Thanachart Fund Management Co., Ltd. OS 50.10% No. 231, MBK Life Building, 5th-7th Floor, Ratchadamri Road, Lumpini Sub-district, Pathumwan District, Bangkok, Thailand
VFL International Life Company SPC, Ltd. OS 100.00% 171 Elgin Avenue, Grand Cayman, Cayman Islands
Wynnefield Private Equity Partners I, L.P. LPI 99.00% 1105 North Market Street, Suite 1300, Wilmington, DE 19801, USA
Key to share classes: LBG Limited by Guarantee LPI Limited Partnership Interest MI Membership Interest MFS Mutual Fund Shares NSB Non-stock basis OS Ordinary Shares PI Partnership Interest PS Preference Shares U Units
Prudential plc Annual Report 2019 prudentialplc.com310 31 December Note 2019 $m 2018* $m
Derivative liabilities 6 – (539) Amounts owed to subsidiary undertakings (141) (1,192) Tax payable (14) (13) Deferred tax liability 9 – (15) Accruals and deferred income (78) (129)
Profit for the year 12,255 1,390 * The 2018 comparative results have been re-presented from those previously published to reflect the change in the Company’s presentational currency from pounds sterling to US dollars (as described in note 2).
Paul Manduca Mike Wells Mark FitzPatrick Chairman Group Chief Executive Group Chief Financial Officer and Chief Operating Officer
Transactions with owners, recorded directly in equity New share capital subscribed 1 22 – 23
Total contributions by and distributions to owners (9) (133) (1,662) (1,804)
Profit for the year – – 12,255 12,255 Actuarial losses recognised in respect of the defined benefit pension scheme – – (75) (75) Foreign exchange translation differences due to change in presentation
Transactions with owners, recorded directly in equity New share capital subscribed – 22 – 22 Share based payment transactions – – (4) (4) Dividend in specie of M&G plc – – (7,379) (7,379)
Total contributions by and distributions to owners 6 123 (9,017) (8,888)
Prudential plc (the Company) is a parent holding company. The Company together with its subsidiaries (collectively, the Group) is an international financial services group with its operations in Asia, the US, Africa and, prior to the demerger of M&G plc in October 2019, the UK and Europe. The Group helps individuals to de-risk their lives and deal with their biggest financial concerns through life and health insurance, and retirement and asset management solutions. On 21 October 2019, the Company completed the demerger of M&G plc, its UK and Europe business, from Prudential plc resulting in two separately listed companies. The Directors of the Company distributed its investment in M&G plc to the Company’s shareholders in the form of a dividend in specie.
In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures: — A cash flow statement and related notes; — Disclosures in respect of transactions with wholly-owned subsidiaries within the Prudential Group; — Disclosure in respect of capital management; — The effects of new but not yet effective IFRSs; and — An additional balance sheet for the beginning of the earliest comparative period following the retrospective change in the accounting policy with respect to the presentation currency (as outlined further below).
The accounting policies set out in note 3 below have, unless otherwise stated, been applied consistently to both years presented in these financial statements.
Investments in subsidiary undertakings Investments in subsidiary undertakings are shown at cost less impairment. Investments are assessed for impairment by comparing the net assets of the subsidiary undertakings with the carrying value of the investment.
Borrowings Borrowings are initially recognised at fair value, net of transaction costs, and subsequently accounted for on an amortised cost basis using the effective interest method. Under the effective interest method, the difference between the redemption value of the borrowing and the initial proceeds, net of transaction costs, is amortised through the profit and loss account to the date of maturity or, for subordinated debt, over the expected life of the instrument. Where modifications to borrowings do not result in a substantial difference to the terms of the instrument, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining expected life of the modified instrument. Where modifications to borrowings do result in a substantial difference to the terms of the instrument, the instrument is treated as if it had been extinguished and replaced by a new instrument which is initially recognised at fair value and subsequently accounted for on an amortised cost basis using the effective interest method. Any costs or fees arising from such a modification are recognised as an expense when incurred.
As discussed above, the Company’s functional currency changed from pounds sterling to US dollars on 31 December 2019. The Company has also changed its presentation currency from pounds sterling to US dollars.
Tax Current tax expense is charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable amounts for the current year. To the extent that losses of an individual UK company are not offset, they can be carried back for one year or carried forward indefinitely to be offset, subject to restrictions based on future taxable profits, against profits arising from the same company or other companies in the same UK tax group.
Deferred tax assets and liabilities are recognised in accordance with the provisions of IAS 12 ’Income Taxes’. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that future taxable profits will be available against which these losses can be utilised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.
The aggregate of the actuarially determined service costs of the currently employed personnel and the net income (interest) on the net scheme assets (liabilities) at the start of the period, is recognised in the profit or loss account. Actuarial gains and losses as a result of the changes in assumptions, experience variances or the return on scheme assets excluding amounts included in the net deferred benefit asset (liability) are recorded in other comprehensive income. The loss on transfer of the pension surplus transferred to M&GPrudential Services Limited has been recognised in the profit or loss account.
Share-based payments The Group offers share award and option plans for certain key employees and a Save As You Earn (‘SAYE’) plan for all UK and certain overseas employees. The share-based payment plans operated by the Group are mainly equity-settled.
Net equity Shareholders’ equity of the Company in accordance with FRS 101 13,173 9,488 Accounting policy difference* 33 18 Share in the IFRS net equity of the Group† 6,271 12,462
Shareholders’ equity of the Group in accordance with IFRS 19,477 21,968 * Adjustment represents difference in accounting policy for expected credit losses on loan assets, the Company has adopted IFRS 9 while the Group applies IAS 39. † The ‘share in the IFRS result and net equity of the Group’ lines represent the parent company’s equity in the earnings and net assets of its subsidiaries and associates.
Capital injections and acquisitions 72 117 Distribution of M&G plc – cost of investment (3,730) – Other disposals (13) – Amounts in respect of share based payments (123) (81)
Prior to the demerger of M&G plc from the Group in October 2019, the following transactions and restructuring occurred: — On 20 September 2019, the Company disposed of its investment in Prudential Capital Holding Company Limited to M&G plc, for consideration of $85 million. A gain on disposal of $73 million is recognised in the income statement.
— On 8 October 2019, the Company acquired Prudential Africa Holdings Limited from Prudential Group Holdings Limited, a subsidiary of the Company, in exchange for consideration of $49 million. On 15 October 2019, the Company subsequently transferred Prudential Africa Holdings Limited to Prudential Corporation Asia Limited under a share-for-share exchange. Additionally, in connection with this transaction, the Company increased its investment in Prudential Group Holdings Limited by $23 million.
Core structural borrowings Other borrowings Total $m $m $m $m $m $m
During 2019, the Company redeemed its £400 million 11.375 per cent Tier 2 subordinated notes, and issued further subordinated debt for proceeds of $371 million, net of issue costs.
Retained profit at 31 December 2019 amounted to $10,376 million (31 December 2018: $6,820 million). The retained profit includes distributable reserves of $4,735 million and non-distributable reserves of $5,641 million. The amount of $5,641 million is not able to be regarded as part of the distributable reserves of the Company because the gains relate to intra-group transactions in which qualifying consideration was not received.
The retained profit of the Company is substantially generated from dividend income received from subsidiaries. The Group segmental analysis illustrates the generation of profit across the Group (see note B1 of the Group IFRS financial statements). The Group and its subsidiaries are subject to local regulatory minimum capital requirements, as set out in note C12 of the Group IFRS financial statements. A number of the principal risks set out in the ‘Report on the risks facing our business and how these are managed’ could impact the generation of profit in the Group’s subsidiaries in the future and hence impact their ability to pay dividends in the future.
In determining the dividend payment in any year the directors follow the Group dividend policy described in the Group Chief Financial Officer and Chief Operating Officer’s report section of this Annual Report. The directors consider the Company’s ability to pay current and future dividends twice a year by reference to the Company’s business plan and certain stressed scenarios.
Company�law�requires�the�directors�to� prepare�Group�and�parent�company� financial�statements�for�each�financial�year.� Under�that�law�they�are�required�to� prepare�the�Group�financial�statements� in�accordance�with�International�Financial� Reporting�Standards�as�adopted�by�the� European�Union�(IFRSs�as�adopted�by�the� EU)�and�applicable�law�and�have�elected� to�prepare�the�parent�Company�financial� statements�in�accordance�with�UK� Accounting�Standards�and�applicable� law�(UK�Generally�Accepted�Accounting� Practice)�including�FRS�101�Reduced� Disclosure�Framework.
The�directors�of�Prudential�plc,�whose� names�and�positions�are�set�out�on�pages� 92�to�97�confirm�that�to�the�best�of�their� knowledge: �— the�financial�statements,�prepared�in� accordance�with�the�applicable�set� of�accounting�standards,�give�a�true� and�fair�view�of�the�assets,�liabilities,� financial�position�and�profit�or�loss�of� the�Company�and�the�undertakings� included�in�the�consolidation�taken� as�a�whole;�
Our procedures for the US insurance segment also included: Historical comparison
Valuation of certain level 2 and level 3 investments held at fair value (2019: $77,203 million, 2018: $181,757 million).
Recoverability of parent company’s investment in subsidiaries – (2019: $10,444 million, 2018: $13,787 million)
Materiality�for�the�parent�company� financial�statements�as�a�whole�was�set� at�$40�million�(2018:�$146�million),� determined�with�reference�to�a�benchmark� of�parent�company’s�net�assets,�of�which� it�represents�0.3�per�cent�(2018:� 1.5�per�cent).�The�component�materiality,� as�determined�by�the�Group�audit�team,� applied�to�the�audit�of�the�parent�company� financial�statements�as�a�whole�is�lower� than�the�materiality�we�would�otherwise� have�determined�by�reference�to�its�net� assets.�
The�components�subjected�to�an�audit� of�account�balances�included�Prudential� Pensions�Limited,�the�insurance�operations� in�Thailand�and�Taiwan,�and�the�fund� management�operations�of�Eastspring� Singapore.�The�account�balances�audited� for�Thailand�were�policyholder�liabilities,� investments,�deferred�acquisition�costs,� premiums�and�claims;�the�account�balances� audited�for�Taiwan�were�policyholder� liabilities,�investments,�and�deferred� acquisition�costs;�the�account�balances� audited�for�Eastspring�Singapore�were� other�income�and�expenses;�the�account� balances�audited�for�Prudential�Pensions� Limited�were�total�investment�return�and� benefits�and�claims.�
4 We have nothing to report on going concern The�Directors�have�prepared�the�financial� statements�on�the�going�concern�basis� as�they�do�not�intend�to�liquidate�the� Company�or�the�Group�or�to�cease�their� operations,�and�as�they�have�concluded� that�the�Company’s�and�the�Group’s� financial�position�means�that�this�is�realistic.� They�have�also�concluded�that�there�are� no�material�uncertainties�that�could�have� cast�significant�doubt�over�their�ability� to�continue�as�a�going�concern�for�at�least� a�year�from�the�date�of�approval�of�the� financial�statements�(“the�going� concern�period”).�
Our�responsibility�is�to�conclude�on� the�appropriateness�of�the�Directors’� conclusions�and,�had�there�been�a�material� uncertainty�related�to�going�concern,�to� make�reference�to�that�in�this�audit�report.� However,�as�we�cannot�predict�all�future� events�or�conditions�and�as�subsequent� events�may�result�in�outcomes�that�are� inconsistent�with�judgements�that�were� reasonable�at�the�time�they�were�made,� the�absence�of�reference�to�a�material� uncertainty�in�this�auditor’s�report�is� not�a�guarantee�that�the�Group�and�the� Company�will�continue�in�operation.�
In�our�evaluation�of�the�Directors’� conclusions,�we�considered�the�inherent� risks�to�the�Group’s�and�Company’s� business�model�and�analysed�how�those� risks�might�affect�the�Group’s�and� Company’s�financial�resources�or�ability� to�continue�operations�over�the�going� concern�period.�The�risks�that�we� considered�most�likely�to�adversely�affect� the�Group’s�and�Company’s�available� financial�resources�over�this�period�were:�
�— The�directors’�confirmation�within�the� viability�statement�on�page�70,�that�they� have�carried�out�a�robust�assessment�of� the�emerging�and�principal�risks�facing� the�Group,�including�those�that�would� threaten�its�business�model,�future� performance,�solvency�and�liquidity; �— The�principal�risks�disclosures�on�pages� 51�to�71�describing�these�risks�and� explaining�how�they�are�being�managed� and�mitigated;�and
�— The�directors’�explanation�in�the� viability�statement�of�how�they�have� assessed�the�prospects�of�the�Group,� over�what�period�they�have�done�so� and�why�they�considered�that�period� to�be�appropriate,�and�their�statement� as�to�whether�they�have�a�reasonable� expectation�that�the�Group�will�be�able� to�continue�in�operation�and�meet�its� liabilities�as�they�fall�due�over�the�period� of�their�assessment,�including�any� related�disclosures�drawing�attention� to�any�necessary�qualifications� or�assumptions.�
Our�work�is�limited�to�assessing�these� matters�in�the�context�of�only�the� knowledge�acquired�during�our�financial� statements�audit.�As�we�cannot�predict� all�future�events�or�conditions�and�as� subsequent�events�may�result�in�outcomes� that�are�inconsistent�with�judgments�that� were�reasonable�at�the�time�they�were� made,�the�absence�of�anything�to�report� on�these�statements�is�not�a�guarantee� as�to�the�Group’s�and�Company’s�longerterm �viability.
