46.26¢ full-year ordinary dividend $5,310m +20% adjusted operating profit from continuing operations1 $9.5bn LCSM shareholder surplus over Group minimum capital requirement7 $1,953m IFRS profit after tax from continuing operations (2018: $2,881 million)
$29.1m community investment 103,775hrs of volunteer service by 10,834 employees employees worldwide 20m life customers
Additional�remuneration� disclosures 05 Financial statements 196 06 European Embedded Value (EEV) basis results 07 Additional information 360
I am pleased to report that Prudential has produced a positive performance during 2019. We continue to focus on how we deliver for our customers, shareholders and wider stakeholders.
significant�work�with�our�advisers�to�assess� options�for�introducing�third-party�finance� into�Jackson.�The�Board�has�determined� that�the�preferred�route�to�achieve�this�is� to�seek�a�listing�of�Jackson�in�the�US,� subject�to�market�conditions.�We�will� now�begin�detailed�engagement�with�key� stakeholders,�with�a�view�to�ensuring�that� Jackson�will�have�the�capital�strength�as� a�separately�listed�business�to�support� its�continued�success�as�a�broad�provider� of�retirement�solutions�for�America’s� ageing�population.
Board changes A�strong�and�decisive�Board�is�at�the� core�of�a�well�run�company.�The�robust� governance�provided�by�our�Board�is� key�to�ensuring�we�continue�to�meet�all�our� objectives.�Developing�the�skills,�diversity� and�experience�of�our�Board�requires�a� flexible�approach�and�openness�to�change,� just�as�the�Group’s�shape�is�itself�changing.� During�2019,�we�made�a�number�of� changes�to�the�Board’s�composition,� all�of�which�have�helped�to�reinforce�its� capabilities�and�position�it�strongly�for� the�future,�and�we�put�plans�in�place�for� refreshing�the�Board�in�the�years�to�come.� Amy�Yip�joined�us�in�September�as�a� Non-executive�Director�and�a�member�of� the�Remuneration�Committee,�bringing� considerable�expertise�in�financial�services� in�China�and�South-east�Asia.�At�the� beginning�of�January�2020,�Jeremy� Anderson�joined�us�as�a�Non-executive� Director�and�a�member�of�the�Risk�and� Audit�Committees,�providing�substantial� experience�in�international�financial� services,�particularly�in�audit�and�risk� management.�I�would�like�to�welcome�
Our shareholders The�Board’s�role�is�to�represent�the�interests� of�all�of�the�Company’s�shareholders.�We� have�delivered�significant�change�to�the� business�during�a�period�of�macroeconomic� and�industry�headwinds,�and�we�have� stepped�up�our�regular�and�frank�dialogue� with�our�shareholders�to�ensure�we�are� responsive�to�their�priorities�and�concerns,� while�ensuring�they�fully�understand�the� wider�backdrop�to�our�performance.� Ongoing�shareholder�engagement�enables� us�to�gather�important�feedback�that� informs�our�decisions�as�a�Board.�For�me� personally,�these�discussions�are�highly� valuable�and�the�ideas�and�suggestions� generated�are�invariably�useful�and�always� taken�seriously.
Changes�in�the�policy�and�regulatory� environment�in�which�we�work�can� have�a�significant�impact�on�our�business� and�what�we�can�do�for�our�customers.� We�build�and�develop�positive�and� open�relationships�with�our�supervisors,� governments�and�civil�society,�and�we�are� grateful�for�the�constructive�work�of�our� regulators,�in�particular�the�Hong�Kong� Insurance�Authority.�We�look�forward�to� continuing�to�work�closely�with�them�into� the�future.
Our people Our�business�is�built�around�our�purpose� and�our�strategy,�but�it�is�our�people�who� implement�that�strategy.�In�our�businesses� around�the�world�we�have�excellent�teams� working�hard�to�ensure�we�meet�our� commitments�to�our�customers.�The� needs,�priorities�and�concerns�of�our� colleagues�are�a�focal�point�for�the�Board.� During�2019,�two�of�our�Non-executive� Directors,�Kai�Nargolwala�for�Asia�and� Africa�and�Tom�Watjen�for�the�US�and�the� UK,�were�appointed�to�act�as�a�conduit� between�employees�and�the�Board,�and� they�will�continue�to�deepen�their�activity� in�this�area.�You�can�read�more�about�their� activities�in�this�area�on�page�74�of� this�report.�
We�are�continuing�our�active�programme� of�community�investment�in�our�businesses� around�the�world.�As�we�collect�premiums� in�the�many�markets�in�which�we�operate,� we�also�understand�the�need�to�help�those� communities�to�strengthen�and�develop.� Our�contribution�includes�projects� covering�a�number�of�areas�such�as�Safe� Steps,�which�provides�advice�around� natural�disasters,�road�safety�and�first�aid;� First�Read,�which�helps�parents�to�develop� their�children’s�numeracy�and�literacy;�and� Cha-Ching,�the�first�global�financial� education�programme.�Our�people�around� the�world�continue�to�make�a�remarkable� effort�volunteering�their�time�and�skills�for� the�benefit�of�their�communities.�I�am� particularly�proud�of�these�contributions,� and�I�support�this�volunteering�activity� personally�through�the�Chairman’s� Challenge,�our�flagship�international� volunteering�programme,�which�brings� teams�together�across�the�Group�to�help� in�their�communities.�This�programme� continues�to�appeal�to�colleagues,�with� more�than�5,400�signing�up�in�2019�to� participate�across�21�projects.
Looking forward Our�Board�is�highly�responsive�to�the� interests�of�our�stakeholders�and�we�will� continue�to�make�improvements�to�the� structure�of�the�Group�where�we�believe� they�will�generate�material�benefits�over� the�long�term.�We�are�well�positioned�to� benefit�from�strong�structural�growth� opportunities�and�continue�to�provide� benefits�for�our�customers�and�value� for�our�investors�well�into�the�future.
Our�business�is�built�around�long-term� structural�opportunities.�In�our�fastgrowing �markets�in�Asia�there�is�a� strong�and�growing�need�for�health�and� protection,�for�savings�opportunities�and� for�ways�to�invest,�and�there�is�a�significant� gap�for�products�that�meet�those�needs.� By�meeting�important�financial�needs,�we� expect�to�build�long-term�relationships� with�our�customers.�This�translates�into� recurring�income�streams�and�low�lapse� rates,�which�in�turn�produce�high-quality� earnings.
We�are�well�positioned�to�meet�structural� opportunities.�We�are�diversified�by� geography,�with�operations�in�15�markets� in�the�region,�through�our�products� offering�health�and�protection,�savings�and� asset�management,�and�in�our�mix�of� channels,�providing�our�products�through� our�large�agency�force�and�our�network�of� partnerships�with�banks�across�the�region.� We�are�also�innovating�at�pace�and�scale�to� digitalise�the�customer�journey�end-toend, �and�delivering�new�value-added� solutions,�such�as�Pulse�by�Prudential,� our�new�digital�health�app.
As�we�stated�at�our�half-year�results,�in� order�to�diversify�at�pace,�Jackson�will�need� access�to�additional�investment�which�we� believe�would�best�be�provided�by�third� parties.�Since�then,�we�have�undertaken� significant�work�with�our�advisers�to�assess� options�for�introducing�third�party�finance� into�Jackson.�The�Board�has�determined� that�the�preferred�route�to�achieve�this�is�to� seek�a�listing�of�Jackson�in�the�US�in�due� course,�subject�to�market�conditions.�
Financial performance The�adjusted�IFRS�operating�profit�based� on�longer-term�investment�returns� (adjusted�operating�profit2)�for�2019�from� our�continuing�operations�increased�by� 20�per�cent�on�both�a�constant�and�actual� exchange�rate�basis,�reflecting�the� continued�growth�and�resilience�of�our� Asian�businesses�and�the�beneficial�impact� of�strong�2019�capital�returns�on�deferred� acquisition�cost�amortisation�in�the�US.� The�IFRS�profit�after�tax�from�continuing� operations�was�$1,953�million�in�2019� (2018:�$2,881�million�on�an�actual� exchange�rate�basis).�This�is�after�a� $(380)�million�post-tax�loss�in�Jackson,� where�accounting�volatility�continues�to� be�expected�given�the�economic�nature� of�our�hedging�programme�and�the�related� accounting�mismatches�that�exist.�
Asia Our�Asian�operations�continued�to�drive� our�performance.�The�fast-growing� markets�of�Asia�offer�long-term�structural� opportunities�for�us,�with�the�region’s� growing�population�having�a�clear�and� increasing�need�for�the�products�we� deliver.�Insurance�penetration�in�Asia�is� only�2.7�per�cent�of�GDP,�compared�with� 7.5�per�cent�in�the�UK4,�while�mutual�fund� penetration�is�just�12�per�cent�in�Asia,� compared�with�96�per�cent�in�the�US5.�
We�have�continued�to�accelerate�our�joint� venture�business�in�China,�where�APE6� sales�over�the�year�were�53�per�cent8� higher,�driving�new�business�profit7�growth� of�38�per�cent8.�We�recently�established�a� new�branch�in�Shaanxi,�our�20th�in�the� country,�and�added�seven�cities�and� 14�sales�and�servicing�offices.�We�are� developing�rapidly�in�a�number�of�our�other� markets�in�the�region,�including�Vietnam� and�the�Philippines,�where�APE6�sales� grew�by�12�per�cent8�and�34�per�cent8� respectively�and�we�are�making�good� progress�in�Indonesia,�where�our�sales� grew�by�23�per�cent8�in�the�year�including� 41�per�cent8�in�the�second�half.�Overall�our� Asia�life�businesses�delivered�4�per�cent8� growth�in�overall�APE6�sales�and�a� 2�per�cent8�growth�in�overall�new� business�profit7.
