations programme as well as its remuneration policies.
Ongoing professional development was undertaken by all directors during 2013. 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 key issues currently facing their function. Members of the Audit Committee have the option to attend meetings of the business unit audit committees to aid their understanding of topical matters of interest to them and how they are handled by the Group.
Re-election Jackie Hunt, Anthony Nightingale and Alice Schroeder will stand for election for the first time at the 2014 Annual General Meeting. In keeping with the provisions of the UK Code, all other directors will stand for re-election.
The Board believes that the nonexecutive directors bring a wide range of business, financial and international experience to the Board and its committees.
Throughout the year, the non-executive directors were considered by the Board to be independent in character and judgement and met the criteria for independence as set out in the UK and HK Codes. The Company has received confirmation of independence from each of the independent non-executive directors as required by the Hong Kong Listing Rules.
Conflicts of interest Directors have a statutory duty to avoid conflicts of interest with the Company. The Company’s Articles of Association allow its directors to authorise conflicts of interest and the Board has adopted a policy and effective procedures to manage and, where appropriate, approve 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, along with other appointments which could result in conflicts or could give rise to a potential conflict.
Directors’ interests Individual directors’ interests are set out on page 116 of the directors’ remuneration report.
External appointments Directors may hold directorships or other significant interests in companies outside the Group which may have business relationships with the Group.
Non-executive directors may serve on a number of other boards, review or advisory groups and charitable trusts, 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 on pages 66 to 68.
Executive directors may accept external directorships and retain any fees earned from those directorships subject to prior discussion with the Group Chief Executive and always provided that they do not lead to any conflicts of interest.
In addition, the Company’s Articles of Association permit the directors and officers of the Company to be indemnified in respect of liabilities incurred as a result of their office.
One overseas strategy event was held in the US and the Board also met on one additional occasion to address business outside of the usual scheduled meetings.
During the year, the Chairman met with the non-executive directors without the executive directors being present on seven occasions.
In the ordinary course of business, Board and committee papers are provided approximately one week in advance of each meeting.
Board committees Corporate governance framework The Board has established Audit, Remuneration, Nomination and Risk Committees as principal standing committees of the Board. These committees form a key element of the Group’s corporate governance framework.
Role and responsibilities of the Committee The Committee’s role is to assist the Board in meeting its responsibilities for the integrity of the Group’s financial reporting, including the effectiveness of the internal control and risk management systems, and for monitoring the effectiveness and objectivity of the internal and external auditors.
In performing its duties, the Committee has access to employees and their financial or other relevant expertise across the Group.
Meetings The Committee held 11 scheduled meetings and one additional meeting during the year and worked closely with the Risk Committee to ensure that any pertinent areas of overlap were appropriately addressed. The Chairman of the Risk Committee is a member of the Audit Committee and the Committee Chairman is a member of the Risk Committee. The cross-membership helps ensure that both committees work together effectively to cover all relevant issues.
How the Committee discharged its responsibilities in 2013 During the year, the Committee undertook the following work: Financial reporting The Committee assessed whether suitable accounting policies had been adopted
Key assumptions and judgements in respect of the Group’s investments, insurance liabilities, and deferred acquisition costs are important, and in this regard, the main areas of focus were: — Oversight of the assumptions applied and operation of internal controls in respect of the items shown below, and more generally, in the preparation of the results; — Specific assumptions for: – Mortality and credit risk for UK annuity business; – Economic and policyholder behaviour assumptions affecting the measurement of Jackson guarantee liabilities and amortisation of deferred acquisition costs; — Non-recurrent adjustments to Asia policyholder liabilities; and
— Investment and derivative valuations, in particular considering the results of independent valuations by the external auditor.
Business unit audit committees Every business unit has its own audit committee which provides oversight to the respective business unit and supports the work of the Committee. Any relevant matters discussed at business unit level are reported to the Committee. The members and chairmen are comprised primarily of senior management who are independent of the respective business unit. The minutes of these committees are reported regularly to the Committee and their meetings are attended by senior management of the respective business unit, including the business units’ heads of Finance, Risk, Compliance and Group-wide Internal Audit, and by the external auditor.
The Committee Chairman also reviewed and approved the appointments to the business unit audit committees.
During the year, the business unit audit committees reviewed their respective internal audit plans, resources and the results of internal audit work, and both external and internal auditors were able to discuss any relevant matters with the Chairman and members of the Committee as required.
During 2013, the Committee also considered and approved changes to the Group Compliance Policy, the Anti-Money Laundering and Counter Terrorist Policy and the Group Sanctions Policy to take account of changes in the relevant legal and regulatory environments.
Auditor performance and independence The Committee assessed the performance, as well as the independence and objectivity, of the external auditor and the effectiveness of the audit process. A key component of this assessment is the consideration that the auditor is sufficiently robust in its challenge. The review of the effectiveness of the external audit process was conducted through a questionnairebased exercise administered by Group Finance. This was circulated to key stakeholders involved in the statutory audit, including committee members, executive management, finance, Groupwide Internal Audit and risk functions across the Group. A report on the principal findings of the review was considered by the Committee in May 2013, alongside a response to the review prepared by KPMG.
In line with the Auditing Practices Board Ethical Statements and the Sarbanes-Oxley Act, a new lead audit partner was appointed in respect of the 2012 financial year.
Changes to the Policy were agreed during 2013, which implemented the Financial Reporting Council’s prohibition on the use of the internal audit function to provide direct assistance to the external auditor and the provisions relating to the introduction of a mandatory audit tender.
The four key principles of the Policy specify that the auditor should not: — Audit its own firm’s work; — Make management decisions for the Group; — Have a mutuality of financial interest with the Group; or
The Policy has two permissible service types, including those that require specific approval by the Committee on an engagement basis and those that are pre-approved by the Committee with an annual limit. In accordance with the Policy, the Committee approves these permissible services, classified as either audit or non-audit services, monitoring the annual limit on an ongoing basis. All non-audit services undertaken by the auditor were agreed prior to the commencement of work and were confirmed as permissible for the external auditor to undertake under the provisions of the Sarbanes-Oxley Act.
The main non-audit services provided by KPMG in 2013 included: — Financial risk management services such as actuarial, forensic and enterprise resource management; — Reports on internal controls not required by legislative authority; — Tax compliance and advisory services; and
Fees payable to the auditor The fees payable to the external auditor for the year ended 31 December 2013 amounted to £15.2 million, of which £3.6 million was payable in respect of non-audit services. Non-audit services accounted for 24 per cent of total fees payable.
Additional information can be found in note B3.4 to the financial statements on page 163.
Training The Committee received detailed presentations on a range of topics including updated financial accounting developments, the new reporting requirements, briefings on developments in the regulatory environment, and received the minutes of both the Disclosure Committee and the Assumptions Approval Committee for information. Further information on the Disclosure Committee appears on page 73. The Assumptions Approval Committee reviewed the key assumptions to be used for financial reporting, business planning, forecasting and the IAS 19 valuation of the three UK defined benefit pension schemes.