The�potential�effect�of�these�laws�and� regulations�on�the�financial�statements� varies�considerably.�Firstly,�the�Group� is�subject�to�laws�and�regulations�that� directly�affect�the�financial�statements� including�financial�reporting�legislation� (including�related�companies�legislation),� distributable�profits�legislation�and�taxation� legislation�and�we�assessed�the�extent�of� compliance�with�these�laws�and�regulations� as�part�of�our�procedures�on�the�related� financial�statement�items.
Secondly,�the�Group�is�subject�to�many� other�laws�and�regulations�where�the� consequences�of�non-compliance�could� have�a�material�effect�on�amounts�or� disclosures�in�the�financial�statements,�for� instance�through�the�imposition�of�fines�or� litigation�or�the�loss�of�the�Group’s�licence� to�operate.�We�identified�the�area�of� regulatory�capital�as�that�most�likely�to�have� such�an�effect�recognising�the�financial�and� regulated�nature�of�the�Group’s�activities.� Auditing�standards�limit�the�required�audit� procedures�to�identify�non-compliance� with�these�laws�and�regulations�to�enquiry� of�the�directors�and�other�management� and�inspection�of�regulatory�and�legal� correspondence,�if�any.�These�limited� procedures�did�not�identify�actual�or� suspected�non-compliance.
Owing�to�the�inherent�limitations�of�an� audit,�there�is�an�unavoidable�risk�that�we� may�not�have�detected�some�material� misstatements�in�the�financial�statements,� even�though�we�have�properly�planned� and�performed�our�audit�in�accordance� with�auditing�standards.�For�example,� the�further�removed�non-compliance�with� laws�and�regulations�(irregularities)�is�from� the�events�and�transactions�reflected�in�the� financial�statements,�the�less�likely�the� inherently�limited�procedures�required�by� auditing�standards�would�identify�it.�In� addition,�as�with�any�audit,�there�remained� a�higher�risk�of�non-detection�of� irregularities,�as�these�may�involve� collusion,�forgery,�intentional�omissions,� misrepresentations,�or�the�override�of� internal�controls.�We�are�not�responsible� for�preventing�non-compliance�and�cannot� be�expected�to�detect�non-compliance� with�all�laws�and�regulations.�
8 The purpose of our audit work and to whom we owe our responsibilities This�report�is�made�solely�to�the�Company’s� members,�as�a�body,�in�accordance�with� Chapter�3�of�Part�16�of�the�Companies�Act� 2006.�Our�audit�work�has�been�undertaken� so�that�we�might�state�to�the�Company’s� members�those�matters�we�are�required� to�state�to�them�in�an�auditor’s�report�and� for�no�other�purpose.�To�the�fullest�extent� permitted�by�law,�we�do�not�accept�or� assume�responsibility�to�anyone�other� than�the�Company�and�the�Company’s� members,�as�a�body,�for�our�audit�work,� for�this�report,�or�for�the�opinions�we� have�formed.
Notes on the EEV basis results 1 Basis of preparation 336 2 Results analysis by business area 337 3 Analysis of new business contribution 338 4 Operating profit from long-term business in force 339 5 Short-term fluctuations in investment returns 339 6 Effect of changes in economic assumptions 340 7 Impact of NAIC reform, hedge modelling and other related changes in the US 340 8 Net core structural borrowings of shareholder-financed businesses 341 9 Gain (loss) attaching to corporate transactions 342 10 Analysis of movement in total net worth and value of in-force for long-term business 342 11 Analysis of movement in free surplus 344 12 Expected transfer of value of in-force business and required capital to free surplus 346 13 Sensitivity of results to alternative assumptions 347 14 Methodology and accounting presentation 349 16 Insurance new business 357
Operating profit from continuing operations 6,905 7,866 Short-term fluctuations in investment returns 5 3,254 (3,335) Effect of changes in economic assumptions 6 (1,868) 416 Impact of NAIC reform, hedge modelling and other related changes in the US 7 (3,457) – Mark-to-market value movements on core structural borrowings 8 (466) 733 Loss attaching to corporate transactions 9 (207) (100)
Profit for the year from continuing operations 4,161 5,580 (Loss) profit for the year from discontinued operations (4,797) 546
Based on operating profit from continuing operations after non-controlling interests (in cents) 266.6¢ 305.3¢ Based on (loss) profit for the year attributable to equity holders of the Company (in cents)
Weighted average number of shares in the year (millions) 2,587 2,575
Profit (loss) for the year from continuing operations 8,069 (2,025) (1,883) 4,161 4,161 5,580
Mark-to-market value movements on Jackson assets backing surplus and required capital – 206 – 206 – 206 (127)
Demerger dividend in specie of M&G plc – – – – (7,379) (7,379) –
Shareholders’ equity at beginning of year 32,008 18,709 (4,616) 46,101 17,301 63,402 60,467
* The 2018 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars and the reclassification of the Group’s UK and Europe operations as discontinued operations in 2019 (see note 1).
Assets less liabilities before deduction of insurance funds 396,241 549,264 Less insurance funds:*
Total net assets attributable to equity holders of the Company 54,711 63,402
Share capital 172 166 Share premium 2,625 2,502 IFRS basis shareholders’ reserves 16,680 19,300
IFRS basis shareholders’ equity 19,477 21,968 Shareholders’ accrued interest in the long-term business 35,234 41,434
The Group completed the demerger of its UK and Europe operations, M&G plc, from the Prudential plc Group on 21 October 2019. In line with the treatment of the results under IFRS, the EEV basis results for the Group’s UK and Europe operations have been reclassified as discontinued operations and removed from the Group’s key performance indicators (KPIs). In the subsequent notes, comparative amounts have been represented to show continuing operations only in order to present the results on a comparable basis. The Directors have also elected to change the Group’s presentation currency from pounds sterling to US dollars. The 2018 comparative results have been accordingly re-presented from those previously published for these changes (see note A1 of the Group IFRS financial statements for exchange rates used).
Overview Results prepared under the EEV Principles represent the present value of the shareholders’ interest in the post-tax future profits (on a local statutory basis) expected to arise from the current book of long-term business, after sufficient allowance has been made for the aggregate risks in that business. The shareholders’ interest in the Group’s long-term business comprises: — The present value of expected future shareholder cash flows from the in-force covered business (value of in-force business), less explicit allowance for the cost of locked-in required capital and the time value of financial options and guarantees across a range of economic scenarios; — Locked-in required capital, based on the applicable local statutory regulations, including any amounts considered to be required above the local statutory minimum requirements to satisfy regulatory constraints (the application of this principle to each business unit is set out below); and
As well as best estimate assumptions for operating factors, the projected cash flows assume a level of future investment return and are discounted using a risk discount rate. Both the risk discount rate and investment return are updated at each valuation date in line with changes in the risk-free rates. During 2019, this has had an overall negative effect on new business and in-force profitability. Different products will be sensitive to different assumptions, for example, spread-based products or products with guarantees are likely to benefit from higher assumed investment returns.
Risk discount rates are set equal to the risk-free rate at the valuation date plus a product-specific allowance for market and non-market risks, excluding risks explicitly captured elsewhere such as via the TVOG. Products such as participating and unit-linked business will have typically a higher allowance for market risk as compared to health and protection products due to a higher proportion of equity-type assets within the investment portfolio. Other product design and business features also affect the risks attached to the emergence of shareholder cash flows, for example, the construct of with-profits funds in some business units can reduce the sensitivity of both policyholder and shareholder cash flows for participating products. Risk discount rates in any one business unit will reflect a blend of the risks attaching to the products written in that business.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 337
The value of future new business is excluded from the embedded value. A description of the EEV methodology and accounting presentation is provided in note 14, including an explanation of the delineation of profit between operating profit based on longer-term investment returns and non-operating items. Further details of best estimate assumptions are provided in note 15.
The 2018 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2018 CER comparative results are translated at 2019 average exchange rates for US dollars following the change in the Group’s presentation currency.
Profit for the year from continuing operations 4,161 5,580 (25)% 5,570 (25)% (Loss) profit for the year from discontinued operations (4,797) 546 (979)% 522 (1,019)%
Based on operating profit from continuing operations after non-controlling interests (in cents) 266.6¢ 305.3¢ (13)% 306.1¢ (13)%
Based on (loss) profit for the year attributable to equity holders of the Company (in cents): 3 Analysis of new business contribution
Unwind of discount and other expected returns note (i) 1,542 728 2,270 1,626 1,176 2,802
Effect of changes in operating assumptions note (ii) 539 1 540 457 154 611 Experience variances and other items note (iii) 285 145 430 298 264 562
Total operating profit from long-term business in force 2,366 874 3,240 2,381 1,594 3,975
Notes (i) The movement in unwind of discount and other expected returns from $2,802 million for 2018 to $2,270 million for 2019 from continuing operations is analysed as follows: Asia $m
Group total $m 2018 unwind of discount and other expected returns 1,626 1,176 2,802 Foreign exchange movement (12) – (12) Effect of changes in interest rates and other economic assumptions (234) (104) (338) Impact of US EEV hedge modelling enhancements note 7 – (210) (210) Growth in opening value of in-force business and other items 162 (134) 28 2019 unwind of discount and other expected returns 1,542 728 2,270
(ii) The 2019 effect of changes in operating assumptions of $539 million in Asia principally reflects the outcome from the annual review of persistency, claims and expense experience, together with the benefit of medical repricing management actions and the beneficial effect on the effective tax rate for China JV from changes to tax legislation in the first half of 2019.
In the US, the effect of experience variances and other items is analysed as follows: Spread experience variance 38 52 Amortisation of interest-related realised gains and losses 102 123 Other items 5 89
Total US experience variances and other items 145 264 5 Short-term fluctuations in investment returns
US Variable annuity business note (ii) (1,556) 487 Fixed annuity and other general account business note (iii) 355 (224)
Taiwan, partially offset by the positive effect of lower risk discount rates in Indonesia and Malaysia in valuing future profits for health and protection business and the effect of changes to the basis of setting economic assumptions as described in note 14(i)(h) and note 15(i).
(iii) For fixed annuity and other general account business, the impact of $355 million reflects the increase in the present value of future projected spread income from the combined decrease in interest rates and credit spreads in the year.
Impact of NAIC reform adopted at 31 December 2019 note (i) 37 Impact of hedge modelling changes and other NAIC reform related changes note (ii) (3,494)
Impact of NAIC reform adopted at 31 December 2019 (64) 343 279 (242) 37
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 341
(ii) Following the implementation of the NAIC’s changes to the US statutory reserve and capital framework, enhancements were made to the model used to allow for hedging within US statutory reporting. As a consequence, the Group has chosen to utilise the enhanced model within EEV to update its allowance for the long-term cost of hedging under EEV economic assumptions. In common with established practice for such changes, the EEV income statement has been prepared on the basis that this change had been effected at the start of the year, at a cost of $(3,233) million, included in non-operating profit.