Africa We�are�continuing�to�make�good�progress� in�our�newer�markets�in�Africa.�In�2019�we� enhanced�our�growing�scale�in�the�region� by�acquiring�a�majority�stake�in�a�leading� life�insurer�operating�in�Cameroon,�Côte� d’Ivoire�and�Togo,�which�have�a�combined� population�of�more�than�65�million.�We� now�operate�in�eight�markets�in�Africa�with� a�total�population�of�almost�400�million.� In�2019,�the�Africa�business�delivered�a� 76�per�cent8�increase�in�APE6�sales�to� $82�million�(2018:�$47�million).
Group Chief Financial Officer and Chief Operating Officer’s report on the 2019 financial performance 34
Building a presence in one of the world’s most under‑penetrated markets.
Operating in eight markets with a total population of almost 400 million.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 13
10,000 Americans reach retirement age each day for the next 20 years.
Risk management and disciplined allocation of capital underpin our activities The Group has a proven track record of disciplined capital allocation. Our governance, processes and controls enable us to deal with uncertainty effectively, which is critical to the achievement of our strategy. Our Group Risk Framework and risk appetite allow us to control our risk exposure successfully throughout the year.
World Population Prospects 2019, Online Edition. Rev. 1. Population aged 65 and over as at 2019 versus 2035.
Our trusted brands and strong distribution channels enable us to understand the growing needs of our customers for long-term savings and financial security, and to design products that meet those needs. By helping to build better lives and stronger communities and to fuel the growth cycle, we create long-term value for both our customers and our shareholders.
We capture the structural opportunities by offering the products and solutions demanded by customers and wider society
We enhance our capabilities by developing our digital offerings and expanding our partnerships, further strengthening our distribution networks
Africa We have also continued to expand our presence in Africa, one of the world’s most under penetrated markets where the population is forecast to grow by a billion by 2045. In July, we completed our acquisition of a 51 per cent stake in a leading life insurer, Group Beneficial, operating in West and Central Africa. We now operate in eight markets with a population of almost 400 million.
US We have invested in a single technology platform to deliver one of the most efficient and scalable operating platforms across the industry. Jackson is the clear leader in each variable annuity distribution channel3, and is well positioned to further enhance its market‑leading annuity position in the brokerage market.
Customers We provide financial security and wealth creation by providing the right products through appropriate distribution. In the light of technological advances and evolving customer needs, we actively embrace the latest technology and embed digital capabilities in our business.
Read more on pages 18 to 33, 73, 76 and 77
Communities We support communities where we operate, through investment in business and infrastructure, tax revenues and community support activities. Responsible and ethical behaviour are embedded in our business and flow into every part of what we do, from our financial performance and tax practices to the way we fight financial crime and deal with our suppliers. We take an active approach in helping tackle environmental and social challenges and recognise that we are responsible for understanding our impact on the environment and doing what we can to minimise any damage.
Sustainability All of our stakeholders require us to undertake the actions to build a sustainable business, which we do through our products and the development of our capabilities. Responsible investment is a key component of sustainability. We take an inclusive approach to responsible investments, seeking to integrate environmental, social and governance considerations into our investment processes and stewardship activities through ownership practices and engagement with investee companies.
Read more on pages 75, 77 to 80 and 84 to 86 >$29 billion Customer claims incurred +10%8 on 2018 $5,310m Adjusted operating profit1,4 +20%3 on 2018 $4,405m New business profit1,2 ‑6%3 on 2018 $9.5bn LCSM shareholder surplus5 2,103¢ EEV per share6 46.26¢ Full-year ordinary dividend per share The Group’s 2020 dividend will be determined under the Group’s dividend policy from a 2019 base of 36.84¢7
5 Surplus over Group minimum capital requirement and estimated before allowing for second interim ordinary dividend. Shareholder business excludes the available capital and minimum capital requirement of participating business in Hong Kong, Singapore and Malaysia. Further information on the basis of calculation of the LCSM measure is contained in note I(i) of the Additional unaudited financial information.
Adjusted IFRS operating profit based on longer-term investment returns (adjusted operating profit)2 $m The Group’s business involves entering into long‑term contracts with customers, and hence the Group manages its associated assets and liabilities over a longer‑term time horizon. This enables the Group to manage a degree of short‑term market volatility. Therefore, adjusted operating profit based on longer‑term investment returns gives a more relevant measure of the performance of the business. Other distorting items are excluded from adjusted operating profit to allow more relevant period‑on‑period comparisons of the trading operations of the Group, eg the effects of corporate transactions are excluded.
EEV new business profit in 2019 decreased by 6 per cent on a constant and actual exchange rate basis compared with 2018. New business profit generated by our Asian business was up 2 per cent on a constant exchange rate basis, with a 29 per cent increase from Asian businesses excluding Hong Kong. Hong Kong fell by 12 per cent broadly in line with the fall in APE sales given the decline in mainland China visitors in the second half of the year. US new business profit decreased by 28 per cent, with an increase in sales being more than offset by a fall in interest rates and the planned diversification of product mix.
Group EEV operating profit in 2019 decreased by 12 per cent on a constant exchange rate basis (12 per cent on an actual exchange rate basis) compared with 2018. In addition to the decrease in new business profit described above, in force profit was lower due, in part, to falling interest rates.
The Group’s available capital, as recorded on a LCSM basis, covers the Group’s minimum capital requirement over three times. In 2019, capital generation from the in‑force business has been used to invest in new business, pay the external dividend and invest in new bancassurance agreements and a new Thai asset manager. After these impacts and market movements, LCSM surplus fell slightly from $9.7 billion at 31 December 2018 to $9.5 billion at 31 December 2019.
Notes 1 The comparative results shown above have been prepared using an actual exchange rate
2 Adjusted operating profit is management’s primary measure of profitability and provides an underlying operating result based on longer‑term investment returns and excludes non‑operating items. This alternative performance measure is reconciled to IFRS profit for the year in note B1.1 of the IFRS financial statements.
3 The EEV basis results have been prepared in accordance with EEV principles discussed in note 1 of the EEV basis results. See note II of Additional unaudited financial information for definition and reconciliation to IFRS balances.
4 For insurance operations, operating free surplus generated represents amounts maturing from the in‑force business during the period less investment in new business and excludes non‑operating items. For asset management businesses, it equates to post‑tax operating profit for the period. Restructuring costs are presented separately from the operating business unit amount. Further information is set out in note 11 of the EEV basis results.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 17
— We secured one of a few 100 per cent licences in Myanmar, our 13th life market in Asia
Asia Our business Our business model is underpinned by the breadth and quality of our operations in the life insurance and asset management sectors. We have an outstanding reputation with customers and regulators alike and we operate in markets with compelling structural drivers that support sustained future growth. We have a top-three position in nine insurance markets in the region and have built an Asian asset management business with one of the largest regional market footprints. This diversity, combined with our continued focus on customer outcomes and profitability, has provided protection from cyclical headwinds.
There are many structural drivers supporting the significant growth potential in Asia. The health protection gap, estimated at $1.8 trillion8, is already substantial as consumers in Asia are under-insured and social safety nets remain limited. Meanwhile, medium-term economic growth prospects are superior to those of developed markets in the west, with continued income growth and rising wealth levels expected to raise the awareness of, and demand for, protection and wealth management solutions. Similarly, demographic trends are also favourable, as youthful emerging markets with growing working-age populations remain a core source of demand for traditional protection and savings products and more mature markets with ageing populations create demand for retirement and wealth management solutions.
We have also embraced the opportunities brought about by government initiatives. Our widening product offerings and new partnerships support many Asian regulators’ vision to provide greater financial inclusion and promote the health and wellbeing of the people. For example, in Hong Kong we have seen strong demand for our annuity and medical reimbursement products that are eligible for tax incentives that were newly introduced by the government. We also successfully refreshed products of our Malaysia conventional business to comply with the new regulations on minimum allocation rate. In addition, our expertise in economic capital reporting, protection-focused business mix and conservative balance sheet position us well for the migration to risk-based solvency frameworks across the region.
First, we seek to enhance the core of our existing business and made excellent progress in this regard in 2019. Significantly, our sales in Indonesia grew 23 per cent1 in the full year and this growth accelerated to 41 per cent1 in the second half from 4 per cent1 in the first half, following a substantial reform of our agency channel and new product launches. We made successful business mix improvements in the Philippines by shifting towards higher-margin health and protection products, which resulted in a 5 percentage point increase in APE sales mix11 for these products and supported the more than doubling of new business profit. On the distribution side, we have extended our exclusive partnership with UOB until the end of 2034 with an expanded scope to include Vietnam and UOB’s digital bank, TMRW, and have established an exclusive 20-year partnership with SeAbank who have 1.2 million retail customers and almost 170 branches in Vietnam.
Secondly, we aim to create ‘best-in-class’ health capabilities. This is being delivered by enhancing customer access to healthcare products and services. Through our digital health SuperApp branded Pulse by Prudential, which is live in 8 markets, we collaborate with various digital partners and use artificial intelligence technology to offer users a wide range of affordable and easy-to-access consumer services such as health assessments, risk factor identification, triage, telemedicine, wellness and digital payment. Meanwhile, we have launched new protection products to meet the evolving needs of our customers, including two certified VHIS plans in Hong Kong and PRUCritical Benefit 88, our first standalone critical illness product in Indonesia. In 2019, we increased our new business profit from health and protection products by 23 per cent in Asia ex-Hong Kong, as we expanded our APE sales of such products in seven markets with notable success in India, where such sales saw 50 per cent underlying growth12.