‘Maintaining the right balance of skills and knowledge is key to achieving the Group’s strategic objectives and the Committee focussed on these in considering new appointments to the Board.’
Biographical details of the members can be found on pages 64 to 68.
— Develop, where appropriate, and periodically review, any objectives established for the implementation of diversity on the Board and monitor progress toward the achievements of those objectives.
Succession planning The Committee reviewed the succession plans for both executive and non-executive appointments to the Board, taking into account the strategic objectives of the Group and the future retirement of directors, as well as the level of diversity desirable for a Group with such a global reach. Further information on the diversity of the Board can be found on page 70. The process included consideration of the anticipated demands of the business and the skills and knowledge required to successfully deliver against these.
With the assistance of Egon Zehnder, the Committee also led the search process for the appointment of Jackie Hunt as
Chief Executive, Prudential UK & Europe. Egon Zehnder assisted Prudential in finding candidates for a number of executive positions below Board level during the course of the year.
Conflicts of interest and independence The Board has delegated authority to the Committee to consider, and where necessary authorise, any actual or potential conflicts of interest arising in respect of the directors. The Committee considered potential conflicts of interest as they arose during the course of the year and in respect of the appointments of new directors.
The Committee also supports the Board in its annual consideration of the Conflicts of Interest Register, which is carried out prior to the publication of the Annual Report, and considers the independence of the non-executive directors, in the context of the criteria set out in the UK and HK Codes.
Biographical details of the members can be found on pages 66 to 68.
The Chairman of the Board, the Group Chief Executive, the Chief Financial Officer, the Group Chief Risk Officer, the Group-wide Internal Audit Director and the Group General Counsel are invited to attend the meetings, as is the Chief Operating Officer, Group Risk and Director of Risk Advisory and Technical Analysis.
Extensive ‘road-testing’ of the framework was carried out during the course of 2012 and 2013, with the Committee receiving regular feedback on the implementation in the business units. Once the Committee was satisfied that the strengthened framework was both appropriate for the business and functioning robustly, it was recommended to the Board for approval.
Key Group risks The Committee continued to monitor the Group’s key risks against the changing economic backdrop and strategic objectives approved by the Board in June.
isk C o m m ittee rep o rt areas of consideration for the Committee and both items formed a notable part of the Committee’s deliberations over the course of 2013.
Dialogue with the regulator Ongoing dialogue with the PRA was maintained through the usual cycle of close and continuous meetings with the Committee Chairman and Group Chief Risk Officer. Discussions focussed on the Pillar I disclosures under Solvency II and the Economic Capital Model, which sets out the Group’s approach to risk appetite and the Group risk framework.
Training and support The Committee regularly received updates from Group Risk, Group-wide Internal Audit and the Group Treasurer on industry and market developments and their impact on Prudential.
The Committee received the minutes of the Group Executive Risk Committee, along with any matters escalated by the other risk management committees.
In performing its duties, the Committee has access to the Group Chief Risk Officer, as well as other employees and their relevant expertise across the Group.
Risk governance Principles and objectives Risk is defined as the uncertainty that Prudential faces in successfully implementing its strategies and objectives. This includes all internal or external events, acts or omissions that have the potential to threaten the success and survival of Prudential.
Material risks will only be retained where this is consistent with Prudential’s risk appetite framework and its philosophy towards risk-taking. The Group’s current approach is to retain such risks where doing so contributes to value creation and the Group is able to withstand the impact of an adverse outcome, and has the necessary capabilities, expertise, processes and controls to appropriately manage the risk.
Prudential’s risk governance framework requires that all of the Group’s businesses and functions establish processes for identifying, evaluating and managing the key risks faced by the Group. The framework is based on the concept of ‘three lines of defence’ comprising risk-taking and management, risk control and oversight and independent assurance. The diagram below outlines the Group level framework.
Primary responsibility for strategy, performance management and risk control lies with the Board, which has established the Risk Committee to assist in providing leadership, direction and oversight in respect of the Group’s significant risks, and with the Group Chief Executive and the chief executives of each of the Group’s business units.
Group Executive Committee (GEC) Purpose: Supports the Group Chief Executive in the executive management of the Group and is comprised of the chief executives of each of the Group’s major business units, as well as a number of functional specialists.
Balance Sheet and Capital Management Committee (BSCMC) Purpose: Supports the Chief Financial Officer in the management of the Group’s balance sheet, as well as providing oversight to the activities of Prudential Capital, which undertakes the treasury function for the Group. The BSCMC is comprised of a number of functional specialists.
Risk control and oversight constitutes the second line of defence, and is achieved through the operation of a number of Group-level risk committees, chaired by either the Chief Financial Officer or the Group Chief Risk Officer, which monitor and keep risk exposures under regular review.
Group Compliance Committee (GCC) Purpose: Oversees the effectiveness of risk and capital management for all financial and non-financial risks faced by Prudential Group and has responsibility to consider Group-wide regulatory compliance risks and controls.
Communication with shareholders Being a major institutional investor, Prudential is very aware of the importance of maintaining a good relationship with its shareholders, as well as with its debt investors. Discussions are held regularly with major shareholders and a programme of meetings took place throughout the year. In addition, Prudential regularly holds a conference for investors to provide further insight on selected areas of the business. In December 2013, the conference was held in London and new Growth and Cash targets for 2014 to 2017 were published.
Annual General Meeting The Annual General Meeting will be held in the Churchill Auditorium at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on 15 May 2014 at 11.00am.
The Annual General Meeting is an important forum for both institutional and private shareholders and all shareholders are encouraged to vote. Shareholders are given the opportunity during annual general meetings to put questions to the Board on matters relating to the Group’s operations and performance.
Details of the 2013 AGM, including the major items discussed at the meeting and the results of the voting, can be found on the Group’s website. All directors in office at the time of the Annual General Meeting held on 16 May 2013 attended the meeting, with the exception of Keki Dadiseth, who was unable to do so due to a prior commitment.
In accordance with the relevant legislation, shareholders holding 5 per cent or more of the fully paid up issued share capital are able to require the directors to hold a general meeting. Written shareholder requests should be addressed to the Group Company Secretary at the registered office.
Company constitution Prudential is governed by the Companies Act 2006, other applicable legislation and regulation, and provisions in its Articles of Association. Any change to the Articles of Association must be approved by special resolution of the shareholders. There were no changes to the constitutional documents during 2013.
The Memorandum and Articles of Association are available on the Group’s website.
Share capital The issued share capital as at 31 December 2013, which is set out in Note C10 on page 257, consisted of ordinary shares of 5 pence each, all fully paid up and listed on the London Stock Exchange and the Hong Kong Stock Exchange. Subject to applicable local securities law, the Company’s shares may be registered on the main register in the UK or the branch registers in Ireland or Hong Kong.