Total net borrowings for central operations 3,137 548 3,685 5,390 166 5,556
Mark-to-market value adjustment at end of year 633 233 * Relates to continuing debt only.
Group Shareholders’ equity at beginning of year 9,587 12,542 22,129 42,045 64,174 Demerger of UK and Europe operations (4,676) (6,513) (11,189) (3,342) (14,531)
Shareholders’ equity at beginning of year from continuing operations note 4,911 6,029 10,940 38,703 49,643
Existing business – transfer to net worth 3,081 (613) 2,468 (2,468) – Expected return on existing business note 4 141 159 300 1,970 2,270 Changes in operating assumptions and
Profit for the year from continuing operations 2,049 810 2,859 2,941 5,800
Intra-group dividends and investment in operations (1,633) – (1,633) – (1,633)
US Shareholders’ equity at beginning of year 2,709 3,125 5,834 12,824 18,658
Operating profit based on longer-term investment returns 1,095 444 1,539 213 1,752
Shareholders’ equity at end of year 1,771 3,709 5,480 10,856 16,336
Note The net value of in-force business for continuing operations comprises the value of future margins from current in-force business less the cost of holding required capital for long-term business as shown below: Asia US Group total Asia US Group total
Time value of options and guarantees* (493) (191) (684) (1,249) (1,842) (3,091)
Prudential plc Annual Report 2019 prudentialplc.com344 11 Analysis of movement in free surplus
For EEV covered business, free surplus is the excess of the regulatory basis net assets for EEV reporting purposes (total net worth) over the capital required to support the covered business. Where appropriate, adjustments are made to total net worth so that backing assets are included at fair value rather than at cost to comply with the EEV Principles. In the Group’s Asia and US operations, assets deemed to be inadmissible on a local regulatory basis are included in net worth where considered recognisable on an EEV basis, with the exception of deferred tax assets in the US that are inadmissible under the local regulatory basis, which have been included in the value of in-force business (VIF) within the Group’s EEV results. Free surplus for asset management and other operations (including assets and liabilities of the Group’s central operations, the Group’s treasury function and Africa operations) is taken to be IFRS basis post-tax earnings and shareholders’ equity, net of goodwill attributable to shareholders, with subordinated debt recorded as free surplus to the extent that it is classified as available capital under the Group’s capital regime. A reconciliation of EEV free surplus to the Group’s Local Capital Summation Method (LCSM) surplus over Group minimum capital requirements is set out in note I(i) in the additional financial information.
Free surplus generated from discontinued operations note (g) – – – – 2,512 2,512
Balance at end of year note (j) 4,220 1,777 5,997 3,739 – 9,736
Distribution rights and other intangibles 596 24 620 2,512 – 3,132
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 345 2018 $m
Operating free surplus generated before restructuring costs 1,563 1,895 3,458 (969) 2,489
Net movement in free surplus (750) 152 (598) 1,431 1,675 2,508 Balance at beginning of year 3,341 2,608 5,949 2,400 4,302 12,651
Balance at end of year 2,591 2,760 5,351 3,831 5,977 15,159
Distribution rights and other intangibles 541 27 568 1,531 9 2,108
Impact of EEV hedge modelling enhancements note 7 (903) – –
(c) Free surplus invested in new business primarily represents acquisition costs and amounts set aside for required capital. (d) The increase in the US in-force free surplus generation before the EEV hedge modelling enhancements described in note 7 includes a $355 million benefit from the release of incremental reserves following the integration of the recently acquired John Hancock business.
(e) Other operating free surplus generated for “other business” includes $(145) million (2018: $(103) million) of interest costs (net of tax) on debt that was substituted to M&G plc in October 2019.
Mark-to-market value movements on Jackson assets backing surplus and required capital – 206 206 – – 206 Other items (including intra-group loans and other intra-group transfers between operations and other non-cash items)* (456) (21) (477) 719 (503) (261)
* The Group total for other items in 2019 included the effect of the redemption of $0.5 billion of subordinated debt.
Total insurance and asset management Other Group total 12 Expected transfer of value of in-force business and required capital to free surplus
Required capital note 10 6,891 6,029 Value of in-force business (VIF) note 10 41,893 38,703 Other items* 205 1,915
Total continuing long-term business operations 48,989 46,647 * ‘Other items’ represent the impact of the time value of options and guarantees and amounts incorporated into VIF where there is no definitive timeframe for when the payments will be made or receipts received. These items are excluded from the expected free surplus generation profile below.
Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus 2019 total as shown above 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years
Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus from continuing long-term operations 2018 total as shown above 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years 13 Sensitivity of results to alternative assumptions
(i) Sensitivity analysis – economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2019 and 31 December 2018 and the new business contribution for 2019 and 2018 for continuing long-term business to: — 1 per cent increase in the discount rates; — 1 per cent increase in interest rates, including consequential changes in assumed investment returns for all asset classes, market values of fixed interest assets and risk discount rates (but excluding changes in the allowance for market risk); — 0.5 per cent decrease in interest rates, including consequential changes in assumed investment returns for all asset classes, market values of fixed interest assets and risk discount rates (but excluding changes in the allowance for market risk); — 1 per cent rise in equity and property yields; — 10 per cent fall in market value of equity and property assets (embedded value only); and — The Group minimum capital requirements under the LCSM in contrast to EEV basis required capital (embedded value only).
Interest rates and consequential effects – 1% increase (1,408) 798 (610) (1,992) 152 (1,840) Interest rates and consequential effects – 0.5% decrease (28) (686) (714) 466 (348) 118
The directional movements in the sensitivities from 31 December 2018 to 31 December 2019 reflect the generally lower government bond yields and higher equity markets at 31 December 2019, and the actual hedging portfolio in place at both valuation dates, which varies due to the nature of Jackson’s dynamic hedging programme.
(ii) Sensitivity analysis – non-economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2019 and 31 December 2018 and the new business contribution for 2019 and 2018 for continuing long-term business operations to: — 10 per cent proportionate decrease in maintenance expenses (for example, a 10 per cent sensitivity on a base assumption of $10 per annum would represent an expense assumption of $9 per annum); — 10 per cent proportionate decrease in lapse rates (for example, a 10 per cent sensitivity on a base assumption of 5 per cent would represent a lapse rate of 4.5 per cent per annum); and
The definition of long-term insurance business comprises those contracts falling under the definition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment contracts (GICs) but do not fall under the technical definition.
New business premiums reflect those premiums attaching to the covered business, including premiums for contracts classified as investment contracts under IFRS. New business premiums for regular premium products are shown on an annualised basis.
The results for any covered business conceptually reflect the aggregate of the post-tax IFRS basis results and the movements in the additional shareholders’ interest recognised on an EEV basis. Therefore, the start point for the calculation of the EEV basis results for Jackson, as for other businesses, reflects the market value movements recognised on an IFRS basis.
In determining the movements in the additional shareholders’ interest, for Jackson’s debt securities backing liabilities, the aggregate EEV basis results reflect the fact that the value of in-force business incorporates the discounted value of expected future spread earnings. This value is generally not affected by short-term market movements in debt securities that, broadly speaking, are held for the longer term. Consequently, within EEV total net worth, Jackson’s debt securities backing liabilities are held on a statutory basis (largely at book value), while those backing surplus and required capital are accounted for at fair value. Consistent with the treatment applied under IFRS, for Jackson’s debt securities classified as available-for-sale, movements in unrealised appreciation and depreciation on these securities are accounted for directly in equity rather than in the income statement, as shown in ‘Mark-to-market value movements on Jackson assets backing surplus and required capital’ in the statement of movement in shareholders’ equity.
The EEV results are affected by the movement in this cost from year to year, which comprises a charge against new business profit and generally a release in respect of the reduction in capital requirements for business in force as this runs off.
Where required capital is held within a with-profits long-term fund, the value placed on surplus assets within the fund is already adjusted to reflect its expected release over time and so no further adjustment to the shareholder position is necessary.
(d) Financial options and guarantees Nature of financial options and guarantees in Prudential’s long-term business Asia Participating products in Asia, principally written in Hong Kong, Singapore and Malaysia, have both guaranteed and non-guaranteed elements. These products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses: regular and final. Regular bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular products. Final bonuses are guaranteed only until the next bonus declaration.
Jackson issues variable annuity contracts for which it contractually guarantees to the contract holder, subject to specific conditions, either: a) a return of no less than total deposits made to the contract, adjusted for any partial withdrawals; b) total deposits made to the contract, adjusted for any partial withdrawals plus a minimum return; or c) the highest contract value on a specified anniversary date, adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable upon depletion of funds (Guaranteed Minimum Withdrawal Benefits (GMWB)) or as death benefits (Guaranteed Minimum Death Benefits (GMDB)). These guarantees generally protect the policyholder’s contract value in the event of poor equity market performance. Jackson hedges the GMWB and GMDB guarantees through the use of equity options and futures contracts, with an expected long-term future hedging cost allowed for within the EEV value of in-force business to reflect the equity options and futures expected to be held based on the Group’s current dynamic hedging programme and consideration of past practice. This allowance was re-estimated in 2019 following the NAIC reform for variable annuity business, as described in note 7. Jackson also historically issued a small amount of income benefits (Guaranteed Minimum Income Benefits (GMIB)), which are now materially fully reinsured.
Fixed annuities provide that at Jackson’s discretion it may reset the interest rate credited to policyholders’ accounts, subject to a guaranteed minimum return, depending on the particular product, jurisdiction where issued and the date of issue.
Jackson also issues fixed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing a guaranteed minimum return, which is of a similar nature to those for fixed annuities.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 351
Time value The value of financial options and guarantees comprises the intrinsic value (arising from a deterministic valuation on best estimate assumptions) and the time value (arising from the variability of economic outcomes in the future).
Where appropriate, a full stochastic valuation has been undertaken to determine the time value of financial options and guarantees. The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations. Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes with an allowance for correlations between various asset classes. Details of the key characteristics of each model are given in note 15(ii).
If the calculation of the time value of options and guarantees results in a positive outcome for a particular product (for example for variable annuity business in the US at 31 December 2019) then the figure is capped at zero, reflecting the strong interaction between the outcome of the central economic scenario and the time value of financial options and guarantees in these circumstances, and the reported value of in-force business before deduction of cost of capital and time value of options and guarantees will reflect the outcome from the full stochastic valuation.
(f) With-profits business and the treatment of the estate For the Group’s relevant Asia operations, the proportion of surplus allocated to shareholders from the with-profits funds has been based on the applicable profit distribution between shareholders and policyholders. The EEV methodology includes the value attributed to the shareholders’ interest in the residual estate of the in-force with-profits business. In any scenarios where the total assets of the life fund are insufficient to meet policyholder claims in full, the excess cost is fully attributed to shareholders. As required, adjustments are also made to reflect any capital requirements for with-profits business in Asia in excess of the available capital of the with-profits funds.
(g) Internal asset management The in-force and new business results from long-term business include the projected future profit or loss from asset management and service companies that support the Group’s covered insurance businesses. The results of the Group’s asset management operations include the current period profit from the management of both internal and external funds. EEV basis shareholders’ other income and expenditure is adjusted to deduct the unwind of the expected margins on the internal management of the assets of the life funds for the period as included in ‘Other’ operations. The deduction is on a basis consistent with that used for projecting the results for covered insurance business. Accordingly, Group operating profit includes the variance between the actual and expected profit margin in respect of the management of the assets for the covered business.
(h) Allowance for risk and risk discount rates Overview Under the EEV Principles, discount rates used to determine the present value of expected future cash flows are set by reference to risk-free rates plus a risk margin.
The risk-free rates are based on local government bond yields at the valuation date and are generally assumed to remain constant throughout the projection.
The risk margin reflects any non-diversifiable risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. In order to better reflect differences in relative market risk volatility inherent in each product group, Prudential sets the risk discount rates to reflect the expected volatility associated with the expected future cash flows for each product group in the embedded value model, rather than at a Group level.