Thirdly, we plan to accelerate growth in Eastspring by expanding its product and distribution capabilities. We have continued to develop new solutions, including our first fund offerings in China and Thailand as well as fixed maturity plans in Taiwan, Singapore, Malaysia and India. We maintained our strong investment performance with 60 per cent of retail and institutional funds outperforming over the past year, collectively helping to attract strong net flows from third parties. This in turn raised our funds under management by 25 per cent2 to $241.1 billion. Further streamlining of our front and middle-office operations was delivered in 2019, following the completion of BlackRock’s Aladdin system implementation across 10 markets. Meanwhile, our disciplined focus on costs has led to further improvement in the cost-income ratio, which fell three percentage points to 52 per cent in 2019, and contributed to the 18 per cent growth in adjusted operating profit for the year to $283 million. Following our acquisition of majority stakes in Thanachart Fund and TMB Asset Management, Eastspring is now Thailand’s fourth largest mutual fund manager, with a market share of 12 per cent13 and combined assets under management of $22 billion4.
Finally, we continue to expand our presence in China across both the insurance and asset management sectors. We recently established a new branch in Shaanxi, our 20th in the country, and have added seven cities and 14 sales services offices in 2019, extending our reach to 94 cities and 229 sales offices. Our current presence gives us access to 77 per cent of China’s population14 and 83 per cent of the insurance market15. Coupled with our continued strong focus on execution, our geographic expansion has helped us achieve strong NBP growth of 38 per cent, with strong double-digit growth across both the agency and bancassurance channels. Our life joint venture also recently received regulatory approval to establish its own asset management company, which will further strengthen our capabilities in savings and retirement products. Furthermore, our wholly owned private fund manager established in Shanghai in December 2018 has secured over one billion Yuan in its first year of operation.
Customers We believe that excellent customer service has been key to our strong reputation and leading pan-Asia franchise. During 2019, we added a further 1.4 million new life customers18, bringing the total to over 15 million life customers, of which about one-third are our health customers. Customer loyalty is high, as reflected by our strong retention ratio which has consistently remained in excess of 90 per cent. The satisfaction and trust our customers have in our business also translates into a high proportion of repeat sales, which comprised 45 per cent of APE sales in 2019. The result of these dynamics is a portfolio of close to 25 million in-force policies, with each policyholder holding 1.6 policies on average.
Our customer centric health ecosystem, which empowers consumers to take control of their personal health and wellbeing in an affordable way any time and anywhere, has made a promising start. The number of individuals who have downloaded the Pulse by Prudential app has exceeded one million since launch in August 2019. Pulse will help us acquire and retain users at pace as we enhance its reach by expanding the scope of service and onboard new partners.
In Hong Kong, our new and innovative product offerings have contributed to the resilience of the domestic segment, which achieved 8 per cent APE sales growth in the full year. This growth accelerated to 12 per cent in the second half from 5 per cent in the first half despite the economic slowdown and social unrest. Our new qualified deferred annuity product was well received by customers in both the agency and bancassurance channels, and with sales of $162 million accounted for 11 per cent of our Hong Kong APE sales since its launch on 1 April 2019. PruActive retirement marked our entry into the annuity market in Singapore, contributing 6 per cent to our Singapore APE sales since its launch in August. We also launched PRUHealth Cancer ReCover in Hong Kong, a first-in-market cancer protection plan tailored for cancer survivors and which also offers holistic homecare services to support in-home recovery.
The improvement of our Indonesia business, whose new business profit rose strongly by 39 per cent1 in 2019, was also helped by the broadening of our product offering. Following the success of our upgraded unit-linked product, PRUlink Generasi Baru, that was launched in late 2018, we offered a number of new and refreshed products in 2019. To raise the productivity of our trainee agents we launched PRUCritical Benefit 88, our first standalone critical illness product, which accounted for around 10 per cent of the case count in this agent segment. Similarly, we refreshed our medical product, PRUprime Healthcare Plus, offering customers a simpler and faster process to upgrade health protection, and this was our best-selling product in Indonesia last year. We also plan to introduce new offerings to our critical illness and Shariah products, which we expect will help sustain the growth momentum in 2020.
Our focus on the agency channel positions us well for sustainable growth, as customers continue to have a strong preference for face-to-face advice from a trusted financial adviser, especially regarding complex protection and wealth solutions. We have created a culture whereby agents aspire to attain membership of the Million Dollar Round Table (MDRT), an industry-recognised indicator of quality. We place great emphasis on agent professionalism and promote career progression by providing tailored training programmes that share experience and best practice across different markets. In addition, to further assist our agents during the sales process and enhance productivity we continually upgrade the tools at their disposal.
Our partnerships also made exceptional progress last year. The bancassurance channel achieved APE sales growth of 14 per cent1, with particularly strong performances in China JV and Vietnam and 24 per cent growth from UOB following the renewal of the strategic partnership at the beginning of the year. Meanwhile, we also extended our collaboration with new partners to widen our access to new customer segments, underlined by our new strategic partnership with OVO, the largest digital payment platform in Indonesia with access to 115 million devices. We anticipate that this partnership will significantly enhance our reach to digitally-savvy consumers in the country through the joint development of digital propositions that encompass health, wellness and wealth products. The experience will also help us in designing and managing distribution strategies in our existing markets as well as in targeting new or recent points of entry.
Hong Kong Life insurance Market ranking19 2nd Population20 7m Penetration6 16.8% Average health protection gap per household8 $9,156
Laos Life insurance Market ranking19 Top 3 Population20 7m Penetration6 0.0%
Life insurance Market ranking19 1st Population20 32m Penetration6 3.3% Average health protection gap per household8 $6,864
Philippines Life insurance Market ranking19 3rd Population20 108m Penetration6 1.3% Average health protection gap per household8 $1,406
Singapore Life insurance Market ranking19 3rd Population20 6m Penetration6 6.2% Average health protection gap per household8 $13,776
Taiwan Life insurance Market ranking19 12th Population20 24m Penetration6 17.5% Average health protection gap per household8 $4,823
Thailand Life insurance Market ranking19 8th Population20 70m Penetration6 3.6% Average health protection gap per household8 $287
Digital In the face of rapidly evolving customer needs and technological disruption, we actively embrace change and the latest technology. Our digital strategy is being executed in two waves. The first focuses on increasing automation and improving digital capabilities in our current business model for better customer experience leading to better business results. The second adds a new business model based on a customer centric digital ecosystem which is manifested in our SuperApp branded Pulse by Prudential.
First wave: Enhancing our current business model In the first wave we are continually increasing the automation of our operations so as to improve both business efficiency and customer experience. For example, 83 per cent of all new business was submitted through e-point-of-sale technology in 2019, representing an increase of 11 percentage points year-onyear, with the enhancement particularly pronounced in our bancassurance partners in Thailand, Taiwan and Malaysia. Our smart underwriting tool, which is now used in 64 per cent of all new sales, offers dynamic underwriting that streamlines the application process and communicates instant underwriting decisions to customers. We provide our rapidly growing digital-savvy customer-base with efficient and secure digital payment solutions, for example, through our recent partnership with Boost, a leading lifestyle e-wallet in Malaysia. We have established a strategic relationship with the global technology services company Tech Mahindra to leverage their scale and expertise in Cloud and Mobile to ensure faster deliveries across all markets.
The component of Pulse designed for the fast-growing small and medium enterprise (SME) segment in Asia is known as PruWorks. Following its launch in Singapore and Indonesia, we are now enhancing this further with a fully integrated, new administration system as well as direct connectivity to enhance customer experience for SMEs and their employees.
Corporate responsibilities We have a large number of staff and agents across our life and asset management businesses across Asia, and an explicit inclusive approach to hiring and monitoring diversity. Progressively, we seek to ensure that mobility is not just seen as part of the opportunity provided to improve our individuals’ skills but is also a source of key competitive advantage as we take learnings from one operation and apply them in another. The change in the method of managing agents in Indonesia using techniques developed in Vietnam is a prime example of this.
We have long-standing and strong relationships with the regulators in the markets we operate in. This is built on a culture of compliance with the rules and our promotion of financial services in the context of public policy. To drive the insurance penetration rates in protection and savings products which are desired by governments and regulators in the region, we support the process of deepening capital markets, building robust regulatory and legal frameworks and enhancing financial literacy in the markets in which we operate, which in turn supports economic growth and stability. We see our investment appetite and risk management approach as contributing to the development and stability of the capital markets for the markets in which we operate. We actively engage with fellow market counterparties and governments to foster greater depth, transparency and liquidity of markets.
While the coronavirus outbreak has slowed down economic activities in the year-todate and dampened our sales momentum in Hong Kong and China, we remain confident in the medium to long-term prospects of these economies and their respective insurance sectors. Our broad geographic spread across the region and the strength of our recurring premium business model lends considerable resilience to our earnings. We will continue to collaborate actively with the relevant governments and uphold our corporate and social responsibilities. This is exemplified by the recent donation of RMB15 million to support efforts in fighting against the disease by our joint ventures in China18. We will also continue to stand by our customers steadfastly and make them healthier with our ‘best-in-class’ health and protection capabilities.
We have built a track record of consistent and resilient expansion across cycles over the past decades, and we are confident in continuing to replicate our past success and to make our customers in Asia healthier and wealthier in the years to come.
Notes 1 Increase stated on a constant exchange rate basis. 2 Increase stated on an actual exchange rate basis. 3 See note II of the Additional unaudited financial information for definition and reconciliation to
11 APE sales mix refers to the proportion of total market APE sales accounted for by each product type.
16 Excluding India. 17 Excluding broker channel. 18 RMB10 million by CPL and RMB5 million by Citic Pru FMC.
21 Total joint venture/foreign players only. 22 Full year 2019 FUM reported based on the country where the funds are managed. 23 IFRS gross premiums earned for Asia segment. 24 Excludes Jiwasraya.