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 Conduct Authority (FCA) and the Hong Kong Stock Exchange, as well as under the Rules of some of the Group’s employee share plans.
Authority to issue shares The directors require authority from shareholders in relation to the issue of shares. Whenever shares are issued, these must be offered to existing shareholders pro rata to their holdings, unless the directors have been given authority by shareholders to issue shares without offering them first to existing shareholders. Prudential seeks authority from its shareholders on an annual basis to issue shares up to a maximum amount and to issue up to 5 per cent of its issued share capital without offering them to existing shareholders, in line with relevant regulations and best practice. Disapplication of statutory pre-emption procedures is also sought for rights issues. The existing authorities to issue shares and to do so without observing preemption rights are due to expire at the end of this year’s Annual General Meeting. An ordinary resolution and a special resolution to approve the renewal of these authorities respectively will be put to shareholders at the Annual General Meeting on 15 May 2014.
Authority to purchase own shares The directors also require authority from shareholders in relation to the purchase of the Company’s own shares. Prudential seeks authority by special resolution on an annual basis for the buyback of its own shares in accordance with the relevant provisions of the Companies Act 2006 and other related guidance. This authority has not been used since it was last granted at the Annual General Meeting in 2013. This existing authority is due to expire at the end of this year’s Annual General Meeting and a special resolution to renew the authority will be put to shareholders at the Annual General Meeting on 15 May 2014.
US corporate governance and regulations As a result of the listing of its securities on the New York Stock Exchange, the Company is required to comply with the relevant provisions of the Sarbanes-Oxley Act 2002 (the ‘Act’) as they apply to foreign private issuers and has adopted procedures to ensure this is the case.
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 the 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 directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware and that each director has taken all the steps that he or she ought to have taken as a director to make himself or herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006.
Customers The five largest customers of the Group constituted in aggregate less than 30 per cent of its total sales for each of 2012 and 2013.
Details of qualifying third party indemnity provisions Corporate governance report 69
Significant agreements impacted by a change of control Additional disclosures 86
Remuneration report 90 Annual statement from the Chairman of the Remuneration Committee 92 Our executive remuneration at a glance 94 Directors’ remuneration policy 107 Annual report on remuneration 120 Supplementary information
This report has been prepared to comply with Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, as well as the Companies Act 2006 and other related regulations.
While we have endeavoured to keep the report as concise as possible, Prudential is a large and complex organisation. Each of our major business units has a market capitalisation which would independently make them a constituent of the FTSE 100, and the pay and remuneration arrangements for the respective business unit CEOs reflect the differing market practices in the geographies and industries in which they operate. As Prudential is unusual in having all of these executives on the Board, and as it is required to comply with Hong Kong as well as UK reporting requirements, our report is understandably longer than many others.
Total shareholder return 1 Jan 09 1 Jan 10 1 Jan 11 1 Jan 12 1 Jan 13 1 Jan 14
Prudential plc – value of £100 invested on 1 January 2009 International insurers – value of £100 invested on 1 January 2009
A n n u al statem en t fro m th e
C h airm an o f th e R em u n eratio n
As you will see, we operate a remuneration architecture which provides a clear link between pay and the achievement of the Group’s key strategic priorities and delivery of shareholder value. This consists of base salary and benefits; an annual bonus, of which a significant proportion is deferred in Prudential shares for three years; and a long-term incentive plan, all underpinned by significant shareholding guidelines.
Across all of our key performance metrics the Group’s 2013 results exceed those achieved in 2012. The Remuneration Committee sets stretching performance ranges for all of its incentive plans and the bonuses awarded to executive directors reflect these excellent achievements during 2013, which have generated substantial value for our shareholders.
In particular, in determining the 2014 remuneration packages the Committee was mindful of the following: — Maintaining our restraint on base salary increases: The 2014 salary increases for executive directors are in line with salary increase budgets for other employees across our business units; — Determining annual bonus metrics that remain based on challenging performance requirements closely aligned to the strategy of the Group and business units. 40 per cent of 2014 bonuses will also be deferred into shares for three years before release in 2018. Deferred shares are subject to malus provisions which mean that part or all of these amounts can be withheld in specific circumstances; — Continuing to ensure that long-term incentive awards only vest subject to achievement of stretching performance measures linked to the three year business plan, as well as being dependent on delivery of shareholder returns that exceeds our peers; — Ensuring long-term alignment between the interests of shareholders and executives by requiring executives to maintain a significant shareholding on an ongoing basis; and
— Retaining the current maximum opportunities under the annual bonus and long-term incentive awards, other than an increase (from 225 per cent to 250 per cent of salary) to the Chief Financial Officer’s long-term incentive award.
Further details of how the Remuneration Committee has aligned 2014 packages with performance are set out in the annual report on remuneration on pages 107 to 119.
Shareholder support Prudential maintains open and transparent communication with our shareholders of which this report forms part. During Autumn 2013, I personally met with shareholders and their representatives, who together own more than half of our share capital, to discuss our remuneration policy and its implementation in 2014.
— The annual report on remuneration will be subject to an advisory vote.
At our 2013 AGM, shareholders supported the implementation of a revised remuneration architecture as illustrated below. No structural changes are being proposed in 2014: Stretching IFRS profit ranges set with reference to business plans approved by the Board.
We have significant share ownership guidelines for all executives3 as follows: B 350% of salary for the Group Chief Executive; and B 200% of salary for other executive directors.
Awards in 2013 and 2014 are below plan limits: B Group Chief Executive: 400% of salary B CEO JNL: 460% of salary B Other PLTIP awards were 250% of salary, or less.
For business unit CEOs awards vest based on TSR and business unit IFRS profit. For other executives awards are subject to TSR and Group IFRS profit.
Jackie Hunt Michael McLintock Nic Nicandrou Barry Stowe Tidjane Thiam Mike Wells
The value of these performance related elements of remuneration are added to the fixed packages provided to executive directors in the table below to calculate the 2013 ‘single figure’ of total remuneration: Fixed pay Performance related
John Foley Group Investment Director 628 275 1,004 2,114 4,021 1,895
Nic Nicandrou Chief Financial Officer 649 254 1,124 2,114 4,141 4,489
The resultant remuneration packages for 2014 are set out in detail in the annual report on remuneration and summarised in the table below: Maximum AIP (% salary)
Nic Nicandrou Chief Financial Officer 5% £682,000 175% 40% 250% Barry Stowe CEO, PCA 3% HK$ 8,490,000 160% 40% 225% Tidjane Thiam Group Chief Executive 3% £1,061,000 200% 40% 400% Mike Wells CEO, JNL2 3% US$ 1,114,000 160% 40% 460%
Benefits The benefits provided to executives are items and allowances that assist them in carrying out their duties efficiently.
Variable pay Annual cash bonus Payments under the Annual Incentive Plan (AIP) incentivise the delivery of stretching financial and personal objectives which are drawn from the annual business plan.