The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate, and allowance for non-diversifiable non-market risk. No allowance is required for non-market risks where these are assumed to be fully diversifiable.
The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each product group and hence the volatility of product-specific cash flows. These are determined by considering how the profit from each product is affected by changes in expected returns on various asset classes. By converting this into a relative rate of return, it is possible to derive a product-specific beta.
In 2019, the Group reconsidered the application of this methodology for certain Asia businesses to reflect a more granular assessment of the underlying market risks when determining the beta, alongside other refinements. These refinements resulted in the change in the risk discount rate for Vietnam shown in note 15(i)(a), and had an impact of $67 million via the effect of change in economic assumptions in note 6. There were small consequential effects on new business contribution and in-force operating profit, which were overall not material in the context of the Group’s results.
Additional credit risk allowance The Group’s methodology allows for credit risk. The total allowance for credit risk is to cover expected long-term defaults, credit risk premium (to reflect the volatility in downgrade and default levels) and short-term downgrades and defaults.
The practical application of the allowance for credit risk varies depending on the type of business as described below: Asia For Asia, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance is considered to be sufficient. Accordingly, no additional allowance for credit risk is required.
US (Jackson) For Jackson, the allowance for long-term defaults of 0.17 per cent at 31 December 2019 (31 December 2018: 0.17 per cent) is reflected in the risk margin reserve charge that is deducted in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.
— Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible, in adverse economic scenarios, to pass on a component of credit losses to policyholders (subject to guarantee features), through lower investment returns credited to policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.
A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group’s covered business. For the Group’s businesses in less mature markets (such as the Philippines and Thailand), additional allowances are applied for emerging market risk ranging from 100 to 250 basis points. The level and application of these allowances are reviewed and updated based on an assessment of the Group’s exposure and experience in the markets. During 2019, the allowance for emerging market risk was removed for Indonesia, Taiwan and Vietnam reflecting the growth in the size of the businesses and increasing management exposure and experience in the local markets. For the Group’s business in more mature markets, no additional allowance is necessary.
(i) Foreign currency translation Foreign currency profits and losses have been translated at average exchange rates for the year. Foreign currency transactions are translated at the spot rate prevailing at the date of the transactions. This includes external dividends paid to shareholders. Prudential will determine and declare its dividend in US dollars commencing with dividends paid in 2020, including the 2019 second interim dividend. Foreign currency assets and liabilities have been translated at closing exchange rates. The principal exchange rates are shown in note A1 of the Group IFRS financial statements.
(j) Taxation In determining the post-tax profit for the year for covered business, the overall tax rate includes the impact of tax effects determined on a local regulatory basis. Tax payments and receipts included in the projected future cash flows to determine the value of in-force business are calculated using tax rates that have been announced and substantively enacted by the end of the reporting period.
In addition, operating results include the effect of changes in tax legislation, unless these changes are one-off and structural in nature or primarily affect the level of projected investment returns, in which case they are reflected as a non-operating result.
Non-operating results comprise: — Short-term fluctuations in investment returns; — Mark-to-market value movements on core structural borrowings; — Effect of changes in economic assumptions; — Impact of NAIC reform, hedge modelling and other related changes in the US; and — The impact of corporate transactions undertaken in the year.
Total profit or loss in the year attributable to shareholders and basic earnings per share include these items, together with actual investment returns. The Group believes that operating profit, as adjusted for these items, better reflects underlying performance.
(b) Investment returns included in operating profit For the investment element of the assets covering the total net worth of long-term insurance business, investment returns are recognised in operating results at the expected long-term rates of return. These expected returns are calculated by reference to the asset mix of the portfolio.
(d) Effect of changes in operating assumptions Operating profit includes the effect of changes to non-economic assumptions on the value of in-force business at the end of the reporting period. For presentational purposes the effect of changes is delineated to show the effect on the opening value of in-force business as operating assumption changes, with the experience variances subsequently being determined by reference to the assumptions at the end of the reporting period, as discussed below.
The total profit that emerges over the lifetime of an individual contract as calculated under the EEV basis is the same as that calculated under the IFRS basis. Since the EEV basis reflects discounted future cash flows, under the EEV methodology the profit emergence is advanced, thus more closely aligning the timing of the recognition of profit with the efforts and risks of current management actions, particularly with regard to business sold during the year.
Risk discount rate % Government bond yield % Expected long-term inflation %New business In-force business 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
(2) For Hong Kong, the assumptions shown are for US dollar denominated business. For other businesses, the assumptions shown are for local currency denominated business. (3) Equity risk premiums (geometric) in Asia range from 2.9 per cent to 4.8 per cent (31 December 2018: 2.6 per cent to 4.5 per cent). (4) The geometric equity return assumptions for the most significant equity holdings of the Asia businesses are: Hong Kong (US dollar denominated business) 4.8 5.3
Risk discount rate: Variable annuity: Risk discount rate 6.5 7.1 Additional allowance for credit risk included in risk discount rate note 14(i)(h) 0.2 0.2
Allowance for long-term defaults included in projected spread note 14(i)(h) 0.17 0.17 US 10-year treasury bond yield 1.9 2.7 Equity risk premium (geometric) 2.9 2.6 Pre-tax expected long-term nominal rate of return for US equities (geometric) 4.8 5.3 Expected long-term rate of inflation 2.9 2.9 S&P 500 equity return volatility note (ii)(b) 17.5 17.5
Fixed index annuity business† 0.50 0.50 2.00 2.00 * Including the proportion of variable annuity business invested in the general account. The assumed spread margin grades up linearly by 25 basis points to a long-term assumption over five years.
† The assumed spread margin grades up linearly by 100 basis points over five years, increasing by a further 50 basis points to a long-term assumption at the end of the index option period (2018 issues: grades up linearly by 25 basis points to a long-term assumption over five years).
(ii) Stochastic assumptions Details are given below of the key characteristics of the models used to determine the time value of financial options and guarantees as referred to in note 14(i)(d).
(b) US (Jackson) — Interest rates and equity returns are projected using a log-normal generator reflecting historical market data; — Corporate bond returns are based on treasury yields plus a spread that reflects current market conditions; — The volatility of equity returns ranges from 17 per cent to 26 per cent for both years; and — The standard deviation of interest rates ranges from 3.1 per cent to 3.3 per cent (2018: from 3.4 per cent to 3.7 per cent).
(iii) Operating assumptions Best estimate assumptions are used for projecting future cash flows, where best estimate is defined as the mean of the distribution of future possible outcomes. The assumptions are reviewed actively and changes are made when evidence exists that material changes in future experience are reasonably certain.
Assumptions required in the calculation of the time value of financial options and guarantees, for example relating to volatilities and correlations, or dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, reflect any dynamic relationships between the assumptions and the stochastic variables.
For Asia, expenses comprise costs borne directly and costs recharged from the Group head office function in Hong Kong that are attributable to the covered business. The assumed future expenses for these businesses also include projections of these future recharges. Development expenses are allocated to Asia covered business and are charged as incurred.
Tax rates The assumed long-term effective tax rates for operations reflect the expected incidence of taxable profit and loss in the projected future cash flows as explained in note 14(i)(j). Except for the change in China JV effective tax rate as discussed in note 4, there has been no change in the effective tax rates applied for projecting future cash flows.
South-east Asia including Hong Kong 2,370 2,460 3,742 3,782 3,979 4,027 24,061 23,693
The amounts shown are not, and not intended to be, reflective of premium income recorded in the Group IFRS income statement. (b) New business in China JV is included at Prudential’s 50 per cent interest in the joint venture. (c) New business in India is included at Prudential’s interest in the associate (with effect from 27 March 2019: 22 per cent; 2018: 26 per cent). (d) In 2019, the Africa business sold new business APE of $82 million (2018: $51 million on an actual exchange rate basis, $47 million on a constant exchange rate basis). Given the relative immaturity of the Africa business, it is incorporated into the Group’s EEV basis results on an IFRS basis and is excluded from new business sales and profit metrics.
In preparing the EEV supplementary information, the directors have: — Prepared the supplementary information in accordance with the EEV Principles; — Identified and described the business covered by the EVM; — Applied the EVM consistently to the covered business; — Determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then applied them consistently; — Made estimates that are reasonable and consistent; and
Our opinion on the EEV basis supplementary information is unmodified We have audited the EEV basis supplementary information of Prudential plc (‘the Company’) for the year ended 31 December 2019 set out in the EEV basis results and Notes on the EEV basis results pages. The EEV basis supplementary information should be read in conjunction with the Group financial statements.
In our opinion, the EEV basis supplementary information of the Company for the year ended 31 December 2019 has been properly prepared, in all material respects, in accordance with the European Embedded Value Principles issued by the European Insurance CFO Forum in 2016 (‘the EEV Principles’) using the methodology and assumptions set out in the Notes on the EEV basis results.
Scope of an audit of financial statements performed in accordance with ISAs (UK) A description of the scope of an audit of financial statements is provided on our website at www.kpmg.com/uk/ auditscopeukco2014a. This report is made subject to important explanations regarding our responsibilities, as published on that website, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
D irectors’ rem uneration report Financial statem ents European Em bedded V alue (EEV
(vi) Reconciliation of Asia renewal insurance premium to gross premiums earned 384
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 363
I(i) Group capital position Following the demerger of M&G plc from Prudential plc, the Hong Kong Insurance Authority (IA) has assumed the role of the group-wide supervisor for the Prudential Group with the Group no longer subject to Solvency II capital requirements. Ultimately, Prudential plc will become subject to the Group Wide Supervision (GWS) framework which is currently under development by the Hong Kong IA for the industry and is expected to be finalised in the second half of 2020. Until Hong Kong’s GWS framework comes into force, Prudential will apply the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine group regulatory capital requirements (both minimum and prescribed levels). Further detail on the LCSM is included in the basis of preparation section below.
The Group holds material participating business in Hong Kong, Singapore and Malaysia. If the available capital and minimum capital requirement attributed to this policyholder business are excluded, then the Prudential Group shareholder LCSM surplus of available capital over the regulatory GMCR at 31 December 2019 was $9.5 billion before allowing for the payment of the 2019 second interim ordinary dividend.
Unallocated to a segment Group total *Excludes M&G plc and includes $3.7 billion of subordinated debt issued by Prudential plc that was transferred to M&G plc on 18 October 2019.
The 31 December 2019 Jackson local statutory results reflect early adoption of the NAIC regulatory framework reforms at the valuation date as agreed with the Department of Insurance Financial Services (DIFS) and Jackson’s decision not to renew its long-standing permitted practice with the DIFS which allowed certain derivative instruments, taken out to protect Jackson against declines in long-term interest rates, to be included at book value in the local statutory returns. At 31 December 2019 these derivatives are held at fair value.
The sensitivity results above assume instantaneous market movements as at 31 December 2019, apart from the -40% equity sensitivity where for Jackson an instantaneous 20% market fall is assumed to be followed by a further market fall of 20% over a four-week period with dynamic hedges assumed to be rebalanced over the period. Aside from this assumed dynamic hedge rebalancing for Jackson in the -40% equity sensitivity, the sensitivity results only allow for limited management actions such as changes to future policyholder bonuses. If such economic conditions persisted, the financial impacts may differ to the instantaneous impacts shown above. In this case management could also take additional actions to help mitigate the impact of these stresses. These actions include, but are not limited to, rebalancing investment portfolios, further market risk hedging, increased use of reinsurance, repricing of in-force benefits, changes to new business pricing and the mix of new business being sold.
Between 31 December 2019 and the end of February 2020, government bond yields and equity markets fell significantly in many countries. For example, US 10-year treasury yields fell by around 80 basis points and the US S&P 500 equity index fell by around 9% over the 2-month period. Based on economic conditions at the end of February 2020, the Group shareholder LCSM capital ratio (over GMCR) is estimated to be in the range of 270% - 280%, compared to 309% at 31 December 2019. This estimated capital ratio at the end of February is slightly higher than implied by the sensitivities above, mainly reflecting the benefit of management actions taken in the period which are not allowed for in the sensitivities.