Launched over 160 insurance products and more than 100 funds $241bn Eastspring Investments’ total funds under management
— Continued growth of advisory sales, with new business sales up 30 per cent as distribution models continue to evolve
— Actively engaged with FinTech partners including Envestnet, MoneyGuidePro and eMoney
United States The US is the world’s largest retirement savings market with approximately four million Americans reaching retirement age every year. This transition continues to trigger the unprecedented shift of trillions of dollars from savings accumulation to retirement income generation.
However, these Americans face challenges in planning for life after work. For those nearing the end of their working careers, a financially secure retirement is at risk, due to insufficient accumulation of savings and the current combination of low yields and market volatility. Employer-based pensions are being withdrawn, and state and government plans are underfunded as the impact of increased administrative costs and lower interest rates continue to reduce the affordability of the post-war pensions model. Social security was never intended to be a primary retirement solution and today its long-term funding status is in question.
Additionally, the life expectancy of an average retiree has significantly increased, lengthening the number of years for which retirement funding is needed.
Market reception for these products has been positive and these have contributed to the delivery of the organic diversification of Jackson sales in 2019, with new business APE sales up 8 per cent to $2,223 million (2018: $2,059 million). The planned transition to a more balanced portfolio has resulted in higher investment in new business in 2019 which over time is expected to enhance statutory capital and cash generation.
Jackson operates within a well-defined risk framework and takes into account the expected cost of hedging when pricing its products. It aggregates financial risks across the company, obtains a unified view of its risk positions, and actively manages net risks through a hedging programme which aims to manage economic risk. Some accounting volatility is expected in periods of large market movements as was seen in 2019, given the economic focus described above, and this has impacted IFRS profitability in the year, as further discussed in the Group Chief Financial Officer and Chief Operating Officer’s report. However, the benefits of Jackson’s hedging programme have been demonstrated in times of equity market decline, for example during the fourth quarter of 2018 and during the recent market turbulence. At the end of 2019 Jackson’s surplus of available capital over required capital was $3,795 million after adopting the NAIC’s changes to its framework for variable annuities. This equates to a ratio of 366 per cent (2018: 458 per cent using the previous NAIC framework). Jackson continues to monitor closely the recent changes in markets and take the appropriate actions through its dynamic hedging strategy. If these conditions persist management could take additional actions to assist in mitigating the impact.
In 2019, Jackson invested significant time and resources with fintech partners to help illustrate the benefits a lifetime income solution can provide within a comprehensive wealth management plan. This gives the financial adviser the necessary tools to customise according to the unique needs and goals of the client. Additionally, investment freedom within VA investment options allows the adviser to build a diversified portfolio that is customised to meet their clients’ individual priorities and preferences, rather than locking them into restrictive allocation models. Some of the fintech platforms where Jackson is actively engaged include eMoney, MoneyGuidePro and Envestnet.
In 2019, Jackson announced distribution agreements with DPL Financial Partners (DPL), TD Ameritrade and RetireOne to provide our protected lifetime income solutions to independent registered investment advisers (RIAs). The collaboration expands Jackson’s distribution footprint and provides Jackson with access to new opportunities in the independent RIA channel. In addition to these new relationships, Jackson’s distribution partnership announced in late 2018 with State Farm is targeted to roll out in the first quarter of 2020. These new partnerships show Jackson’s determination and progress on channel diversification.
Despite lower interest rates, the life insurance industry saw increased total annuity sales as of the third quarter of 2019, primarily due to a clearer regulatory environment and more aggressive product feature changes (ie withdrawal percentages) implemented by competitors. Higher industry sales of fixed annuities were offset slightly by lower variable annuity sales.
We believe that Jackson is well positioned to manage the impact of these regulatory changes and welcome the outcomes of the revised regulations.
As a long-term investor, Jackson considers both financial and non-financial factors in our investment processes, decisionmaking and ownership practices that may have a meaningful impact on our customers’ long-term investment outcomes. Similarly, as active asset owners of the capital we invest on behalf of our customers, we believe that due consideration of the various factors that can impact investment returns is part of our fiduciary duty to our customers.
Jackson also takes pride in helping the communities in which we operate, providing significant employment, tax revenues, charitable programmes and contributions, as well as the investment of general account assets, all of which provide valuable public services and build infrastructure for the benefit of the wider community and economy.
Investment for growth We believe that a significant opportunity exists to reach even more American retirees and serve their needs with annuity products going forward. This is because there are trillions of dollars of adviserdistributed assets across distribution platforms that have not historically been a focus for the business, such as the dual-registered investment adviser channel, which we can seek to access. The industry will need to remain flexible and cost-effective in making changes to product systems and processes. We continue to seek to understand and make the necessary adjustments to support the needs and demands of American retirees into the future.
2 ©2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar www.AnnuityIntel.com Total sales by company and channel 3Q YTD 2019. Jackson ranks #1 out of 25 companies in the Independent NASD channel, #1 out of 19 companies in the Bank channel, #1 out of 15 companies in the Wirehouse channel, and #3 out of 19 companies in the Regional Firms channel.
6 2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar www.AnnuityIntel.com. Total Sales by Company & by Contract 3Q YTD 2019. Jackson ranks #1 out of 677 VA contracts with reported sales in the Independent Channel in 3Q YTD 2019.
7 WealthManagement.com, FUSE research. 8 New advisers defined as producers who have not sold Jackson products since 2013.
Ranked #2 overall in terms of Top Firms for Quality of Wholesalers7
Investment for growth Jackson continues to invest in technology and innovative products to adapt efficiently and effectively to what our customers and regulatory environment require. Jackson launched an advisory version of our flagship product Perspective II, our innovative Elite Access product and our fixed index MarketProtector product to allow for penetration into untapped distribution.
Jackson Charitable Foundation reached more than 1.75m students through partnership with Discovery Education, Junior Achievement USA and Ramsey Education, advancing financial education across the United States volunteered 48,000+ hours in 2019
Our US business took its first steps in the execution of its diversification strategy, broadened its presence across the US annuity market, delivered increased remittances to the Group, and early adopted the new National Association of Insurance Commissioners (NAIC) variable annuity framework. Jackson has successfully demonstrated its ability both to develop and distribute new products in order to diversify its product range. Over time, this will contribute to a more balanced mix of policyholder liabilities which will enhance statutory capital and cash generation. During 2019, this transition has resulted in a higher investment in new business than has been seen in recent periods, with resulting impacts on capital generation and new business profit margins.
Over 2019, global equity markets rallied strongly. In the US markets the S&P 500 index increased by 29 per cent over 2019, but government bond yields were generally lower over the period, with the US 10 year government bond yield ending the year at 1.9 per cent (2018: 2.7 per cent).
Mark FitzPatrick Group Chief Financial Officer and Chief Operating Officer increase in Asia adjusted operating profit1 $9.5bn LCSM surplus6 over the Group minimum capital requirement (31 December 2018: $9.7bn)
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 35 to an IFRS loss after tax of $(380) million for the US over 2019. The interest rate falls have also led to gains on bonds, which are recognised outside the income statement, and US’s IFRS segment shareholders’ equity increased from $7,163 million at the end of 2018 to $8,929 million at the end of 2019. EEV has fewer mismatches (for example future fee income is fully recognised), but fluctuations in interest rates also impact Jackson’s EEV results, since EEV discount rates and future expectations of separate account returns are based on current risk free rates. While our IFRS and EEV results in 2019 may therefore show a degree of volatility, we believe that the Jackson business is positioned to enhance its capital and cash generation over time as it continues to focus on the US retirement market opportunity.
We have presented the results of the UK and Europe operations (referred to as M&G plc) as discontinued operations and have adopted the US dollar as our presentational currency which better reflects the economic footprint of our business going forward. Prior year comparatives have been restated, as required under IFRS. However comparative balance sheet amounts are not restated for discontinued operations. As in previous years, growth rates referred to are on a constant exchange rate basis unless otherwise stated.
IFRS basis non-operating items from continuing operations Non-operating items in 2019 consist of short-term fluctuations in investment returns on shareholder-backed business of negative $(3,203) million (2018: negative $(791) million on an actual exchange rate basis), the net loss arising from corporate transactions undertaken in the year of negative $(142) million (2018: negative $(107) million on an actual exchange rate basis), and the amortisation of acquisition accounting adjustments of negative $(43) million (2018: negative $(61) million on an actual exchange rate basis) arising mainly from the REALIC business acquired by Jackson in 2012.
Negative short-term fluctuations comprised positive $657 million (2018: negative $(684) million on an actual exchange rate basis) for Asia, negative $(3,757) million (2018: negative $(134) million) in the US and negative $(103) million (2018: positive $27 million on an actual exchange rate basis) in other operations.
After allowing for non-operating items, the total profit after tax from continuing items was $1,953 million (2018: $2,881 million2).
In addition to the effects seen above, falling interest rates resulted in unrealised gains of $2.7 billion being recognised outside the income statement as part of other comprehensive income, partially mitigating the adverse effect of market movements on the Group’s IFRS shareholders’ funds.
Tax strategy The Group publishes its tax strategy annually which, in addition to complying with the mandatory UK (Finance Act 2016) requirements, also includes a number of additional disclosures, including a breakdown of revenues, profits and taxes for all jurisdictions where more than $5 million tax was paid. This disclosure is included as a way of demonstrating that our tax footprint (ie where we pay taxes) is consistent with our business footprint. An updated version of the tax strategy, including 2019 data, will be available on the Group’s website before 31 May 2020.