Annual deferred bonus The Company mandates that a proportion of each executive director’s annual bonus is not paid in cash and must be deferred. The deferred bonus is subject to malus provisions designed to ensure that performance is sustained. Deferral into shares aligns the interests of our executive directors with our shareholders and helps to ensure a focus on the longer-term sustainable success of the Company.
M&G Executive LTIP The M&G Executive LTIP is designed to incentivise the delivery of: — Longer-term sustainable growth; and adherence to the Group’s and M&G’s risk appetite.
irecto rs’ rem u n eratio n p o licy 95 Prudential plc Annual Report 2013
Base salary Prudential’s policy is to offer all executive directors base salaries which are competitive within their local market.
Additionally, economic factors such as inflation are considered. Having taken a view on the appropriate levels of increase based on these criteria, market data is reviewed with the intention that any resultant salary remains within a competitive range.
Annual salary increases for executive directors will normally be in line with the increases for other employees across our business units. However, there is no prescribed maximum annual increase.
The maximum paid will be the cost to the company of providing these benefits. The cost of these benefits may vary from year to year but the Committee is mindful of achieving the best value from providers.
Prudential’s policy is to offer all executive directors a pension provision which is competitive within their local market.
Those executives who joined the Group before June 2003 were entitled to join the defined benefit plans available at that time. At the end of 2013, no executive director was an active member of a Group defined benefit scheme.
Executives who are not an active member of a defined benefit scheme have the option to: — Receive payments into a defined contribution scheme; or
The Committee has the discretion to determine the specific performance conditions attached to each AIP cycle and to set annual targets for these measures with reference to the business plans approved by the Board. The financial measures used for the AIP will typically include profit, cash and capital adequacy. For the measures used in 2013 and 2014, please refer to our annual report on remuneration.
Jackson’s profitability and other key financial measures determine the value of the Jackson Senior Management Bonus Pool.
Notes 1 The Group Investment Director is responsible for oversight of Prudential’s investment activities, with particular emphasis on ensuring alignment to the Group’s risk appetite. The weighting of his bonus objectives reflect this role. 2 The President & CEO, JNL also participates in the Jackson Senior Management Bonus Pool. The whole of the pool is determined by financial performance.
When awards are released they are increased to reflect the number of shares which could have been purchased with the dividends paid on the released shares, during the deferral period.
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding deferred award. This power could be invoked in specific circumstances, for example, if a business decision taken during the performance period led to a material breach of a law or regulation, or if there is a material adverse restatement of the accounts for that period.
— Continue in accordance with the rules of the Plan; and/or
See page 104 for details of the Committee’s powers in respect of AIP participants joining or leaving the Group.
Opportunity The maximum vesting under this arrangement is 100 per cent of the original deferral, plus accrued dividend shares.
The level of the initial deferred bonus awards are determined by the value of the bonus in respect of performance in the previous year as described in the table above. The release of awards is not subject to any further performance conditions.
The Rules of the PLTIP were approved by shareholders in 2013. The Committee will operate this Plan in line with these Rules.
Granting awards The PLTIP is a conditional share plan: the shares which are awarded will ordinarily be released to directors after three years to the extent that performance conditions have been met. If performance conditions are not achieved in full, the unvested portion of any award lapses and performance cannot be retested.
In the case of a corporate transaction (eg takeover, merger, winding up, rights issue etc) the Committee may determine that awards will be exchanged for replacement awards (either in cash or shares) of equal value or be released. Where awards are released the Remuneration Committee will have regard to the performance of the Company, the time elapsed between the date of grant and the relevant event and any other matter which the Remuneration Committee considers relevant or appropriate.
The Committee may make amendments to the Rules of the Plan which are minor and to benefit the administration of the Plan, which take account of any changes in legislation, and/or which obtain or maintain favourable tax, exchange control or regulatory treatment. No amendments may be made to the advantage of participants without prior shareholder approval.
irecto rs’ rem u n eratio n p o licy 99 Prudential plc Annual Report 2013
The performance conditions attached to each award is dependent on the role of the executive and will be disclosed in the relevant annual report on remuneration.
The awards made under the PLTIP to the Chief Executive, M&G are subject only to the TSR performance condition as the IFRS profit of M&G is a performance condition under the M&G Executive LTIP.
Relative TSR Relative TSR is measured over three years. 25 per cent of this portion of each award will vest for achieving the threshold level of median increasing to full vesting for meeting the stretch level of upper quartile.
For any award made under the PLTIP 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.
For new awards, organisations may be included in the peer group if their size, geographic footprint and products become similar to those of the Company. Organisations which no longer meet such criteria may be excluded from the peer group.
The Committee retains the ability to adjust and/or set different performance measures (or the weighting of performance conditions) which apply to future long-term incentive awards if events occur (such as a change in strategy, a material acquisition and/or divestment of a Group business or a change in prevailing market conditions) which cause the Committee to determine that the measures are no longer appropriate and that amendment is required so that they achieve their original purpose. The Committee will consult with major shareholders before revising performance conditions on future awards under the PLTIP. In addition, these would be disclosed in the relevant annual report on remuneration and would be subject to an advisory vote at the AGM.
See page 104 for details of the Committee’s powers in respect of M&G Executive LTIP participants joining or leaving the Group.
Opportunity The Chief Executive, M&G receives an award with an initial value of 300 per cent of salary under the M&G Executive LTIP.
The phantom share price at vesting is currently determined by the increase or decrease in M&G’s profitability with profit and investment performance adjustments also applied.
Operation The share ownership guidelines for the executive directors were increased as part of the review of remuneration architecture approved by shareholders in 2013. The revised guidelines, effective from 1 January 2013, are: — 350 per cent of salary for the Group Chief Executive; and
Progress against the share ownership guidelines is detailed in the ‘Statement of directors’ shareholdings’ section of the annual report on remuneration.
Group Performance Share Plan (‘GPSP’) and Business Unit Performance Plan (‘BUPP’)
Opportunity The maximum award which could be made to a participant under the GPSP and BUPP in total in any year was 550 per cent of salary.
Asia BUPP Asia BUPP awards are dependent on the achievement of PCA’s new business profit, IFRS profit and cash remittance measured over a cumulative three-year period. Each of these measures will determine vesting of one third of each award. Threshold performance results in 30 per cent of the award vesting increasing to 100 per cent for stretch performance.
As set out in the rules of the GPSP and BUPP, the Committee has the discretion to amend the performance conditions attached to an award if circumstances relevant to the performance condition have changed and the Committee is satisfied that the amended measure will be a fairer measure of performance and no more or less demanding than the original condition. The Committee may make amendments to the Rules of the Plan which are minor and to benefit the administration of the Plan, which take account of any changes in legislation, and/or which obtain or maintain favourable tax, exchange control or regulatory treatment. No amendments may be made to the advantage of participants without prior shareholder approval.