The estimated movement in the Group shareholder LCSM surplus over 2019 is driven by: — Operating capital generation of $1.9 billion: generated by expected return on in-force business net of strain on new business written in 2019. It includes the impact from the release of incremental reserves associated with the John Hancock acquisition in the US ($0.4 billion) and interest paid prior to demerger on subordinated debt transferred to M&G plc ($(0.2) billion); — Non-operating experience of $(0.6) billion: this includes the negative impact of higher equity markets on Jackson’s derivatives net of reserve movements partially offset by the positive impacts of market and exchange rate movements on Asia surplus over the year; — Corporate activities (excluding demerger items) of $(0.8) billion: this is the effect on LCSM surplus of corporate transactions in the period, principally arising from the extension of the UOB bancassurance distribution deal; — Demerger costs of $(0.4) billion: this includes transaction related costs and other one-off costs arising from the demerger; — Subordinated debt redemption of $(0.5) billion: a reduction in surplus from the impact of debt redeemed during 2019; — Demerger related impacts of $1.0 billion: includes $3.8 billion of pre-demerger dividend paid by M&G plc, $1.0 billion of restructuring impacts prior to demerger and $0.4 billion from debt raised by Prudential plc on behalf of M&G plc, partially offset by $(4.2) billion from the transfer of subordinated debt to M&G plc prior to demerger; and
Reconciliation of Group shareholder LCSM surplus to EEV free surplus (excluding intangibles)
Estimated Group shareholder LCSM surplus (over GMCR) 4.7 3.8 1.0 9.5 Increase required capital for EEV free surplus note (i) (0.6) (2.2) – (2.8) Adjust surplus assets and core structural borrowings to market value note (ii) 0.3 0.2 (0.2) 0.3 Add back inadmissible assets note (iii) 0.1 0.1 – 0.2 Deductions applied to EEV free surplus note (iv) (0.9) – – (0.9)
(iii) LCSM restricts the valuation of certain sundry non-intangible assets. In most cases these assets are considered fully recognisable in free surplus. As an exception to this, both LCSM surplus and EEV free surplus restrict the deferred tax asset held by Jackson to the level allowed to be admitted by the local regulator in local statutory available capital.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 367
In determining the LCSM available capital and required capital the following principles have been applied: — For regulated insurance entities, available and required capital are based on the local solvency regime applicable in each jurisdiction, with minimum required capital is set at the solo legal entity statutory minimum capital requirements. The treatment of participating funds is consistent with the local basis; — For the US insurance entities, available and required capital are based on the local US RBC framework set by the NAIC, with minimum required capital set at 100 per cent of the CAL RBC; — For asset management operations and other regulated entities, the shareholder capital position is derived based on the sectoral basis applicable in each jurisdiction, with minimum required capital based on the solo legal entity statutory minimum capital requirement; — For non-regulated entities, the available capital is based on IFRS net assets after deducting intangible assets. No required capital is held in respect of unregulated entities; — Investments in subsidiaries, joint ventures and associates (including, if any, loans that are recognised as capital on the receiving entity’s balance sheet) are eliminated from the relevant holding company to prevent the double counting of available capital; and
— The Hong Kong IA has agreed that specific bonds (being those subordinated debt instruments held by Prudential plc at the date of demerger) can be included as part of the Group’s capital resources for the purposes of satisfying group minimum and prescribed capital requirements. Senior debt instruments held by Prudential plc have not been included as part of the Group capital resources and are treated as a liability in the LCSM results presented above (this is equivalent to a 15 per cent reduction in the Group shareholder LCSM coverage ratio (over GMCR)). Grandfathering provisions under the GWS framework remain subject to further consultation and the Hong Kong legislative process in due course.
Asia operations: Internal funds 141.9 112.5 Eastspring Investments external funds (as analysed note I(v)) 124.7 77.8 Other† – 22.2
† Other represents funds managed by Eastspring Investments on behalf of M&G plc, that were categorised as the internal funds of the UK and Europe operations prior to the demerger of M&G plc. Following the demerger, these funds have been reclassified to external funds under management of Eastspring Investments.
Total investments and cash and cash equivalents held by the continuing operations on the consolidated statement of financial position 412.6 349.6
External and M&G plc funds of Eastspring Investments 124.7 100.0 Internally managed funds held in joint ventures and associate, excluding assets attributable to external unit holders of the consolidated collective investment schemes and other adjustments 6.6 5.7
I(iii) Holding company cash flow The holding company cash flow describes the movement in the cash and short-term investments of the centrally managed group holding companies and differs from the IFRS cash flow statement, which includes all cash flows in the year including those relating to both policyholder and shareholder funds. The holding company cash flow is therefore a more meaningful indication of the Group’s central liquidity.
During both 2019 and 2018 the cash and short-term investments of the central holding companies were managed in sterling, in line with the management of the Group’s external dividends. Following the change to the Group’s presentational currency, the holding company cash flow statement below is shown in US dollars and prior period amounts have been restated accordingly. Cash movements in the year have been converted from sterling into US dollars by using the month-end sterling to US dollar exchange rate for the month in which the transaction occurred. Cash balances at the start and end of the year have been translated from sterling to US dollars using the spot rates at 1 January and 31 December respectively. As an exception to the above, external dividends paid for both 2019 and 2018 have been translated at the exchange rate relevant to the day they were paid to ensure consistency with the financial statements.
At 31 December 2019, the Group changed its basis of managing central cash-holdings from sterling to US dollars to better reflect the inflows from the Group’s operations post the demerger of M&G plc and its decision to declare dividends in US dollars from 2020. Therefore, in future reporting the holding company cash flow will be prepared directly in US dollars.
Asia note (b) 950 916 US note (b) 509 452 Other operations 6 49 Total continuing operations 1,465 1,417
Holding company cash flow before dividends and other movements 1,627 1,687 Dividends paid (1,634) (1,662)
Operating holding company cash flow after dividends but before other movements (7) 25 Other movements
Total holding company cash flow (2,006) 1,178 Cash and short-term investments at beginning of year 4,121 3,063 Foreign exchange movements 92 (120)
(c) The net interest paid in 2019 includes amounts on debt substituted to M&G plc shortly prior to its demerger of $231 million. (d) Transactions to effect the demerger includes the transfer of subsidiaries and settlement of intercompany loans totalling $(193) million issuance of substitutable debt for cash of $367 million, receipt of the pre-demerger dividend of $3,841 million, and the substitution of M&G plc as issuer of sub-ordinated debt in place of Prudential plc (as discussed further in note C6 of the IFRS financial statements), which reduced Cash and short-term investments by $(4,161) million.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 369
I(iv) Analysis of adjusted IFRS operating profit based on longer-term investment returns by driver from long-term insurance businesses This schedule classifies the Group’s adjusted IFRS operating profit based on longer-term investment returns (adjusted operating profit) from continuing long-term insurance businesses into the underlying drivers using the following categories: — Spread income represents the difference between net investment income and amounts credited to certain policyholder accounts. It excludes the operating investment return on shareholder net assets, which has been separately disclosed as expected return on shareholder assets.
— With-profits represents the pre-tax shareholders’ transfer from the with-profits business for the period. — Insurance margin primarily represents profit derived from the insurance risks of mortality and morbidity. — Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses (see below).
— DAC adjustments comprise DAC amortisation for the period, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business written in the period.
(a) Margin analysis of long-term insurance business – continuing operations The following analysis expresses certain of the Group’s sources of adjusted IFRS operating profit based on longer-term investment returns as a margin of policyholder liabilities or other relevant drivers. Details on the calculation of the Group’s average policyholder liability balances are given in note (1).
Margin on revenues 2,810 – 2,810 Expenses: Expected return on shareholder assets 172 14 186
Share of related tax charges from joint ventures and associate note (5) (53) – (53)
Total segment profit from continuing operations 2,888 2,563 5,451 2018 CER notes (6),(7)
Adjusted IFRS operating profit based on longer-term investment returns – asset management 239 11 250
(2) Margin represents the operating return earned in the year as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. (3) The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business. (4) The DAC adjustments contain a credit of $72 million in respect of joint ventures and associate in 2019 (2018: AER credit of $73 million). (5) Under IFRS, the Group’s share of results from its investments in joint ventures and associate accounted for using the equity method is included in the Group’s profit before tax on a net of related tax basis. These tax charges are shown separately in the analysis of Asia operating profit drivers in order for the contribution from the joint ventures and associate to be included in the margin analysis on a consistent basis as the rest of the Asia’s operations.
(7) The 2018 comparative results exclude the contribution from the discontinued UK and Europe operations.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 371
I(v) Asia operations – analysis of adjusted IFRS operating profit based on longer-term investment returns by business unit (a) Analysis of adjusted IFRS operating profit based on longer-term investment returns by business unit Adjusted operating profit based on longer-term investment returns for Asia operations are analysed below. The table below presents the 2018 results on both AER and CER bases to eliminate the impact of exchange translation.
South-east Asia operations including Hong Kong 2,523 2,251 2,247 12% 12%
I(iv) Analysis of adjusted IFRS operating profit based on longer-term investment returns by driver from long-term insurance businesses continued
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 373
Average funds managed by Eastspring Investments $214.0bn $186.3bn Margin based on operating income* 30bps 30bps Cost/income ratio† 52% 55%
(c) Eastspring Investments total funds under management Eastspring Investments, the Group’s asset management business in Asia, manages funds from external parties and also funds for the Group’s insurance operations. The table below analyses the total funds managed and Eastspring Investments.
(2) Total funds under management – analysis by asset class $bn % of total $bn % of total
Expected period of emergence Asia US Group total Asia US Group total
The discounted expected generation from new business written in 2019 can be reconciled to the new business profit for long-term business operations as follows: 2019 $m
Undiscounted expected free surplus generation for years 2020 to 2059 7,723 2,120 9,843 Less: discount effect (4,211) (721) (4,932)
Discounted expected free surplus generation from new business written in 2019 4,283 1,399 5,682 Free surplus investment in new business (619) (539) (1,158)
† Other items represent the impact of the time value of options and guarantees on new business, foreign exchange effects and other non-modelled items. Foreign exchange effects arise as EEV new business profit amounts are translated at average exchange rates and the expected free surplus generation is translated at closing rates.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 375
The undiscounted expected free surplus generation from all in-force business at 31 December 2019 shown below can be reconciled to the amount that was expected to be generated as at 31 December 2018 as follows: Group $m $m $m $m $m $m Other $m Total $m 2018 expected free surplus generation for years 2019 to 2058 4,759 4,823 4,807 4,695 4,608 4,505 72,778 100,975
Demerger of UK and Europe operations (755) (776) (753) (728) (707) (684) (10,316) (14,719)
Less: Amounts expected to be realised in the current year (1,987) – – – – – – (1,987)
Non-operating and other 2019 expected free surplus generation for years 2020 to 2059 – 1,523 1,445 1,412 1,500 1,574 15,206 22,660 * Excluding 2019 new business. † Including impact of US EEV hedge modelling enhancements as described in note 7 of the EEV financial statements.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 377
The equivalent discounted amounts of the undiscounted expected transfers from in-force business and required capital into free surplus shown previously are as follows: Discounted expected generation from all in-force business
Total EEV for long-term business operations 54,179 * Other items represent the impact of the time value of options and guarantees and other non-modelled items.
I(vii) Option schemes The Group presently grants share options through three schemes and exercises of the options are satisfied by the issue of new shares. Executive directors and eligible employees based in the UK may participate in the Prudential Savings-Related Share Option Scheme. Executives and eligible employees based in Asia as well as, prior to the demerger of M&G plc from the Prudential Group, eligible employees of M&G plc based in Europe can participate in the Prudential International Savings-Related Share Option Scheme, while agents based in certain regions of Asia can participate in the Prudential International Savings-Related Share Option Scheme for Non-Employees. Further details of the schemes and accounting policies are detailed in note B2.2 of the IFRS basis consolidated financial statements.