Adjusted operating profit based on longer-term investment returns before tax from continuing operations
Total adjusted operating profit based on longer-term investment returns before tax from continuing operations 5,310 4,409 20 4,429 20
Profit from continuing operations before tax attributable to shareholders 1,922 3,450 (44) 3,466 (45)
Tax credit (charge) attributable to shareholders’ returns 31 (569) 105 (570) 105
Profit from continuing operations for the year 1,953 2,881 (32) 2,896 (33) Profit for the year from discontinued operations 1,319 1,142 15 1,092 21 Remeasurement of discontinued operations on demerger 188 – n/a – n/a Cumulative exchange loss recycled through other comprehensive income (2,668) – n/a – n/a (Loss) profit from discontinued operations for the year,
Basic earnings per share based on adjusted operating profit after tax from continuing operations 175.0 145.2 21 146.0 20
Basic earnings per share based on: Total profit after tax from continuing operations 75.1 111.7 (33) 112.5 (33) Total (loss) profit after tax from discontinued operations (44.8) 44.3 (201) 42.4 (206)
Group capital position Following the demerger of M&G plc from Prudential plc, the Hong Kong Insurance Authority (IA) is now the Group-wide supervisor for the Prudential Group. Ultimately, the Group 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 it comes into force, Prudential is applying the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine Group regulatory capital requirements.
The high quality and recurring nature of the Group’s operating capital generation and disciplined approach to managing balance sheet risk is evident from the $2.5 billion of in-force capital generation in the period, which supported $0.6 billion of investment in new business (on an LCSM basis), inorganic investment in Asia along with external dividends. The movement in LCSM surplus also includes demerger and other capital related items. More information is set out in note I(i) of the Additional unaudited financial information. The Group’s LCSM position is resilient to external macro movements as demonstrated by the sensitivity disclosure contained in note I(i) of the Additional unaudited financial information, alongside further information on the basis of calculation of the LCSM measure.
Group minimum capital requirement (GMCR) ($ billion) 9.5 4.5 7.6 3.8 LCSM surplus (over GMCR) ($ billion) 23.6 9.5 19.4 9.7 * The shareholder LCSM amounts exclude the available capital and minimum capital requirements of the participating business in Hong Kong, Singapore and Malaysia. † 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.
In addition to its net core structural borrowings of shareholder-financed businesses set out above, the Group has access to funding via the medium-term note programme, the US shelf programme (the platform for issuance of SEC registered bonds in the US market), a commercial paper programme and committed revolving credit facilities. All of these are available for general corporate purposes.
Prudential plc has maintained a consistent presence as an issuer in the commercial paper market for the past decade and had $520 million in issue at the year end (2018: $601 million).
As at 31 December 2019, the Group had a total of £2.0 billion of undrawn committed facilities, expiring in 2024. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 31 December 2019.
Total net cash remitted from continuing operations 1,465 1,417 3 From discontinued operations
Central outflows (522) (572) Dividends paid (1,634) (1,662) Other movements (1,999) 1,153
Cash and short-term investments at end of year 2,207 4,121 * The holding company cash flow describes the movement in the cash and short-term investments of the centrally managed group holding companies.
Other expenditure of $(1,999) million relates to amounts paid in connection with the demerger and other corporate transactions in the year, including the redemption of subordinated debt in the first half of 2019. Further information is contained in note I(iii) of the Additional unaudited financial information.
As highlighted in my report for the first half of 2019, holding company cash was expected to reduce in the second half of 2019. Cash and short-term investments totalled $2.2 billion at the end of the year (2018: $4.1 billion on an actual exchange rate basis), commensurate with the reduced size of the Group post-demerger. The Group will seek to manage its financial condition such that it has sufficient resources available to provide a buffer to support the retained businesses in stress scenarios and to provide liquidity to service central outflows.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 39
Adjusted operating profit after tax and non-controlling interests from continuing operations9 4,528 3,739 6,896 7,862
Shareholders’ funds at end of the year 19,477 21,968 54,711 63,402
Group IFRS shareholders’ funds in the 12 months to 31 December 2019 decreased by 11 per cent to $19.5 billion (31 December 2018: $22.0 billion on an actual exchange rate basis) principally as a result of the demerger of M&G plc which reduced shareholders’ funds by $(7.4) billion. Excluding this effect, shareholders’ funds increased by $4.9 billion primarily as a result of profit after tax from continuing businesses of $1.9 billion, profit generated by M&G plc up to the date of demerger of $1.3 billion and unrealised gains on fixed income securities of Jackson of $2.7 billion following a decrease in US long-term interest rates. These amounts were offset by dividends paid in the year of $(1.6) billion.
The Group’s EEV basis shareholders’ funds at 31 December 2019 was $54.7 billion. This compares with $46.1 billion at 31 December 2018 if the $17.3 billion in respect of the UK & Europe operations is excluded. The growth over the year is primarily driven by EEV profit from continuing operations of $4.2 billion, total inter-group dividends from M&G plc in the period before demerger of $5.5 billion less external dividends of $(1.6) billion. On a per share basis, the Group’s embedded value at 31 December 2019 equated to 2,103 cents. More information on the Group’s EEV results are included in the segmental detail that follows.
Operating free surplus generated before restructuring costs and US EEV hedge modelling enhancements 3,800 3,458 10 3,462 10
Non-operating (loss) profit (568) (1,649) Net cash flows paid to parent company (1,475) (1,368) Foreign exchange movements on foreign operations, timing differences and other items (172) (991)
Dividend The Board has approved a 2019 second interim ordinary dividend of 25.97 cents per share, equivalent to the 19.60 pence per share previously indicated in the demerger Circular.
Asia Operational and financial highlights Our 2019 Asia financial results reflect the benefits of our diverse and well-positioned portfolio across the Asia region, the resilience of the longer-term growth drivers in these markets, our long-held prioritisation of high quality, recurring premium life insurance business and focused execution on our key strategic priorities.
Total Asia excluding Hong Kong 3,145 1,480 2,733 1,168 15 27 2,691 1,150 17 29
Lower levels of APE sales and new business profit in Hong Kong (down 11 and 12 per cent respectively) were more than offset by higher overall APE sales and new business profit in markets outside Hong Kong (up 17 and 29 per cent respectively). Our Asia ex-Hong Kong businesses accelerated strongly, as new APE sales growth steadily increased throughout the year, with 11 per cent growth in the first quarter rising to 26 per cent growth in the fourth quarter.
We continue to favour health and protection products due to their resilience to market cycles and superior margins. Collectively, such products achieved new business profit growth of more than 20 per cent outside Hong Kong and produced 67 per cent of our overall Asia new business profit in 2019. This also contributed to our high mix of regular premiums, which comprised 93 per cent of our APE sales in 2019.
Our partnerships also made encouraging progress last year. The bancassurance channel achieved APE sales growth of 14 per cent, with particularly strong performances in our China joint venture and Vietnam and 24 per cent growth from UOB following the renewal of the strategic partnership at the beginning of the year.
In Hong Kong, our domestic business was resilient with new product launches and focused management actions leading to an 8 per cent increase in local APE sales. This was supported by strong take-up of our new qualified deferred annuity product which accounted for 11 per cent of our Hong Kong APE sales since its launch on 1 April 2019 as well as our VHIS plans, both of which are eligible for tax incentives that were newly introduced by the government. Our Hong Kong life insurance business serves the health and savings needs of both domestic as well as visiting mainland Chinese consumers. The social unrest drove a decline in mainland Chinese visitors in the second half of 2019 inhibiting sales to this segment which led to a 41 per cent reduction in related APE sales compared with the second half of 2018, and to a 21 per cent reduction in APE sales
over the year as a whole. Overall Hong Kong APE sales and new business profit were 11 and 12 per cent lower respectively.
In our China JV, APE sales were 53 per cent higher at $590 million. This growth reflects a strong performance by both our agency and bancassurance channels with the latter reflecting the success of our strategy to drive increased branch activation. Higher volumes helped deliver an increase in new business profit by 38 per cent.
The broad-based performance of our other life insurance markets led to a 9 per cent increase in related new sales, with particularly strong growth in the Philippines (34 per cent higher), while shifting towards higher-margin health and protection products. The 24 per cent increase in new business profit contribution from our other life markets is driven by higher new sales volumes, favourable assumption changes and modelling enhancements.
Operating profit from long-term business and asset management before restructuring costs 6,138 6,070 1 6,052 1
Non-operating profit was $1,962 million (2018: $(1,232) million1), mainly reflecting higher than assumed equity and fixed income returns in the period, partly offset by the effect of lower period end interest rates leading to a reduction in future assumed investment returns, among other factors.
Operating free surplus generated before restructuring costs 1,772 1,563 13 1,567 13
Overall Asia operating free surplus generated14, after investment in new business, was $1,772 million, an increase of 13 per cent compared with the prior period, driven by higher in-force generation and a lower level of investment in new business. The 8 per cent increase in the in-force return reflects growth in the in-force life portfolio, favourable operating experience effects and strong growth in asset management earnings, which more than offsets less favourable economic effects. The level of investment in new business reduced by 4 per cent, despite higher new sales, and reflects the net impact of assumption changes and various country and business mix effects. In turn, this growth in operating free surplus generation supported an increased net cash remittance of $950 million for the year (2018: $916 million). Non-operating profit of $1,195 million mainly relates to the net effect of bond and equity gains across most Asia markets.
Local statutory capital We maintained a resilient balance sheet with a robust shareholder LCSM surplus of $4.7 billion and coverage ratio of 253 per cent at 31 December 2019 (31 December 2018: $3.6 billion and 244 per cent) supported by our expertise in risk management and a conservative approach to credit risk. We seek to safeguard our business from market volatility through our strong focus on protection products and our prudent asset and liability management strategy, which continues to be well-matched by both currency and duration. This is demonstrated by the relatively low sensitivity of our new business profit and our embedded value to a wide range of capital market fluctuations.