Notes to the remuneration policy table for executive directors Determining the performance measures The Committee selected the performance measures which currently apply to variable pay plans on the following basis: AIP The performance measures are selected to incentivise the delivery of the Group’s business plan, specifically to ensure that financial objectives are delivered while maintaining adequate levels of capital. Executives are also rewarded for the achievement of personal objectives. These personal 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.
PLTIP Awards made under the PLTIP are currently subject to the achievement of IFRS profit targets and relative TSR. IFRS profit was selected as a performance measure because it is central to the management of the business and a key driver of shareholder value. Relative TSR was selected as a performance measure because it focuses on the value delivered to shareholders – aligning the long-term interests of shareholders with those of executives. There is one exception; awards made under the PLTIP to the CEO, M&G are subject only to the TSR performance condition. His annual awards under the M&G Executive LTIP (see below) are subject to an IFRS profit target, thereby ensuring that he has the same combination of performance targets as other executives.
M&G Executive LTIP The performance measures under the M&G Executive LTIP are currently M&G’s IFRS operating profit and investment performance. IFRS profit was selected as a performance measure as it is central to the management of the business and a key driver of shareholder value. Investment performance was selected as a performance measure as it is the principal measure of the relative return which M&G provides to its investors and is crucial in ensuring the long-term success of M&G.
GPSP The performance measure under the GPSP is relative TSR. Relative TSR was selected as a performance measure because it focuses on the value delivered to shareholders – aligning the long-term interests of shareholders with those of executives.
Asia BUPP The performance measures under the PCA BUPP are PCA IFRS operating profit, PCA new business profit and PCA cash remittances. These measures were selected as performance measures because they reflected the growth and cash strategy of PCA.
UK BUPP The performance measure under the UK BUPP is relative TSR. Relative TSR was selected as a performance measures for the UK BUPP because this aligned the UK business with the Group performance measure in order to reflect the cash generative priorities of the UK business.
Setting the performance ranges Where variable pay has performance conditions based on business plan measures (for example the AIP and the IFRS profit element of the PLTIP) the performance ranges are set by the Remuneration Committee prior to, or at the beginning of, the performance period. Performance is based on annual and longer-term plans approved by the Board. These reflect the long-term ambitions of the Group and business units, in the context of anticipated market conditions.
Key differences between directors’ remuneration and the remuneration of other employees Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their local market and given their individual skills, experience and performance. Each business unit’s salary increase budget is set with reference to local market conditions. The Remuneration Committee considers salary increase budgets in each business unit when determining the salaries of executive directors.
The principles that apply to executive directors are cascaded to other employees in their business unit. All senior leaders in the Group participate in annual bonus schemes which have performance conditions which mirror the CEO for their business unit. In addition, they are eligible to receive awards under the Prudential Long Term Incentive Plan or the M&G Executive LTIP with performance conditions aligned to those which apply to executive directors.
Scenarios of total remuneration The chart below provides an illustration of the future total remuneration for each executive director in respect of remuneration opportunity for 2014. Three scenarios of potential outcome are provided based on underlying assumptions shown in the notes to the chart.
John Foley Jackie Hunt Michael McLintock Nic Nicandrou Barry Stowe Tidjane Thiam Mike Wells
— JNL bonus pool at highest of the last three years.
Service contracts Executive directors’ service contracts provide details of the broad types of remuneration to which they are entitled, and about the kinds of plans in which they may be invited to participate. The service contracts offer no certainty as to the value of performance-related reward and confirm that any variable payment will be at the discretion of the Company.
Statement of consideration of conditions elsewhere in the Group Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their local market and given their individual skills, experience and performance. Each business unit’s salary increase budget is set with reference to local market conditions. The Remuneration Committee considers salary increase budgets in each business unit when determining the salaries of executive directors.
Prudential does not consult with employees when setting the directors’ remuneration policy: Prudential is a global organisation with employees and agents in multiple business units and geographies. As such, there are practical challenges associated with consulting with employees directly on this matter. As many employees are also shareholders, they will be able to participate in the binding vote on the directors’ remuneration policy.
Statement of consideration of shareholder views The Remuneration Committee and the Company undertake regular consultation with key institutional investors on the remuneration policy and implementation. This engagement is led by the Remuneration Committee Chairman and is an integral part of the Company’s investor relations programme. The Committee is grateful to shareholders for the feedback which is provided, and takes this into account when determining executive remuneration.
Approach to recruitment remuneration The table below outlines the approach that Prudential will take when recruiting a new executive director. This approach would also apply to internal promotions.
The approach to recruiting a non-executive director or a non-executive chairman is outlined in the remuneration policy for nonexecutive directors and the non-executive Chairman on page 106.
The salary, benefits and pension for a new executive director will be set using the approach set out in the table ’Fixed pay policy for Executive Directors’.
The variable remuneration opportunities for a new executive director would be consistent with the limits and structures outlined in the variable pay policy table.
If a newly appointed executive director forfeits one or more long-term incentive awards on leaving a previous employer, these may be replaced with Prudential awards with an equivalent value. Replacement awards will generally be made under the terms of a long-term incentive plan approved by shareholders, and vest on the same schedule as the foregone awards. Performance conditions will be applied to awards replacing foregone long-term incentive awards; these will be the same as those applied to the long-term incentive awards made to Prudential executives in the year in which the forfeited award was made.
This provision would only be used to compensate for remuneration forfeited on leaving a previous employer. Any arrangement established to replace foregone long-term incentive awards would reflect, as far as possible, the terms of the original award (including, if applicable, any performance conditions). The value of this would be capped to be no higher, on recruitment, than the awards which the individual had to surrender to be recruited.
Should an executive die while serving as an employee their estate would not be entitled to receive payments and benefits in respect of their notice period – provisions are made under the Company’s life assurance scheme to provide for this circumstance (see ‘Benefits’ in the Fixed pay policy for executive directors).
irecto rs’ rem u n eratio n p o licy 105 Prudential plc Annual Report 2013
Principles The treatment of outstanding deferred bonuses will be decided by the Committee, taking into account the circumstances of the departure, including the performance of the director.
Should an executive die while serving as an employee, outstanding deferred bonus awards will be released as soon as possible after the date of death.
Potential variations Any executive director dismissed for cause would forfeit all outstanding long-term incentive awards.
Should an executive director step down from the Board but remain employed by the Group, they would retain any outstanding long-term incentive awards which they held on their change of role. These awards would remain subject to the original Rules, performance conditions and vesting schedule.
The Committee may award a departing executive a bonus which will usually be pro-rated to reflect the portion of the final financial year in which they served which had elapsed on the last day of their employment. Any such bonus would be calculated with reference to individual and financial performance measures in the usual way. The Committee may determine that a portion of such a bonus must be deferred.
Potential variations Any executive director dismissed for cause would not be eligible for any outstanding bonus payments.
— By way of settlement or compromise of any claim arising in connection with the termination of a director’s office or employment.
Non-executive directors are not eligible to participate in annual bonus plans or long-term incentive plans.