The option schemes will terminate as follows, unless the directors resolve to terminate the plans at an earlier date: — Prudential Savings-Related Share Option Scheme: 16 May 2023; — Prudential International Savings-Related Share Option Scheme: 19 May 2021; and — Prudential International Savings-Related Share Option Scheme for Non-Employees 2012: 12 May 2022.
The weighted average share price of Prudential plc for the year ended 31 December 2019 was £15.05 (2018: £17.36). Particulars of options granted to directors are included in the Directors’ remuneration report on page 160. The closing prices of the shares immediately before the date on which the options were granted during the year were £14.00 for the
Prudential Savings-Related Share Option Scheme and £14.57 for the Prudential International Savings-Related Share Option Scheme for Non-Employees.
The total number of securities available for issue under the scheme is 1,251,512 which represents 0.048 per cent of the issued share capital at 31 December 2019.
M&G plc employees with outstanding options on demerger were treated as ‘good leavers’, with both the vesting period and number of options exercisable curtailed on demerger.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £14.69.
The weighted average fair value of options granted under the plan in the period was £3.35.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 379
There are no securities available for issue under the scheme at 31 December 2019. At the time of the demerger, the only participants with outstanding options in this plan were M&G plc employees. The outstanding options over Prudential plc shares did not vest at demerger. Instead, they have been exchanged for an equivalent grant in M&G plc shares. The M&G plc participants have been treated as ‘good leavers’.
There were no options granted under the plan during the current period.
I(viii) Selected historical financial information of Prudential The following table sets forth Prudential’s selected consolidated financial data for the periods indicated. Certain data is derived from Prudential’s audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU) and European Embedded Value (EEV).
Continuing operations: Earned premiums, net of reinsurance 43,481 44,431 38,496 37,490 41,290
Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (83,905) (23,426) (63,808) (42,881) (29,912)
(Loss) gain on disposal of businesses and corporate transactions (142) (107) 292 (322) (70)
Tax (charges) attributable to policyholders’ returns (365) (107) (321) (210) (105)
Profit before tax attributable to shareholders’ returns 1,922 3,450 2,588 1,169 2,539 Tax credit (charges) attributable to shareholders’ returns 31 (569) (840) (119) (439)
Based on profit from continuing operations for the year attributable to the equity holders of the Company : Basic earnings per share (in cents) 75.1¢ 111.7¢ 68.0¢ 41.0¢ 82.3¢ Diluted earnings per share (in cents) 75.1¢ 111.7¢ 67.9¢ 40.9¢ 82.2¢
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 381
Profit before tax attributable to shareholders 1,922 3,450 2,588 1,169 2,540
Operating earnings per share after tax and non-controlling interest (in cents) 175.0¢ 145.2¢ 134.6¢ 126.5¢ 114.3¢
Profit attributable to shareholders from continuing operations 4,161 5,580 8,561 3,859 4,366
Operating earnings per share (in cents) 266.6¢ 305.3¢ 263.0¢ 239.7¢ 220.8¢
EEV shareholders’ equity, excluding non-controlling interests 54.7 63.4 60.5 48.2 47.8
Annual premium equivalent (APE) sales 7,384 7,058 7,046 6,989 6,787 EEV new business profit (NBP) (post-tax) 4,405 4,707 4,220 3,820 3,501
Core structural borrowings of shareholder-financed businesses 5,594 9,761 8,496 8,400 7,386
Funds under management note (iii) 543.9 455.3 452.0 374.8 348.7 Group shareholder LCSM surplus note (iv) 9.5 9.7
(iii) Funds under management comprise funds of the Group held in the statement of financial position and external funds that are managed by the Group’s asset management operations. The comparative results from 2015 to 2018 have been re-presented from those previously published to exclude the discontinued UK and Europe operations and for other adjustments as described in note I(ii).
The annual report uses alternative performance measures (APMs) to provide more relevant explanations of the Group’s financial position and performance. This section sets out explanations for each APM and reconciliations to relevant IFRS balances.
II(i) Reconciliation of adjusted IFRS operating profit based on longer-term investment returns to profit before tax from continuing operations Adjusted IFRS operating profit attributable to shareholders based on longer-term investment returns from continuing operations (operating profit) presents the operating performance of the business. This measurement basis adjusts for the following items within total IFRS profit before tax: — Short-term fluctuations in investment returns on shareholder-backed business; — Amortisation of acquisition accounting adjustments arising on the purchase of business; and — Gain or loss on corporate transactions, such as disposals undertaken in the year and costs connected to the demerger of M&G plc from Prudential plc.
II(ii) Calculation of IFRS gearing ratio IFRS gearing ratio is calculated as net core structural borrowings of shareholder-financed businesses divided by closing IFRS shareholders’ equity plus net core structural borrowings.
Core structural borrowings of shareholder-financed businesses 5,594 9,761 Less holding company cash and short-term investments (2,207) (4,121)
II(iii) Return on IFRS shareholders’ funds Operating return on IFRS shareholders’ funds is calculated as adjusted operating profit net of tax and non-controlling interests divided by closing shareholders’ equity. Total comprehensive return on shareholders’ funds is calculated as IFRS total comprehensive income for the period net of tax and non-controlling interests divided by closing shareholders’ equity. Following the demerger of the UK and Europe operations in October 2019 and their treatment as discontinued, it is more meaningful to derive the 2019 return using profit from continuing operations and closing shareholders’ equity. The Group will be introducing a new return on equity performance measure for the Group’s 2020 Prudential Long-Term Incentive Plan (PLTIP) awards alongside other metrics. This measure is to be calculated as adjusted operating profit after tax and net of non-controlling interests, divided by average shareholders’ equity. Accordingly, the calculation of the return on IFRS shareholders’ funds going forward will be aligned to be based on average shareholders’ equity.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 383 2019 $m
Adjusted operating profit based on longer-term investment returns 3,276 3,070 (1,036) 5,310 179 5,489
Profit attributable to non-controlling interests (6) – (3) (9) – (9)
Adjusted operating profit based on longer-term investment returns, net of tax and non-controlling interests 2,834 2,633 (939) 4,528 145 4,673
Operating return on shareholders’ funds (%) 26% 29% n/a 23% – 24% Total comprehensive return on * Demerger-related items comprise interest on the subordinated debt that was substituted to M&G plc prior to the demerger ($179 million pre-tax) and one-off costs of the demerger ($407 million pre-tax).
Tax on operating profit (411) (402) Profit attributable to non-controlling interests (1) –
Adjusted operating profit based on longer-term investment returns, net of tax and noncontrolling interests 2,476 2,161
IFRS total comprehensive income 1,608 536 Closing shareholders’ funds 8,175 7,163
Operating return on shareholders’ funds (%) 30% 30% Total comprehensive return on * Given the significant changes of Group shareholders’ funds as a result of the demerger of the UK and Europe operations in October 2019, it is not meaningful to compare the 2019 and 2018 returns on shareholders’ funds at a Group level. The 2018 comparatives have therefore excluded the presentation of a Group return on shareholders’ funds. Additionally, the 2018 comparatives for Asia and US operations have been re-presented from those previously published to reflect the use of closing rather than opening shareholders’ funds to be on a comparable basis with the 2019 calculation.
II(iv) Calculation of IFRS shareholders’ funds per share IFRS shareholders’ funds per share is calculated as closing IFRS shareholders’ equity divided by the number of issued shares at 31 December 2019 of 2,601 million (31 December 2018: 2,593 million). The demerger alters the size of the Group’s shareholders’ equity and the nature of its operations, rendering a comparison with the prior year return on shareholders’ funds value unrepresentative.
Closing IFRS shareholders’ equity ($ million) 10,866 8,929 (318) 19,477 Shareholders’ funds per share (cents) 418¢ 343¢ (12)¢ 749¢
II(v) Calculation of asset management cost/income ratio The asset management cost/income ratio is calculated as asset management operating expenses, adjusted for commission and joint venture contribution, divided by asset management total IFRS revenue adjusted for commission, joint venture contribution, performance-related fees and non-operating items.
Operating expense 329 311 Share of joint venture expense (102) (133)
Note Operating income and expense include the Group’s share of contribution from joint ventures (but excludes any contribution from associates). In the consolidated income statement of the Group IFRS basis results, the net post-tax income of the joint ventures and associates is shown as a single line item.
II(vi) Reconciliation of Asia renewal insurance premium to gross premiums earned Reconciliation of Asia renewal insurance premium to gross earned premiums and calculation of Asia Life weighted premium income.
Asia renewal insurance premium 19,007 17,165 17,046 Add: General insurance premium 135 120 122 Add: IFRS gross earned premium from new regular and single premium business 6,386 6,421 6,402 Less: Renewal premiums from joint ventures (1,771) (1,717) (1,657)
Asia renewal insurance premium (as above) 19,007 17,165 17,046 Asia APE (see Note II(vi)) 5,161 4,999 4,959
II(vii) Reconciliation of APE new business sales to gross premiums earned The Group reports APE new business sales as a measure of the new policies sold in the period. This differs from the IFRS measure of gross premiums earned as shown below: Annual premium equivalents (APE) from continuing operations 7,384 7,058 Adjustment to include 100% of single premiums on new business sold in the year note (a) 23,409 21,318 Premiums from in-force business and other adjustments note (b) 14,271 17,238
shareholders’ equity of asset management and other operations. The value of in-force business reflects the present value of expected future shareholder cash flows from long-term in-force business which are not captured as shareholders’ interest on an IFRS basis. Total net worth represents the net assets for EEV reporting that reflect the regulatory basis position, with adjustments to achieve consistency with the IFRS treatment of certain items as appropriate.
II(ix) Calculation of return on embedded value Return on embedded value is calculated as the total post-tax EEV profit for the year as a percentage of closing EEV basis shareholders’ equity.
EEV basis profit (loss) for the year from continuing operations, net of tax and non-controlling interests ($ million) 8,063 (2,025) (1,886) 4,152 (528) 4,680
Total return on shareholders’ funds (%) 21% (12)% n/a 8% n/a 8%
* Demerger-related items comprise interest on the subordinated debt that was substituted to M&G plc prior to the demerger and one-off costs of the demerger. † Given the significant changes of Group shareholders’ funds as a result of the demerger of the UK and Europe operations in October 2019, it is not meaningful to compare the 2019 and 2018 returns on shareholders’ funds at a Group level. The 2018 comparatives have therefore excluded the presentation of a Group return on shareholders’ funds. Additionally, the 2018 comparatives for Asia and US operations have been re-presented from those previously published to reflect the use of closing rather than opening shareholders’ funds to be on a comparable basis with the 2019 calculation.
Operating return on embedded value is calculated as the post-tax EEV operating profit for the year as a percentage of closing EEV basis shareholders’ equity.
EEV basis operating profit for the year from continuing operations, net of tax ($ million) 6,138 1,782 6,070 2,828
Closing EEV shareholders’ equity excluding goodwill attributable to shareholders ($ million) 31,374 18,709 (4,616) 45,467
Shareholders’ funds per share (in cents) 1,234¢ 722¢ (178)¢ 1,778¢ Shareholders’ funds per share excluding goodwill attributable to shareholders (in cents) 1,209¢ 722¢ (178)¢ 1,753¢
II (xi) Calculation of new business contribution/embedded value New business contribution/embedded value is calculated as the post-tax EEV new business contribution for the year as a percentage of closing EEV basis shareholders’ equity.
Closing EEV basis shareholders’ equity ($ million) 39,235 16,342 32,008 18,709
Prudential’s approaches to managing risks are explained in the section of this document headed ‘Group Chief Risk and Compliance Officer’s Report on the risks facing our business and how these are managed’.
Prudential’s businesses are inherently subject to market fluctuations and general economic conditions Uncertainty, fluctuations or negative trends in international economic and investment climates could have a material adverse effect on Prudential’s business and profitability. Prudential operates in a macroeconomic and global financial market environment that presents significant uncertainties and potential challenges. For example, interest rates in the US and some Asian countries in which Prudential operates remain low relative to historical levels, and the transition to a lower carbon economy may impact on long-term asset valuations.