Actual exchange rate Constant exchange rate $m Margin bps $m Margin bps $m Margin bps
Total life income 6,187 5,645 5,604 Expenses: Share of related tax charges from joint ventures and associates (31) (53) (51)
Adjusted operating profit from long-term business and asset management before restructuring costs 3,276 2,888 2,872
Adjusted operating profit after tax for the year before restructuring costs 2,840 2,477 2,464
Profit for the year after tax before restructuring costs 3,725 1,815 1,799
Our earnings continue to be based on high-quality drivers. The overall 14 per cent growth in Asia life insurance adjusted operating profit to $2,993 million (2018: $2,633 million1) was driven principally by 14 per cent growth in insurance margin related revenues and reflects our ongoing focus on recurring premium health and protection products, and the associated continued growth of our in-force business. Renewal premiums10, reflecting the long-term nature of our insurance business, grew 12 per cent.
Fee income increased by three per cent, broadly in line with the increase in average unit-linked liabilities, while spread income rose by five per cent given changes in product and geographical mix and lower interest rates in the period.
With-profits earnings relate principally to the shareholders’ share in bonuses declared to policyholders. As these bonuses are typically weighted to the end of a contract, under IFRS, with-profit earnings consequently emerge only gradually over time. The 14 per cent growth in with-profits earnings reflects the ongoing growth in these portfolios.
The benefit of our focus on profitable and capital efficient health and protection, with-profit and asset management businesses is evident in the attractive 26 per cent (2018: 30 per cent) return delivered on closing segment equity over 2019.
New business profit 883 1,230 (28) Adjusted operating profit* 3,070 2,563 20 EEV operating profit* 1,782 2,828 (37) Jackson RBC ratio (%) 366 458 (92) ppts * Before restructuring costs
New business performance Life EEV new business profit and APE new business sales (APE sales)
Overall new US APE sales increased to $2,223 million (2018: $2,059 million), with the proportion of general account products (fixed annuities, fixed index annuities and wholesale business) at 34 per cent (2018: 19 per cent) of new sales reflecting our intention to diversify our product mix over time to balance the overall risk profile of Jackson better. This was supported by new product launches and additional distribution initiatives. New business profit was lower at $883 million (2018: $1,230 million). Of this $(347) million reduction, $(155) million is a result of lower interest rates and other changes in economic assumptions compared with the prior period. The remainder reflects the change in product mix and other assumption change impacts.
Addition for closed block of group pay-out annuities in the US – – – 5,532 Transfers from general to separate account 951 (951) 708 (708) Investment-related items and other movements 32,373 549 (15,436) 2,086
Overall US net flows were $0.2 billion over the year (2018: $(0.3) billion). Separate account net flows were negative at $(1.6) billion (2018: positive $1.5 billion), reflecting lower new sales of variable annuities in the period and expected higher levels of surrenders as the in-force book develops. Investment related movements reflect favourable investment performance driven by strong capital market returns. General account net flows were $1.8 billion (2018: $(1.7) billion), driven by higher new sales in the period. Total year-end policyholder liabilities were $269.5 billion (2018: $236.4 billion), with separate account liabilities at $195.1 billion and general account and other liabilities at $74.5 billion.
IFRS earnings Profit margin analysis of US long-term insurance and asset management operations17 $m Margin bps $m Margin bps
Adjusted operating profit after tax for the year before restructuring costs 2,633 2,161
Adjusted operating profit US long-term adjusted operating profit was $3,038 million (2018: $2,552 million), and reflects the benefit of favourable marketrelated DAC adjustments in the period compared with unfavourable DAC adjustments in the prior period.
Fee income was marginally higher compared with the prior period, with the benefit of a 2 per cent increase in average separate account balances largely offset by a modest decline in the average fee margin17.
Insurance margin primarily represents income from variable annuity guarantees and profits from legacy life businesses. This increased by 4 per cent to $1,317 million (2018: $1,267 million) mainly as a result of higher income from variable annuity guarantees.
Non-operating items The non-operating result was negative $(3,795) million pre-tax (2018: negative $(241) million pre-tax) and contributed to a net loss after tax of $(380) million (2018: net income $1,982 million).
Operating profit from long-term business and asset management before restructuring costs 1,782 2,828 (37)
During 2019, 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 model for its EEV reporting to update its allowance for the long-term cost of hedging, resulting in a $(3,233) million reduction in Jackson’s EEV at the start of the year.
The reduction in expected return from business in force reflects lower period end interest rates which reduce the expected unwind, and a lower starting balance of EEV shareholders’ funds compared with the prior period.
The EEV non-operating loss of $(3,802) million mainly includes negative $(3,233) million from the adoption of the new hedging model (as discussed above), and negative $(1,201) million from economic effects, offset by positive $876 million from favourable investment movements.
Overall segment embedded value ended the year at $16.3 billion (2018: $18.7 billion).
Operating free surplus generated from in-force life business and asset management before restructuring costs and EEV hedge modelling enhancements 2,567 2,195 17
Operating free surplus generated before EEV hedge modelling enhancements 2,023 1,872 8 Impact of 2019 EEV hedge modelling enhancements (903) – –
Total movement in free surplus (983) 152 Free surplus at 1 January 2,760 2,608
Local statutory capital – Jackson National Life (Jackson) Jackson applies the US statutory reserve and capital framework required by the NAIC and adopted the NAIC’s changes to this framework for variable annuities with effect from 31 December 2019. This new capital methodology incorporates a unified approach to reserving and required capital determination. In addition, with effect from 1 October 2019, Jackson chose not to renew its long-standing permitted practice to exclude unrealised gains on certain derivative instruments taken out to protect Jackson against declines in long-term interest rates.
Adoption of NAIC reforms (see above) 279 137 142 (17) Other non-operating movements, including market effects and removal of the * Includes operating experience variances and the impact of John Hancock
— other non-operating items that reduced the RBC ratio by 50 percentage points, primarily representing variable annuity net hedge losses in the period given asymmetries between the statutory accounting basis and the economics hedged by Jackson.
During 2019 Jackson remitted $(525) million to Prudential, representing around half of Jackson’s operating capital generation in the period (excluding John Hancock effects), which reduced the RBC ratio by 37 percentage points. As previously announced, from 2020 Jackson’s remittances are expected to be more evenly spread over the calendar year than in prior periods.
In respect of the previously noted ongoing NAIC review of the C-1 bond factors in the required capital calculation, the expected implementation has been delayed to 2021 or thereafter. After adoption of the new capital regime, the estimated reduction in RBC ratio under the current proposal is circa 10 to 20 points.
Return on segment equity US return on closing IFRS shareholders’ funds.
Operating return on closing shareholders’ funds (%) 29 30 Total comprehensive return on closing shareholders’ funds (%) 26 7
The US operating return on segment equity was 29 per cent (2018: 30 per cent). The total comprehensive return on segment equity, including non-operating and other comprehensive income movements, described above, was 26 per cent (2018: 7 per cent).
4 Approximately half of the corporate expenditure is incurred in sterling and our assumptions forecast an exchange rate of £1=$1.2599.
12 See note I(iii) of the Additional unaudited financial information for the basis of calculation. 13 For insurance operations, operating free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and excludes non-operating items. For asset management businesses, it equates to post-tax operating profit for the period. Restructuring costs are presented separately from the operating business unit amount. Further information is set out in note 11 of the EEV basis results.
1 Introduction Group structure On�21�October�2019,�just�18�months�after� announcing�its�intention�to�do�so,�the�Group� completed�the�demerger�of�M&G�plc,� marking�the�successful�and�controlled� delivery�of�a�complex�and�historic�change� to�the�business,�in�which�the�Risk�function� played�a�central�role.�An�unsettled� macroeconomic�and�geopolitical� environment�added�to�the�challenges�in� completing�a�strategic�initiative�of�this� magnitude�and�to�the�key�objective�of� delivering�two�distinct�and�strongly� capitalised�groups.�Strong�stewardship�was� provided�by�the�Risk�function�through�risk� opinions,�guidance�and�assurance�on�critical� activity,�as�well�as�assessments�and�ongoing� monitoring�of�external�risks.�At�the�same� time,�the�function�retained�its�focus�on� managing�the�risks�of�the�ongoing�business� performing�its�defined�role�in�providing�risk� management�support�and�oversight,�as�well� as�objective�challenge�to�ensure�the�Group� remained�within�its�risk�appetite.�
The world economy Economic�growth�worldwide�slowed�in� 2019�driven�by�a�contraction�in�global� manufacturing,�in�particular�in�the� Eurozone,�UK�and�some�Asian�economies.� Various�factors�contributed�to�this� slowdown,�including�geopolitical�tensions� (in�particular�those�around�trade),�steps� taken�in�China�to�deleverage�its�financial� system,�and�tightened�financial�conditions� in�the�US�during�the�first�half�of�the�year.� Faced�with�the�prospect�of�slowing� economic�growth�and�continued�subdued� inflation,�the�major�central�banks�across� North�America,�Europe�and�Asia� implemented�significant�changes�in� monetary�policy,�deploying�both� conventional�and�non-conventional� accommodation.�The�US�Federal�Reserve� cut�its�benchmark�federal�funds�rate�by� 75�basis�points�over�2019,�while�the�ECB� delivered�a�10�basis�point�interest�rate�cut� and�announced�a�resumption�of�its� quantitative�easing�programme�in� September.�At�the�start�of�2020,�the� prospects�for�global�growth�initially� appeared�to�have�improved�with�the� signing�of�the�‘Phase�One’�initial�trade� agreement�by�the�US�and�China�in�January� and�signs�that�macroeconomic�data�was� stabilising�throughout�the�Eurozone�and� parts�of�Asia.�Since�then�however,�it�is� becoming�increasingly�evident�that�the� coronavirus�outbreak�has�impacted� economic�activity�in�Hong�Kong�and�China� with�spill�over�to�the�rest�of�the�global� economy.�This�has�prompted�the�world’s� major�central�banks�to�commit�to�measures� to�manage�the�potential�economic�effects� and�in�early�March�2020�the�US�Federal� Reserve�cut�its�benchmark�federal�funds� rate�by�50�basis�points.�This�demonstrates� the�fragility�of�any�improvement�in�the� growth�outlook,�with�geopolitical�risks� representing�another�source�of�potential� disruption,�including�a�resurfacing�in�trade� tensions,�a�resumption�of�the�protests�in� Hong�Kong�and,�looking�forward,�political� uncertainty�that�may�arise�from�the�US�
Regulations Prudential�operates�in�highly�regulated� markets,�and�the�nature�and�focus� of�regulation�and�laws�remains�fluid.� A�number�of�national�and�international� regulatory�developments�are�in�progress,� with�a�continuing�focus�on�solvency�and� capital�standards,�conduct�of�business,� systemic�risks�and�macroprudential� policy.�Some�of�these�changes�will�have� a�significant�impact�on�the�way�that�the� Group�operates,�conducts�business�
and�manages�its�risks.�These�regulatory� developments�will�continue�to�be�monitored� at�a�national�and�global�level�and�form�part�of� Prudential’s�engagement�with�government� policy�teams�and�regulators.�In�addition�to� the�evolving�regulatory�landscape,�and� following�the�completion�of�the�demerger� in�October,�Prudential’s�Group-wide� supervisor�changed,�with�the�Hong�Kong�IA� assuming�the�role�in�October�2019.� Constructive�engagement�continues�on�the� Group-wide�Supervision�Framework�(GWS)� that�will�apply�to�the�Group,�which�is� expected�to�be�finalised�in�2020.