Non-executive directors are not eligible to receive benefits, a pension allowance or to participate in the Group’s employee pension schemes.
Travel and expenses for nonexecutive directors (including the Chairman) are incurred in the normal course of business, for example in relation to attendance at Board and committee meetings. The costs associated with these are all met by the Company.
In July 2011, a share ownership guideline for non-executive directors was introduced. It is expected that non-executive directors will hold shares with a value equivalent to one times the annual basic fee (excluding additional fees for chairmanship and membership of any committees).
Non-executive directors will be expected to attain this level of share ownership within three years of the implementation of this requirement (or within three years of their date of appointment, if later).
The Chairman receives an annual fee for the performance of their role. This fee is agreed by the Remuneration Committee and is paid to the Chairman in cash, subject to the appropriate deductions. On appointment, the fee may be fixed for a specified period of time. Following the fixed period (if applicable) this fee will be reviewed annually. Changes in the fee are effective from 1 July.
In determining the level of the fee for the Chairman the Committee considers: — The time commitment and other requirements of the role; the performance and experience of the Chairman; internal relativities; Company financial performance; salary increases for all employees; and benchmark information from appropriate markets.
Notice periods – non-executive directors and non-executive Chairman Non-executive directors are appointed pursuant to letters of appointment with notice periods of six months without liability for compensation. A contractual notice period of 12 months by either party applies for the non-executive Chairman. The Chairman would not be entitled to any payments for loss of office. For information on the terms of appointment for non-executive directors please see the corporate governance report.
The operation of the Committee The members of the Committee during 2013, and the number of Remuneration Committee meetings they attended, are listed below. All are independent non-executive directors: Director Meetings attended
Lord Turnbull KCB CVO (Chairman) 5/5 Keki Dadiseth (until 1 May 2013) 0/2 Michael Garrett (until 31 August 2013) 3/3 Kai Nargolwala 5/5 Anthony Nightingale CMG SBS JB (from 1 June 2013) 3/3 Philip Remnant CBE ACA (from 1 January 2013) 5/5
Early March 2013 Approve the 2012 directors’ remuneration report; consider 2012 bonus awards for executive directors; consider vesting of the long-term incentive awards with a performance period ending on 31 December 2012; and approve 2013 long-term incentive awards, performance measures and Plan documentation.
Mid-March 2013 Confirm 2012 annual bonuses and the vesting of long-term incentive awards with a performance period ending on 31 December 2012, in light of audited financial results.
June 2013 Review the remuneration of the Group Leadership Team, senior risk staff and of employees with a remuneration opportunity over £1 million per annum; consider the cascade of the remuneration architecture to the senior management team; and review progress towards share ownership guidelines by the Chairman, executive directors and Group Executive Committee members.
The Chairman and the Group Chief Executive attend meetings by invitation. The Committee also had the benefit of advice from: Group Chief Risk Officer; Chief Financial Officer; Group Human Resources Director; and Director of Group Reward and Employee Relations. Individuals are never present when their own remuneration is discussed.
Rob Devey Chief Executive, UK & Europe FTSE 40 International Insurance Companies
Rob Devey £600,000 £618,000 John Foley £610,000 £628,300 Michael McLintock £360,000 £370,800 Nic Nicandrou £630,000 £648,900 Barry Stowe HK$ 8,000,000 HK$ 8,240,000 Tidjane Thiam £1,000,000 £1,030,000 Mike Wells US$1,050,000 US$1,081,500
Annual bonus The directors’ remuneration policy section provides further details of the design of Prudential’s annual bonus plans.
2013 annual bonus opportunities Executive directors’ bonus opportunities, the weighting of performance measures for 2013 and the proportion of annual bonuses deferred are set out below: Weighting of measures
Rob Devey1 160% 40% of total bonus 20% 60% 20% John Foley 160% 40% of total bonus 50% – 50% Jackie Hunt 160% 40% of total bonus 20% 60% 20% Michael McLintock2 600% 40% of total bonus 20% 60% 20% Nic Nicandrou 175% 40% of total bonus 80% – 20% Barry Stowe 160% 40% of total bonus 20% 60% 20% Tidjane Thiam 200% 40% of total bonus 80% – 20% Mike Wells3 160% 40% of total bonus 80% – 20%
The performance measures, and the relative achievement compared to the performance range, is illustrated below. The Board believe that, due to the commercial sensitivity of these targets, disclosing them may damage the competitive position of the Group.
Personal performance As set out in our remuneration policy, a proportion 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. 2013 objectives were set for each executive prior to the start of the financial year, and performance against these objectives was assessed by the Committee at its meeting in February 2014.
Rob Devey1 Chief Executive, UK & Europe £618,000 160% 77.4% £637,776 John Foley Group Investment Director £628,300 160% 99.9% £1,004,023 Jackie Hunt Chief Executive, UK & Europe £625,000 160% 93.4% £934,375 Michael McLintock2 Chief Executive, M&G £370,800 600% 100.0% £2,224,800 Nic Nicandrou Chief Financial Officer £648,900 175% 99.0% £1,123,895 Barry Stowe Chief Executive, PCA HK$8,240,000 160% 95.4% HK$12,579,184 Tidjane Thiam Group Chief Executive £1,030,000 200% 99.8% £2,055,880 Mike Wells3 President & CEO, JNL US$1,081,500 160% 99.2% US$1,716,773
2013 Jackson bonus pool In 2013 the Jackson bonus pool was determined by Jackson’s profitability, capital adequacy, remittances to Group, in-force experience and credit rating. Across all of these measures, Jackson delivered excellent performance and exceeded prior year performance. As a result of this performance, the Committee determined that Mike Wells’ share of the bonus pool would be US$3,625,600.
The remuneration policy report contains further details of the design of Prudential’s long-term incentive plans. Information on long-term incentives awarded in 2013 is shown on page 115.
Group Performance Share Plan (GPSP) and UK BUPP awards In 2011, all executive directors were made awards under the GPSP. The line chart below compares Prudential’s TSR during the performance period (1 January 2011 to 31 December 2013) with that of the peer group index TSR. As a result of Prudential’s excellent TSR performance, which was in excess of 140 per cent of the index, these awards will be released in full: Dec 2010 Dec 2011 Dec 2012 Dec 2013
n n u al rep o rt o n rem u n eratio n 111 Prudential plc Annual Report 2013
Jackson awards In 2010, Mike Wells was granted awards under two legacy long-term incentive plans offered to senior staff in Jackson; these awards had a four-year performance period. In 2011, following his appointment to the Prudential Board, he received awards under the GPSP and Jackson BUPP. These awards had a three-year performance period. Mike Wells’ 2010 JNL awards (the JNL Long-Term Incentive Plan and 2010 JNL US Performance Share Plan) will be released in 2014, alongside his 2011 GPSP and BUPP awards. The vesting of these awards are set out below: Jackson BUPP Mike Wells’ 2011 Jackson BUPP award vests subject to Shareholder Capital Value (SCV) growth over the performance period. As a result of excellent SCV growth of 17.7 per cent per annum over the performance period this award will vest in full: Percentage of award that vests: Compound annual growth in SCV over three years: Actual performance
Pension entitlements Pension provisions in 2013 were: Executive 2013 pension arrangement Life assurance provision
An annual profit sharing contribution equivalent to 6 per cent of pensionable salary was made in 2013.