Global financial markets are subject to uncertainty and volatility created by a variety of factors. These factors include monetary policy in China, the US and other jurisdictions together with their impact on the valuation of all asset classes and effect on interest rates and inflation expectations, concerns over sovereign debt, a general slowing in world growth. Other factors include the increased level of geopolitical risk and policy-related uncertainty (including the broader market impacts resulting from the trade negotiations between the US and China), and socio-political, climate-driven and pandemic events and other outbreaks such as the recent coronavirus. The extent of financial market and economic impact of these factors may be influenced by the actions, including the effectiveness of mitigating measures, of governments, policymakers and the public.
The adverse effects of such factors could be felt principally through the following items: — Lower interest rates and reduced investment returns arising on the Group’s portfolios including impairment of debt securities and loans, which could reduce Prudential’s capital and impair its ability to write significant volumes of new business, increase the potential adverse impact of product guarantees included in Jackson’s variable annuities and non unit-linked investment products in Asia, and/or have a negative impact on its assets under management and profit.
— Estimates of the value of financial instruments becoming more difficult because in certain illiquid or closed markets, determining the value at which financial instruments can be realised is highly subjective. Processes to ascertain such values require substantial elements of judgement, assumptions and estimates (which may change over time).
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 389
Jackson writes a significant amount of variable annuities that offer capital or income protection guarantees. The value of these guarantees is affected by market factors (such as interest rates, equity values, bond spreads and realised volatility) and policyholder behaviour. Jackson uses a derivative hedging programme to reduce its exposure to market risks arising on these guarantees. There could be market circumstances where the derivatives that Jackson enters into to hedge its market risks may not cover its exposures under the guarantees. The cost of the guarantees that remain unhedged will also affect Prudential’s results.
In addition, Jackson hedges the guarantees on its variable annuity book on an economic basis (with consideration of the local regulatory position) and, thus, accepts variability in its accounting results in the short term in order to achieve the appropriate result on these bases. In particular, for Prudential’s Group IFRS reporting, the measurement of the Jackson variable annuity guarantees is typically less sensitive to market movements than for the corresponding hedging derivatives, which are held at market value. However, depending on the level of hedging conducted regarding a particular risk type, certain market movements can drive volatility in the economic or local regulatory results that may be less significant under IFRS reporting.
Also, Jackson has a significant spread based business with a significant proportion of its assets invested in fixed-income securities and its results are therefore affected by fluctuations in prevailing interest rates. In particular, fixed annuities and stable value products written by Jackson expose Prudential to the risk that changes in interest rates, which are not fully reflected in the interest rates credited to customers, will reduce spread. The spread is the difference between the rate of return Jackson is able to earn on the assets backing the policyholders’ liabilities and the amounts that are credited to policyholders in the form of benefit increases, subject to minimum crediting rates. Declines in spread from these products or other spread businesses that Jackson conducts, and increases in surrender levels arising from interest rate rises, could have a material impact on its businesses or results of operations.
Certain of Prudential’s subsidiaries are subject to applicable insurance, foreign exchange and tax laws, rules and regulations (including in relation to distributable profits) that can limit their ability to make remittances. In some circumstances, including changes to general market conditions, this could limit Prudential’s ability to pay dividends to shareholders or to make available funds held in certain subsidiaries to cover operating expenses of other members of the Group.
(Geo)political risks and political uncertainty may adversely impact economic conditions, increase market volatility, cause operational disruption to the Group and impact its strategic plans, which could have adverse effects on Prudential’s business and its profitability The Group is exposed to (geo)political risks and political uncertainty in the markets in which it operates. Recent shifts in the focus of some national governments toward more protectionist or restrictive economic and trade policies, and international trade disputes, could impact on the macroeconomic outlook and the environment for global financial markets. This could take effect, for example, through increased friction in cross-border trade, such as implementation of trade tariffs or the withdrawal from existing trading blocs or agreements, and the exercise of executive powers to restrict overseas trade and/or financial transactions. The degree and nature of regulatory changes and Prudential’s competitive position in some geographic markets may also be impacted, for example, through measures favouring local enterprises, such as changes to the maximum level of non-domestic ownership by foreign companies.
(Geo)political risks and political uncertainty may also adversely impact the Group’s operations and its operational resilience. Increased (geo)political tensions may increase cross-border cyber activity and therefore increase cyber security risks. (Geo)political tensions may also lead to civil unrest and/or acts of civil disobedience. This includes the unrest in Hong Kong, where mass anti-government demonstrations have given rise to increased disruption throughout the region. Such events could impact operational resilience by disrupting Prudential’s systems, operations, new business sales and renewals, distribution channels and services to customers, which may result in a reduction in contributions from business units to the central cash balances and profit of the Group, decreased profitability, financial loss, adverse customer impacts and reputational damage.
In addition, if a sovereign default or other such events described above were to occur as has happened on occasion in the past, other financial institutions may also suffer losses or experience solvency or other concerns, which may result in Prudential facing additional risks relating to investments in such financial institutions that are held in the Group’s investment portfolio. There is also risk that public perceptions about the stability and creditworthiness of financial institutions and the financial sector generally might be adversely affected, as might counterparty relationships between financial institutions. If a sovereign were to default on its obligations, or adopt policies that devalued or otherwise altered the currencies in which its obligations were denominated this could have a material adverse effect on Prudential’s financial condition and results of operations.
Downgrades in Prudential’s financial strength and credit ratings could significantly impact its competitive position and damage its relationships with creditors or trading counterparties Prudential’s financial strength and credit ratings, which are used by the market to measure its ability to meet policyholder obligations, are an important factor affecting public confidence in Prudential’s products, and as a result its competitiveness. Downgrades in Prudential’s ratings as a result of, for example, decreased profitability, increased costs, increased indebtedness or other concerns could have an adverse effect on its ability to market products, retain current policyholders, and on the Group’s financial flexibility. In addition, the interest rates at which Prudential is able to borrow funds are affected by its credit ratings, which are in place to measure the Group’s ability to meet its contractual obligations.
Prudential plc’s long-term senior debt is rated as A2 by Moody’s, A by Standard & Poor’s and A- by Fitch.
Prudential is subject to the risk of exchange rate fluctuations owing to the geographical diversity of its businesses Due to the geographical diversity of Prudential’s businesses, Prudential is subject to the risk of exchange rate fluctuations. Prudential’s operations generally write policies and invest in assets denominated in local currencies. Although this practice limits the effect of exchange rate fluctuations on local operating results, it can lead to fluctuations in Prudential’s consolidated financial statements upon the translation of results into the Group’s presentation currency. This exposure is not currently separately managed. The Group now presents its consolidated financial statements in US dollars, which is the currency in which a large proportion of the Group’s earnings and assets and liabilities are denominated or linked to (such as the Hong Kong dollar, that is pegged to the US dollar). There remains some entities that are not denominated in or linked to the US dollar and transactions which are conducted in non-US dollar currencies. Prudential is subject to the risk of exchange rate fluctuations from the translation of the results of these entities and transactions and the risks from the maintenance of the Hong Kong dollar peg to the US dollar.
The implementation of large scale transformation, including complex strategic initiatives, gives rise to significant execution risks, may affect Prudential’s operational capacity, and may adversely impact the Group if these initiatives fail to meet their objectives As part of the implementation of its business strategies and to maintain market competitiveness, Prudential undertakes large scale transformation across the Group. Many of these change initiatives, which currently focus on digitalisation, outsourcing initiatives and industry and regulatory-driven change, are complex, interconnected and/or of large scale. There may be adverse financial and non-financial (including operational, regulatory, conduct and reputational) implications for the Group if these initiatives are subject to implementation delays, or fail, in whole or in part, to meet their objectives. Additionally, these initiatives inherently give rise to design and execution risks, and may increase existing business risks, such as placing additional strain on the operational capacity, or weakening the control environment, of the Group.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 391
The performance of the Group’s core business activities and the uninterrupted availability of services to customers rely significantly on, and require significant investment in, IT infrastructure and security, system development, data governance and management, compliance and other operational systems, personnel, controls and processes. During times of significant change, the resilience and operational effectiveness of these systems and processes at Prudential and/or its third party providers may be adversely impacted. In particular Prudential and its business partners are making increasing use of emerging technological tools and digital services, or forming strategic partnerships with third parties to provide these capabilities. Automated distribution channels to customers increase the criticality of providing uninterrupted services. A failure to implement appropriate governance and management of the incremental operational risks from emerging technologies may adversely impact on Prudential’s reputation and brand, the results of its operations, its ability to attract and retain customers, its ability to deliver on its long-term strategy and therefore its competitiveness and longterm financial success.
In addition, Prudential relies on the performance and operations of a number of bancassurance, outsourcing (including external technology and data hosting), and service partners. These include back office support functions, such as those relating to IT infrastructure, development and support, and customer facing operations and services, such as product distribution and services (including through digital channels) and investment operations. This creates reliance upon the resilient operational performance of these partners, and failure to adequately oversee the partner, or the failure of a partner (or of its
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 393
Prudential is exposed to ongoing risks as a result of the demerger of M&G plc On 21 October 2019, Prudential completed the demerger of M&G plc and, in connection with the demerger, Prudential entered into a demerger agreement with M&G plc. Among other provisions, the demerger agreement contains a customary indemnity under which Prudential has agreed to indemnify M&G plc against liabilities incurred by the M&G group that relate to the business of the Group. Although it is not anticipated that Prudential will be required to pay any substantial amount pursuant to such indemnity obligations, if any amount payable thereunder is substantial this could have a material adverse effect on Prudential’s financial condition and/or results of operations.
With effect from 21 October 2019, the group-wide supervisor of Prudential plc changed to the Hong Kong Insurance Authority (HKIA). Prior to the introduction of the proposed GWS Framework, the Group is being supervised on an interim basis in line with principles agreed with the HKIA. Until the GWS Framework is finalised the Group cannot be certain of the nature and extent of differences between the interim principles agreed with the HKIA and the specific regulatory requirements of the GWS Framework. With the agreement of the HKIA, Prudential is applying the Local Capital Summation Method (LCSM) to determine Group regulatory capital requirements. Any differences between these interim supervisory requirements and those that will be adopted under the GWS Framework may lead to changes to the way in which capital requirements are calculated and to the eligibility of the capital instruments issued by Prudential to satisfy such capital requirements. The Group’s existing processes and resources may also need to change to comply with the final GWS Framework legislation or any other requirements of the HKIA. The need to adapt to any such changes or to respond to any such requirements may lead to increased costs or otherwise impact the business, financial condition, results, profitability and/or prospects of the Group.
In November 2019 the FSB has endorsed a new Holistic Framework (HF), intended for the assessment and mitigation of systemic risk in the insurance sector, for implementation by the IAIS in 2020 and has suspended G-SII designations until completion of a review to be undertaken in 2022. Many of the previous G-SII measures have already been adopted into the Insurance Core Principles (ICPs) and
In July 2014, the FSB announced widespread reforms to address the integrity and reliability of inter-bank offer rates (IBORs). The discontinuation of IBORs in their current form and their replacement with alternative risk-free reference rates such as the Sterling Overnight Index Average benchmark (SONIA) in the UK and the Secured Overnight Financing Rate (SOFR) in the US could, among other things, impact the Group through an adverse effect on the value of Prudential’s assets and liabilities which are linked to or which reference IBORs, a reduction in market liquidity during any period of transition and increased legal and conduct risks to the Group arising from changes required to documentation and its related obligations to its stakeholders.
Accounting Standards Board (IASB) introduced a framework that it described as Phase I which, under its standard IFRS 4 permitted insurers to continue to use the statutory basis of accounting for insurance assets and liabilities that existed in their jurisdictions prior to January 2005. In May 2017, the IASB published its replacement standard on insurance accounting (IFRS 17, ‘Insurance Contracts’), which will have the effect of introducing fundamental changes to the statutory reporting of insurance entities that prepare accounts according to IFRS from 2021. In June 2019, the IASB published an exposure draft proposing a number of targeted amendments to this new standard including the deferral of the effective date by one year from 2021 to 2022. As a result of comments on this exposure draft, the IASB plans to redeliberate on a number of areas of IFRS 17, with an amended standard expected to be issued in mid-2020. The EU will apply its usual process for assessing whether the standard meets the necessary criteria for endorsement. The Group is reviewing the complex requirements of this standard and considering its potential impact. The effect of changes required to the Group’s accounting policies as a result of implementing the new standard is currently uncertain, but these changes can be expected to, amongst other things, alter the timing of IFRS profit recognition. Given the implementation of this standard is likely to require significant enhancements to IT, actuarial and finance systems of the Group, it will also have an impact on the Group’s expenses.