A dditional inform ation prudentialplc.com� Prudential plc Annual�Report�2019 53 long-term�profitability,�and�this�is�making� companies�evaluate�their�place�in,�and� contribution�to,�society.�The�‘why�and�how’� a�business�acts�has�become�arguably�at� least�as�important�as�what�it�produces�or� the�services�that�it�provides.�Similarly,� understanding�and�managing�the� environmental,�social�and�governance� (ESG)�implications�of�the�Group’s� business�is�fundamental�to�Prudential’s� brand,�reputation�and�ultimately� long-term�success.�Ensuring�high�levels� of�transparency�and�responsiveness� to�stakeholders�is�a�key�aspect�of�this.� Key�social�issues�with�implications�for� the�Group�include�risks�arising�from� demographic�changes�as�well�as�those� arising�from�privacy�and�data�security� requirements�and�expectations.�
Recent�changes�in�demographic,� geographical�and�environmental�factors� have�driven�public�health�trends,�such�as� obesity,�and�changed�the�nature,�likelihood� and�impact�of�extreme�events�such�as� pandemics,�with�a�consequential�impact� on�Prudential’s�underwriting�assumptions� and�product�design.�Given�the�unique�set� of�variables�associated�with�extreme� events,�past�experience�is�not�an�indication� of�the�likely�impact�or�ability�to�deal�with� future�occurrences.�The�coronavirus� outbreak�demonstrates�the�unpredictable� nature�of�such�events�and�the�impact�on� the�functioning�of�society,�with� consequential�disruption�to�business� operations,�staff,�customers�and�sales.� The�Group�is�actively�managing�this�impact�
In�support�of�increased�social�inclusion� and�to�meet�evolving�customer�needs,� the�Group�is�increasing�its�use�of�digital� services,�technologies�and�distribution� methods�for�the�products�and�services� that�it�offers.�This�amplifies�the�risks�to� Prudential�associated�with�regulations� and�expectations�in�relation�to�privacy�and� data�security.�These�changes�to�the�Group’s� use�of�technology�and�distribution�models� have�broad�implications,�touching�on� Prudential’s�conduct�of�business,� increasing�the�risks�of�technology�and� data�being�compromised�or�misused�and� potentially�leading�to�new�and�unforeseen� regulatory�issues.
Prudential plc Annual�Report�2019� prudentialplc.com54 3 Managing the risks in implementing our strategy This�section�provides�an�overview�of�the�Group’s�strategy,�the�significant�risks�arising�from�the�delivery�of�this�strategy�and�current� risk�management�focus.�The�risks�outlined�below,�which�are�not�exhaustive,�are�discussed�in�more�detail�in�sections�5�and�6.
A dditional inform ation prudentialplc.com� Prudential plc Annual�Report�2019 55 4 Risk governance a System of governance Appropriately�managed�risks�allow� Prudential�to�take�business�opportunities� and�enable�the�growth�of�its�business.� Effective�risk�management�is�therefore� fundamental�in�the�execution�of�the� Group’s�business�strategy.�Prudential’s� approach�to�risk�management�must�be� both�well�embedded�and�rigorous,�closely� aligned�to�the�Group’s�key�stakeholders� and�operate�across�the�entire�group.� As�the�economic�and�political�environment� in�which�we�operate�changes,�it�should� also�be�sufficiently�broad�and�dynamic� to�respond�to�these�changes.
Prudential�has�in�place�a�system�of� governance�that�promotes�and�embeds�a� clear�ownership�of�risk,�processes�that�link� risk�management�to�business�objectives� and�a�proactive�Board�and�senior� management�providing�oversight�of�risks.� Mechanisms�and�methodologies�to�review,� discuss�and�communicate�risks�are�in�place� together�with�risk�policies�and�standards� to�ensure�risks�are�identified,�measured,� managed,�monitored�and�reported.
How risk is managed Risk�management�is�embedded�across�the� Group�through�the�Group�Risk�Framework,� which�is�owned�by�the�Board�and�details� Prudential’s�risk�governance,�risk� management�processes�and�risk�appetite.� The�Group’s�risk�governance�arrangements� are�based�on�the�concept�of�the�‘three�lines� of�defence’�model,�comprising�risk�taking� and�management,�risk�control�and� oversight,�and�independent�assurance� and�has�been�developed�to�monitor�the� risks�to�our�business.�The�aggregate�Group� exposure�to�its�key�risk�drivers�is�monitored� and�managed�by�the�Group�Risk�function� which�is�responsible�for�reviewing,� assessing,�providing�oversight�and�reporting� on�the�Group’s�risk�exposure�and�solvency� position�from�the�Group�economic,� regulatory�and�ratings�perspectives.
Tr an sf or m at io n ris kEconom ic and geopolitical risks
C lim at e di sc lo su re s an d tra ns iti on ri sk
Prudential plc Annual�Report�2019� prudentialplc.com56 b Group Risk Framework i Risk governance and culture Prudential’s�risk�governance�comprises�the� Board�organisational�structures,�reporting� relationships,�delegation�of�authority,�roles� and�responsibilities,�and�risk�policies�that� the�Group�Head�Office�and�the�business� units�establish�to�make�decisions�and� control�their�activities�on�risk-related� matters.�It�includes�individuals,�Groupwide �functions�and�committees�involved� in�overseeing�and�managing�risk.
The�Group�Risk�Committee�reviews�the� Group�Risk�Framework�and�recommends� to�the�Board�any�changes�required�to� ensure�that�it�remains�effective�in� identifying�and�managing�the�risks� faced�by�the�Group.�A�number�of�core� risk�policies�and�standards�support�the� Framework�to�ensure�that�risks�to�the� Group�are�identified,�assessed,�managed� and�reported.�In�addition,�a�set�of�policies� owned�by�other�Group�functions�support� the�effective�implementation�of�the�Group� Risk�Framework.�
Prudential’s�Group�Code�of�Business� Conduct�and�Group�Governance�Manual� include�a�series�of�guiding�principles�that� govern�the�day-to-day�conduct�of�all�its� people�and�any�organisations�acting�on� its�behalf.�This�is�supported�by�specific� risk-related�policies�which�require�that� the�Group�act�in�a�responsible�manner.� These�include,�but�are�not�limited�to,� policies�related�to�financial�crime�covering� anti-money�laundering,�financial�crime�and� anti-bribery�and�corruption.�The�Group’s� third-party�supply�policy�ensures�that� human�rights�and�modern�slavery� considerations�are�embedded�across�all�of� its�supplier�and�supply�chain�arrangements.� Embedded�procedures�to�allow�individuals� to�speak�out�safely�and�anonymously� against�unethical�behaviour�and�conduct� are�also�in�place.
In�accordance�with�provision�28�of�the�UK� Corporate�Governance�Code,�a�process� is�in�place�to�support�Group-wide� identification�of�the�company’s�emerging� and�principal�risks�and�this�combines�both� top-down�and�bottom-up�views�of�risks� at�the�level�of�the�Group�and�its�business� units.�The�Board�performs�a�robust� assessment�and�analysis�of�these�principal� and�emerging�risks�facing�the�company� through�the�risk�identification�process,� the�Group�ORSA�report�and�the�risk� assessments�undertaken�as�part�of�the� business�planning�review,�including�how� they�are�managed�and�mitigated,�which� supports�decision-making.
Risk�management�and�control� requirements�are�set�out�in�the�Group�risk� policies,�and�form�part�of�the�holistic�risk� management�approach�under�the�Group’s� ORSA�process.�These�risk�policies�define: �— The�Group’s�risk�appetite�in�respect�of� material�risks,�and�the�framework�under� which�the�Group’s�exposure�to�those� risks�is�limited; �— The�processes�to�enable�Group�senior� management�to�effect�the�measurement� and�management�of�the�Group�material� risk�profile�in�a�consistent�and�coherent� way;�and
Risks to the Group’s financial situation (including those from the external macroeconomic and geopolitical environment) The�global�economic�and�geopolitical�environment�may�impact�on�the�Group�directly�by�affecting�trends�in�financial�markets� and�asset�values,�as�well�driving�short-term�volatility.