All other UK-based executives Pension supplement in lieu of pension of 25 per cent of salary.
Prior to joining the Board, John Foley participated in a defined benefit scheme. There are no entitlements under this scheme in respect of his service as an executive director.
* Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits. † 2013 pension benefits include cash supplements for pension purposes, and contributions into DC schemes as outlined on page 111. ‡ In line with the regulations, the estimated value of LTIP releases has been calculated based on the average share price over the last three months of 2013. The actual value of LTIPs, based on the share price on the date awards are released, will be shown in the 2014 report. § Other payments comprises of pay in lieu of salary and pension supplement for Rob Devey over the period 1 November 2013 to 31 December 2013 and a cash payment to Jackie Hunt in respect of shares forfeited when leaving Standard Life, the net value of which was used to purchase Prudential shares. Further information is outlined on page 118. There were no malus adjustments in 2013.
¶ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of the Companies Act.
Notes 1 Rob Devey left the Company on 31 October 2013.
2 Jackie Hunt joined the Company on 5 September 2013. Her benefits included a one-off relocation payment of £188,679 to cover additional expenses such as stamp duty and estate agent fees.
3 Barry Stowe’s benefits relate primarily to his expatriate status, including costs of £224,612 for housing, £35,230 for children’s education, £70,452 for home leave and a £252,142 Executive Director Location Allowance.
4 Mike Wells’ bonus figure excludes a contribution of £9,779 from a profit sharing plan which has been made into a 401(k) retirement plan. This is included under 2013 pension benefits.
* The value of benefits is the cost to the Company of providing core and additional benefits. The value of some benefits included in the 2012 benefits calculation (for example life assurance) have not been included in 2013 taxable benefits information as they are not subject to UK tax. The 2012 number has not been restated from the 2012 report as the differences are not considered significant.
† 2012 pension benefits includes amounts paid as cash supplements, employers contributions into DC schemes and the 2012 increase in transfer value in Michael McLintock’s DB pension, as set out in the 2012 directors’ remuneration report. In the 2012 report these amounts were shown in two columns: ‘Cash supplements for pension purposes’ and ‘2012 employers pension contributions.’
Notes 1 ‘The Single Figure’ for Michael McLintock for 2012 includes the increase in transfer value of his defined benefit pension. This is outlined in the 2012 directors’
remuneration report. 2 Barry Stowe’s benefits relate primarily to his expatriate status, including costs of £217,567 for housing, £32,104 for children’s education, £69,289 for home leave and a £248,894 Executive Director Location Allowance.
Prudential TSR v FTSE 100 and International Insurers – total return over �ve years to December 2013
Percentage change in remuneration The table below sets out how the change in remuneration for the Group Chief Executive between 2012 and 2013 compares to a wider employee comparator group: Salary Benefits Bonus
The employee comparator group used for the purpose of this analysis is all UK employees. This includes employees in the UK Insurance Operations business, M&G and Group Head Office, and reflects the average change in pay for employees employed in both 2012 and 2013. The salary increase includes uplifts made through the annual salary review, as well as any additional changes in the year, for example promotions or role changes.
Relative importance of spend on pay The table below sets out the amounts paid in respect of 2012 and 2013 on all employee pay and dividends: Percentage change
Underlying employee pay excluding social security and pension costs increased by 13.6 per cent. Further information is set out in the financial statements.
Basic fee 87,500 90,000 Additional fees: Audit Committee Chairman 70,000 70,000 Audit Committee member 25,000 25,000 Remuneration Committee Chairman 50,000 60,000 Remuneration Committee member 25,000 25,000 Risk Committee Chairman 60,000 65,000 Risk Committee member 25,000 25,000 Nomination Committee member – 10,000 Senior Independent Director 50,000 50,000
The resulting fees paid to non-executives are: £000s 2013 fees 2012 fees benefits*
† Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of the Companies Act. The Chairman and non-executive directors are not entitled to participate in annual bonus plans or long-term incentive plans.
Notes 1 Jackie Hunt’s award was granted on 7 October 2013. The number of shares awarded was calculated using the same share price as used for the other executive directors. Jackie Hunt was also made awards to replace long-term incentives forfeited when she left Standard Life. These are outlined under ‘Recruitment arrangements’.
2013 cash long-term incentive awards In addition to his PLTIP award, Michael McLintock receives an annual award under the M&G Executive LTIP. In 2013 he received the following award: Executive Role
The interests of directors in ordinary shares of the Company are set out below. ‘Beneficial interest’ includes shares acquired under the Share Incentive Plan (detailed in the table on page 123), deferred annual incentive awards and interests in shares awarded on appointment (detailed in the ‘other share awards’ table on page 121). It is only these shares that count towards the share ownership guidelines.
Notes 1 Jackie Hunt was appointed to the Board on 5 September 2013. 2 For the 1 January 2013 figure part of Barry Stowe’s beneficial interest in shares is made up of 207,963 ADRs (representing 415,926 ordinary shares) and 95,305 ordinary shares (8,513.73 of these ADRs are held within an investment account which secures premium financing for a life assurance policy). For the 31 December 2013 figure the beneficial interest in shares is made up of 200,570 ADRs (representing 401,140 ordinary shares).
n n u al rep o rt o n rem u n eratio n 117 Prudential plc Annual Report 2013
John Foley 25 Apr 08 551 1,340 1 Jun 13 29 Nov 13 2,953 – 2,953 – – – – John Foley 20 Sep 13 901 1,340 1 Dec 16 31 May 17 – 998 – – – – 998 Tidjane Thiam 16 Sep 11 466 1,340 1 Dec 14 29 May 15 965 – – – – – 965 Tidjane Thiam 20 Sep 13 901 1,340 1 Dec 16 31 May 17 – 499 – – – – 499 Nic Nicandrou 16 Sep 11 466 1,340 1 Dec 16 31 May 17 3,268 – – – – – 3,268
Notes 1 A gain of £16,418.68 was made by directors in 2013 on the exercise of SAYE options. 2 No price was paid for the award of any option. 3 The highest and lowest closing share prices during 2013 were 1,340 pence and 901.5 pence respectively. 4 All exercise prices are shown to the nearest pence.