Litigation, disputes and regulatory investigations may adversely affect Prudential’s profitability and financial condition Prudential is, and may in the future be, subject to legal actions, disputes and regulatory investigations in various contexts, including in the ordinary course of its insurance, investment management and other business operations. These legal actions, disputes and investigations may relate to aspects of Prudential’s businesses and operations that are specific to Prudential, or that are common to companies that operate in Prudential’s markets. Legal actions and disputes may arise under contracts, regulations (including tax) or from a course of conduct taken by Prudential, and may be class actions. Although Prudential believes that it has adequately provided in all material respects for the costs of litigation and regulatory matters, no assurance can be provided that such provisions are sufficient. Given the large or indeterminate amounts of damages sometimes sought, other sanctions that might be imposed and the inherent unpredictability of litigation
Prudential’s Articles of Association contain an exclusive jurisdiction provision Under Prudential’s Articles of Association, certain legal proceedings may only be brought in the courts of England and Wales. This applies to legal proceedings by a shareholder (in its capacity as such) against Prudential and/or its directors and/or its professional service providers. It also applies to legal proceedings between Prudential and its directors and/ or Prudential and Prudential’s professional service providers that arise in connection with legal proceedings between the shareholder and such professional service providers. This provision could make it difficult for US and other non-UK shareholders to enforce their shareholder rights.
Social risks that could impact Prudential may arise from a failure to consider the rights, diversity, well-being, and interests of people and communities in which the Group, or its third parties, operates. These risks are increased as Prudential operates in multiple jurisdictions with distinct local cultures and considerations. Emerging population risks associated with public health trends (such as an increase in obesity) and demographic changes (such as population urbanisation and ageing) may affect customer lifestyles and therefore may impact claims against the Group’s insurance product offerings. As a provider of insurance and investment services, Prudential has access to extensive amounts of customer personal data, including data related to personal health, and is therefore exposed to the regulatory and reputational risks associated with customer data misuse or security breaches. These risks are explained in the ‘Information security and loss or misuse of data’ risk factor. The potential for reputational risks extends to the Group’s supply chains, which may be adversely impacted by factors such as poor labour standards and abuses of human rights by third parties. As an employer, the Group is also exposed to the risk of being unable to attract, retain and develop highly-skilled staff, which can be increased where Prudential does not have responsible working practices.
A failure to maintain high standards of corporate governance may adversely impact the Group and its customers, staff and employees, through poor decisionmaking and a lack of oversight of its key risks. Poor governance may arise where key governance committees have insufficient independence, a lack of diversity, skills or experience in their members, or unclear (or insufficient) oversight responsibilities and mandates. Inadequate oversight over remuneration increases the risk of poor senior management behaviours. Prudential operates across multiple jurisdictions and has a group and subsidiary governance structure which may add further complexity to these considerations. Participation in joint ventures or partnerships where Prudential does not have direct overall control increases the potential for reputational risks arising from poor governance.
Administration expenses Administration expenses are expenses and renewal commissions incurred in managing existing business.
Alternative performance measures (APMs) Alternative performance measures (APMs) are non-GAAP measures used by the Prudential Group within its annual reports to supplement disclosures prepared in accordance with widely accepted guideline and principles established by accounting standard setters, such as International Financial Reporting Standards (IFRS). These measures provide useful information to enhance the understanding of the Group’s financial performance. A reconciliation of these APMs to IFRS metrics is provided in additional financial information section of the annual report.
Annual premium equivalent (APE) A measure of new business sales activity that is calculated as the aggregate of annualised regular premiums from new business plus one-tenth of single premiums on new business written during the period.
C Cash remittances Amounts paid by our business units to the Group comprising dividends and other transfers net of capital injections, which are reflective of emerging earnings and capital generation.
Cash surrender value The amount of cash available to a policy holder on the surrender of or withdrawal from a life insurance policy or annuity contract.
Investment grade Investments rated BBB- or above for S&P and Baa3 or above for Moody’s. Generally, they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them.
Investment-linked products or contracts Insurance products where the surrender value of the policy is linked to the value of underlying investments (such as collective investment schemes, internal investment pools or other property) or fluctuations in the value of underlying investment or indices. Investment risk associated with the product is usually borne by the policyholder. Insurance coverage, investment and administration services are provided for which the charges are deducted from the investment fund assets. Benefits payable will depend on the price of the units prevailing at the time of surrender, death or the maturity of the product, subject to surrender charges. These are also referred to as unit-linked products or unit-linked contracts.
K Key performance indicators (KPIs) These are measures by which the development, performance or position of the business can be measured effectively. The Group Board reviews the KPIs annually and updates them where appropriate.
Local Capital Summation Method (LCSM) LCSM is the methodology used for the calculation of the Group’s regulatory capital requirements (both minimum and prescribed levels) together with related governance requirements.
Non-participating business A life insurance policy where the policyholder is not entitled to a share of the company’s profits and surplus, but receives certain guaranteed benefits. Examples include pure risk policies (eg fixed annuities, term insurance, critical illness) and unit-linked insurance contracts.
P Participating funds Distinct portfolios where the policyholders have a contractual right to receive at the discretion of the insurer additional benefits based on factors such as the performance of a pool of assets held within the fund, as a supplement to any guaranteed benefits. The insurer may either have discretion as to the timing of the allocation of those benefits to participating policyholders or may have discretion as to the timing and the amount of the additional benefits. For Prudential the most significant participating funds are for business written in Hong Kong, Malaysia and Singapore.
Present value of new business premiums (PVNBP) The present value of new business premiums is calculated as the aggregate of single premiums and the present value of expected future premiums from regular premium new business, allowing for lapses and other assumptions made in determining the EEV new business contribution.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 399
Term life contracts These contracts provide protection for a defined period and a benefit that is payable to a designated beneficiary upon death of the insured.
W Whole life contracts A type of life insurance policy that provides lifetime protection; premiums must usually be paid for life. The sum assured is paid out whenever death occurs. Commonly used for estate planning purposes.
Shareholder Meetings The 2020 Annual General Meeting (AGM) will be held in the Churchill Auditorium at the QEII Centre, Broad Sanctuary, Westminster, London SW1P 3EE on 14 May 2020 at 11.00am.
Issued share capital The issued share capital as at 31 December 2019 consisted of 2,601,159,949 (2018: 2,593,044,409) ordinary shares of 5 pence each, all fully paid up and listed on the London Stock Exchange and the Hong Kong Stock Exchange. As at 31 December 2019, there were 46,847 (2018: 47,260) accounts on the register. Further information can be found in note C10 on page 290.
Rights and obligations The rights and obligations attaching to the Company’s shares are set out in full in the Articles. There are currently no voting restrictions on the ordinary shares, all of which are fully paid, and each share carries one vote on a poll. If votes are cast on a show of hands, each shareholder present in person or by proxy, or in the case of a corporation, each of its duly authorised corporate representatives, has one vote except that if a proxy is appointed by more than one member, the proxy has one vote for and one vote against if instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution.
As at 10 March 2020, Trustees held 0.30 per cent of the issued share capital under the various plans in operation.
Rights to dividends under the various schemes are set out in the Directors’ remuneration report on pages 136 to 195.
All Directors are required to hold a minimum number of shares under guidelines approved by the Board, which they would also be expected to retain as described in the Directors’ remuneration report.
Shareholders registered on the UK register and Hong Kong branch register
Record date 27 March 2020 27 March 2020 27 March 2020
Dividend mandates Shareholders may have their dividends paid directly to their bank or building society account. If you wish to take advantage of this facility, please call Equiniti and request a Cash Dividend Mandate form. Alternatively, shareholders may download the form from www.prudentialplc.com/investors/ shareholder-information/forms
Share dealing services The Company’s registrars, Equiniti, offer a postal dealing facility for buying and selling Prudential plc ordinary shares; please see the Equiniti address or telephone 0371 384 2248. They also offer a telephone and internet dealing service, Shareview, which provides a simple and convenient way of selling Prudential shares. For telephone sales, call 0345 603 7037 between 8.00am and 5.30pm, Monday to Friday, and for internet sales log on to www.shareview.co.uk/dealing
ShareGift Shareholders who have only a small number of shares, the value of which makes them uneconomic to sell, may wish to consider donating them to ShareGift (Registered Charity 1052686). The relevant share transfer form may be downloaded from our website www.prudentialplc.com/investors/ shareholder-information/forms or from Equiniti. Further information about ShareGift may be obtained on +44 (0)20 7930 3737 or from www.ShareGift.org
Business units Prudential Corporation Asia 13th Floor One International Finance Centre 1 Harbour View Street Central Hong Kong www.prudentialcorporation-asia.com
This document may contain ‘forward-looking statements’ with respect to certain of Prudential’s plans and its goals and expectations relating to its future financial condition, performance, results, strategy and objectives. Statements that are not historical facts, including statements about Prudential’s beliefs and expectations and including, without limitation, statements containing the words ‘may’, ‘will’, ‘should’, ‘continue’, ‘aims’, ‘estimates’, ‘projects’, ‘believes’, ‘intends’, ‘expects’, ‘plans’, ‘seeks’ and ‘anticipates’, and words of similar meaning, are forwardlooking statements. These statements are based on plans, estimates and projections as at the time they are made, and therefore undue reliance should not be placed on them. By their nature, all forward-looking statements involve risk and uncertainty.
A number of important factors could cause Prudential’s actual future financial condition or performance or other indicated results to differ materially from those indicated in any forward-looking statement. Such factors include, but are not limited to, future market conditions, including fluctuations in interest rates and exchange rates, the continuance of a sustained low-interest rate environment, and the impact of economic uncertainty, asset valuation impacts from the transition to a lower carbon economy, inflation and deflation and the performance of financial markets generally; global political uncertainties; the policies and actions of regulatory authorities, including, in particular, the policies and actions of the Hong Kong Insurance Authority, as Prudential’s new Group-wide supervisor, as well as new government initiatives generally; the impact of continuing application of Global Systemically Important Insurer or ‘G-SII’ policy measures on Prudential; the impact on Prudential of systemic risk policy measures adopted by the International Association of Insurance Supervisors; the impact of competition and fast-paced technological change; the effect on Prudential’s business and results from, in particular, mortality and morbidity trends, lapse rates and policy renewal rates; the physical impacts of climate change and global health crises on Prudential’s business and operations; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; the impact of internal transformation projects and other strategic actions failing to meet their objectives; the risk that Prudential’s operational resilience (or that of its suppliers and partners) may prove to be inadequate, including in relation to operational disruption due to external events; disruption to the availability, confidentiality or integrity of Prudential’s IT, digital systems and data (or those of its suppliers and partners); any ongoing impact on Prudential of the demerger of M&G plc; the impact of changes in capital, solvency standards, accounting standards or relevant regulatory frameworks, and tax and other legislation and regulations in the jurisdictions in which Prudential and its affiliates operate; the impact of legal and regulatory actions, investigations and disputes; and the impact of not adequately responding to environmental, social and governance issues. These and other important factors may, for example, result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits. Further discussion of these and other important factors that could cause Prudential’s actual future financial condition or performance or other indicated results to differ, possibly materially, from those anticipated in Prudential’s forward-looking statements can be found under the ‘Risk factors’ heading of this document.
1994 Prudential Corporation Asia is formed in Hong Kong as a regional head office to expand operations beyond an existing presence in Malaysia, Singapore and Hong Kong.
2019 Prudential demerges its UK and Europe business, M&G plc, in order to focus on its international business.
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Prudential plc is not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America, or with the Prudential Assurance Company, a subsidiary of M&G plc, a company incorporated in the United Kingdom.