Rob Devey1 1 July 2009 12 months 12 months John Foley 8 December 2010 12 months 12 months Jackie Hunt 25 April 2013 12 months 12 months Michael McLintock 21 November 2001 6 months 12 months Nic Nicandrou 26 April 2009 12 months 12 months Barry Stowe 18 October 2006 12 months 12 months Tidjane Thiam 20 September 2007 12 months 12 months Mike Wells2 15 October 2010 12 months 12 months
Notes 1 Rob Devey left the Company on 31 October 2013. 2 The contract for Mike Wells is a renewable one-year fixed-term contract. The contract is renewable automatically upon the same terms and conditions, unless the Company or the director gives at least 90 days’ notice prior to the end of the relevant term.
Chairman’s letter of appointment Paul Manduca was appointed as a non-executive director on 15 October 2010 and became Senior Independent Director on 1 January 2011. On 2 July 2012 he was appointed Chairman. A contractual notice period of 12 months by either party applies.
Notes 1 Keki Dadiseth retired from the Board on 1 May 2013. 2 Michael Garrett retired from the Board on 31 August 2013. 3 For Anthony Nightingale and Alice Schroeder the table assumes initial election by shareholders at the 2014 AGM.
External appointments Subject to the Group Chief Executive’s or the Chairman’s approval, executive directors are able to accept external appointments as non-executive directors of other organisations. Any fees paid may be retained by the executive director. During 2013, Michael McLintock received £65,000 as a trustee and non-executive director of another organisation. Jackie Hunt received £45,000 as a non-executive director for another organisation. Other directors served on the boards of educational, development, charitable and cultural organisations without receiving a fee for such services.
Recruitment arrangements Jackie Hunt On 26 April 2013, it was announced that Jackie Hunt would join Prudential as Chief Executive for UK & Europe. The Remuneration Committee determined that long-term awards forfeited by Ms Hunt as a consequence of joining Prudential would be replaced on a like-for-like basis, and are subject to Prudential performance criteria.
Ms Hunt was compensated for the loss of her outstanding Standard Life long-term incentive awards with equivalent awards under the Prudential Long Term Incentive Plan as outlined below: Standard Life award being replaced
Ms Hunt was not compensated for forfeiting her 2013 Standard Life Group LTIP. Instead, a 2013 long-term incentive award was granted to her. Full details of this award are set out in the ‘Long-term incentives awarded in 2013’ section of this report.
Ms Hunt forfeited Standard Life deferred bonus awards with a value of £801,210. The Company arranged for these to be replaced with Prudential shares on a like-for-like basis. A cash payment was made to Ms Hunt in respect of these awards, the net value of which was used to purchase 36,337 shares which will be held in a nominee arrangement on her behalf and released to her in March 2014 and March 2015 (in line with the release dates of the original Standard Life awards).
Payments to past directors Rob Devey On 26 April 2013 it was announced that Rob Devey would leave Prudential at the end of October 2013. In line with his contractual entitlements, Mr Devey will receive a payment in lieu of salary and pension allowance for the period 1 November 2013 to 25 April 2014. This is paid in instalments and is subject to mitigation. The total amount paid will be £378,000. Medical and life assurance cover will be provided until 25 April 2014. The amounts paid in 2013 are included in the table of 2013 total remuneration on page 112.
End of performance period * The Award is calculated based on the average share price over the three dealing days prior to the award being granted (22 May 2013). † The percentage of award released for achieving maximum targets is 100 per cent (which will then be pro-rated for time employed). 50 per cent of the award will vest subject to relative TSR and 50 per cent subject to the achievement of UK IFRS profit targets. Further details of the performance conditions are outlined in the ‘Long-term incentives awarded in 2013’ section.
n n u al rep o rt o n rem u n eratio n 119 Prudential plc Annual Report 2013
The Remuneration Committee used their discretion to determine that outstanding variable awards of pay would be treated in the following ways: — A 2013 bonus pro-rated for the amount of time Mr Devey was employed by Prudential during the 2013 financial year (to 31 October 2013). A 2013 bonus of £637,776 was awarded; — 60 per cent of this award was paid in cash and 40 per cent was deferred into Prudential shares and will be released in 2016; — Outstanding long-term incentive awards were prorated based on the time Mr Devey was employed by Prudential as a proportion of the relevant performance periods. Awards will continue to be subject to the original performance conditions and released on the original timescales.
The performance conditions attached to the 2010 GPSP and BUPP awards were met in full and awards to Clark Manning were released during 2013 on a pro-rata basis, as disclosed in last year’s report. There are no further outstanding awards.
Other directors A number of former directors receive retiree medical benefits for themselves and their partner (where applicable). This is consistent with other senior members of staff employed at the same time. A de minimis threshold of £10,000 has been set by the Committee; any payments, or benefits provided to a past director under this amount will not be reported.
Prudential Long Term Incentive Plan 1,649,705,967 87.11% 244,056,797 12.89% 1,893,762,764 44,065,902
— The Chief Financial Officer’s total remuneration opportunity for 2014 has increased by 10 per cent. This reflects the increasing complexity and responsibilities of the role, together with the incumbent’s considerable performance and contribution to the Group. In making this adjustment the Remuneration Committee were mindful of ensuring that the majority of this be provided through long-term incentive awards, so that the full value is only realised over the long term and subject to the achievement of stretching performance conditions. Major shareholders were consulted on this change prior to implementation.
Mike Wells 1, 3 JNL PSP 2009 218,100 455.5 218,100 – 31 Dec 12
JNL Performance Share Plan. This maximum number of shares may be released if stretch performance targets are achieved.
Business-specific cash-based long-term incentive plans Details of all outstanding awards under cash-based long-term incentive plans are set out in the table below. The performance period for all M&G Executive LTIP awards is three years while the performance period for all JNL LTIP awards is four years: Year of initial award
Note Under the M&G Executive LTIP, the value of each unit at award is £1. The value of units changes based on M&G’s profit growth and investment performance over the performance period. For the 2010 award of 987,179 units, the unit price at the end of the performance period was £2.65, which resulted in a payment of £2,616,024 to Michael McLintock during 2013. For the 2011 award of 1,318,148 units, the unit price at the end of the performance period was £2.30. This will result in payment of £3,031,740 to Michael McLintock in 2014.
Other share awards The table below sets out the share awards that have been made to executive directors under their appointment terms and those deferred from annual incentive plan payouts. The number of shares is calculated using the average share price over the three business days commencing on the day of the announcement of the Group’s annual financial results for the relevant year. For the awards from the 2012 annual incentives, made in 2013, the average share price was 1,124.17 pence.
Deferred 2012 annual incentive award 2013 37,726 984 38,710 31 Dec 15 1,055
Mike Wells 1 2009 after tax deferral program award 3 2010 32,250 32,250 – 15 Mar 13 15 Mar 13 520 1,154
Deferred 2010 Group deferred bonus plan award 2011 94,080 2,456 96,536 31 Dec 13 721.5
Deferred 2012 annual incentive award 2013 80,364 2,096 82,460 31 Dec 15 1,055
Notes 1 The Deferred Share Awards for Barry Stowe and Mike Wells were made in ADRs. The figures in the table are represented in terms of ordinary shares