The�Group’s�market�risks�are�managed� and�mitigated�by�the�following: �— The�Group�market�risk�policy; �— The�Group�Asset�Liability�Committee� –�a�first-line�risk�management�advisory� committee�to�the�Group�Chief� Executive�Officer�which�supports� the�identification,�assessment�and� management�of�key�financial�risks� significant�to�the�achievement�of� the�Group’s�business�objectives; �— Risk�appetite�statements,�limits� and�triggers; �— Our�asset�and�liability�management� programmes�which�include� management�actions�such�as�asset� allocation,�bonus�revisions,�repricing� and�the�use�of�reinsurance�where� appropriate; �— Hedging�derivatives,�including�equity� options�and�futures,�interest�rate�swaps� and�swaptions�and�currency�forwards; �— The�monitoring�and�oversight�of�market� risks�through�the�regular�reporting� of�management�information;�and
Equity and property investment risk In�Asia,�the�shareholder�exposure�to�equity� price�movements�results�from�unit-linked� products,�where�fee�income�is�linked�to� the�market�value�of�the�funds�under� management.�Further�exposure�arises� from�with-profits�businesses�where� bonuses�declared�are�based�broadly�on� historical�and�current�rates�of�return�from� the�Asia�business’s�investment�portfolios,� which�include�equities.
In�Jackson,�investment�risk�arises�from�the� assets�backing�customer�policies.�Equity� risk�is�driven�by�the�variable�annuity� business,�where�the�assets�are�invested�in� both�equities�and�bonds�and�the�main�risk� to�the�shareholder�comes�from�providing� the�guaranteed�benefits�offered.�The� exposure�to�this�is�primarily�controlled�by� using�a�derivative�hedging�programme,� as�well�as�through�the�use�of�reinsurance� to�pass�on�the�risk�to�third-party�reinsurers.
Jackson�is�affected�by�interest�rate� movements�to�its�fixed�annuity�book�where� the�assets�are�primarily�invested�in�bonds� and�shareholder�exposure�comes�from� the�mismatch�between�these�assets�and� the�guaranteed�rates�that�are�offered�to� policyholders.�Interest�rate�risk�results� from�the�cost�of�guarantees�in�the�variable� annuity�and�fixed�index�annuity�business,� which�may�increase�when�interest�rates� fall.�The�level�of�sales�of�variable�annuity� products�with�guaranteed�living�benefits� is�actively�monitored,�and�the�risk�limits� we�have�in�place�help�to�ensure�we�are� comfortable�with�the�level�of�interest� rate�and�market�risks�incurred�as�a�result.� Derivatives�are�also�used�to�provide� some�protection.�
Foreign exchange risk The�geographical�diversity�of�Prudential’s� businesses�means�that�it�has�some� exposure�to�the�risk�of�foreign�exchange� rate�fluctuations.�Some�entities�within�the� Group�that�write�policies,�invest�in�assets� or�enter�into�other�transactions�in�local� currencies�or�currencies�not�linked�to�the� US�dollar.�Although�this�limits�the�effect�
Debt and loan portfolio Credit�risk�also�arises�from�the�debt� portfolio�in�the�Asia�business�comprising� the�shareholder,�with-profit�and�unit-linked� funds,�the�value�of�which�was�$74.7�billion� at�31�December�2019.�The�majority� (67�per�cent)�of�the�portfolio�is�in�unitlinked �and�with-profits�funds�and� so�exposure�of�the�shareholder�to�this� component�is�minimal.�The�remaining� 33�per�cent�of�the�debt�portfolio�is�held� to�back�the�shareholder�business.
Group sovereign debt Prudential�also�invests�in�bonds�issued� by�national�governments.�This�sovereign� debt�holdings�represented�21�per�cent� or�$18.0�billion1�of�the�shareholder�debt� portfolio�of�the�Group�as�at�31�December� 2019�(31�December�2018:�20�per�cent�or� $14.8�billion�of�the�shareholder�debt� portfolio�attributable�to�continuing� operations).�One�per�cent�of�this�was�rated� AAA�and�83�per�cent�was�considered� investment�grade�(31�December�2018:� 84�per�cent�of�the�sovereign�debt�holdings� attributable�to�continuing�operations�was� considered�investment�grade).
Government 26.74% Financial 25.72% Consumer,�non-cyclical 10.74% Utilities 10.72% Industrial 6.59% Energy 6.34% Communications 3.78% Consumer,�cyclical 3.61% Basic�materials 2.57% Technology 2.09% Other 1.10%
A�number�of�risk�management�tools�are� used�to�manage�and�mitigate�this�liquidity� risk,�including�the�following: �— The�Group’s�liquidity�risk�policy; �— Risk�appetite�statements,�limits� and�triggers; �— Regular�assessment�by�the�Group� and�business�units�of�LCRs�which�are� calculated�under�both�base�case�and� stressed�scenarios�and�are�reported� to�committees�and�the�Board; �— The�Group’s�Liquidity�Risk� Management�Plan,�which�includes� details�of�the�Group�Liquidity�Risk� Framework�as�well�as�gap�analysis� of�liquidity�risks�and�the�adequacy� of�available�liquidity�resources�under� normal�and�stressed�conditions; �— Regular�stress�testing; �— Our�contingency�plans�and�identified� sources�of�liquidity; �— The�Group’s�ability�to�access�the� money�and�debt�capital�markets; �— Regular�deep�dive�assessments;�and
Operational risk Prudential�defines�operational�risk�as�the� risk�of�loss�(or�unintended�gain�or�profit)� arising�from�inadequate�or�failed�internal� processes,�personnel�or�systems,�or�from� external�events.�This�includes�employee� error,�model�error,�system�failures,�fraud�or� some�other�event�which�disrupts�business� processes�or�has�a�detrimental�impact�to� customers.�Processes�are�established�for� activities�across�the�scope�of�our�business,� including�operational�activity,�regulatory� compliance,�and�those�supporting�ESG� activities�more�broadly,�any�of�which�can� expose�us�to�operational�risks.�A�large� volume�of�complex�transactions�is� processed�by�the�Group�across�a�number� of�diverse�products�and�are�subject�to�a� high�number�of�varying�legal,�regulatory� and�tax�regimes.�Prudential�has�no�appetite� for�material�losses�(direct�or�indirect)� suffered�as�a�result�of�failing�to�develop,� implement�or�monitor�appropriate�controls� to�manage�operational�risks.
The�Group’s�outsourcing�and�third-party� relationships�require�distinct�oversight� and�risk�management�processes.�A�number� of�important�third-party�relationships� exist�which�provide�the�distribution� and�processing�of�Prudential’s�products,� both�as�market�counterparties�and�as� outsourcing�partners,�and�new�IT�and� technology�partners�are�being�engaged.� In�Asia,�the�Group�continues�to�expand� its�strategic�partnerships�and�renew� bancassurance�arrangements�and�in�Africa� Prudential�is�continuing�its�expansion� through�acquisitions.�These�third-party� arrangements�support�Prudential�in� providing�a�high�level�and�cost-effective� service�to�our�customers,�but�they�also� make�us�reliant�on�the�operational� resilience�and�performance�of�our� outsourcing�partners.
The�Group’s�requirements�for�the� management�of�material�outsourcing� arrangements,�which�are�in�accordance� with�relevant�applicable�regulations,�are� included�through�its�well-established� Group-wide�third-party�supply�policy.� Third-party�management�is�also�included� in�the�Group-wide�framework�and�risk� management�for�operational�risk�(see� below).�Third-party�management�forms� part�of�the�Group’s�operational�risk� categorisations�and�a�defined�qualitative� risk�appetite�statement,�limits�and�triggers� are�in�place.�
The�performance�of�the�Group’s�core� business�activities�places�reliance�on�the� IT�infrastructure,�provided�by�our�external� IT�and�technology�partners,�that�supports� day-to-day�transaction�processing�and� administration.�The�IT�environment�must� also�be�secure,�and�an�increasing�cyber� risk�threat�needs�to�be�addressed�as�the� Group’s�digital�footprint�increases�and�the� sophistication�of�cyber�threats�continue�to� evolve�–�see�separate�information�security� risk�sub-section�below.�Exposure�to� operational�and�other�external�events� could�impact�operational�resilience�by� significantly�disrupting�systems,�operations� and�services�to�customers,�which�may� result�in�financial�loss,�customer�impacts� and�reputational�damage.
core�of�the�Group’s�embedded�BCM� programme.�The�BCM�programme�and� framework�are�appropriately�linked�to�all� business�activities,�and�includes�business� impact�analyses,�risk�assessments,�incident� management�plans,�disaster�recovery� plans,�and�the�exercising�and�execution�of� these�plans.�Based�on�industry�standards,� the�BCM�programme�is�designed�to� provide�business�continuity�that�matches� the�Group’s�evolving�business�needs� and�is�appropriate�to�the�size,�complexity� and�nature�of�the�Group’s�operations.� Prudential�is�also�taking�a�broader,� multi-functional�approach�to�building� greater�business�resilience,�working�with� our�external�third-party�providers�and� our�service�delivery�teams�to�improve�our� ability�to�withstand,�absorb�and�recover� from�disruption�to�our�business�services,� while�minimising�the�impact�on�our� customers.�The�Group�continuously� reviews�and�develops�its�contingency� plans�and�its�ability�to�respond�effectively� when�disruptive�incidents�occur,�such�as� those�resulting�from�the�Hong�Kong�protests� and�the�recent�COVID-19�outbreak.
During�2019,�the�revised�organisational� structure�and�governance�model�for�cyber� security�management�was�implemented.� This�change�has�resulted�in�a�centralised� Group-wide�Information�Security�and� Privacy�function,�leveraging�skills,�tools� and�resources�across�the�business�under� a�‘centre�of�excellence’�model.�This� organisational�change�has�increased�the� Group’s�efficiency�and�agility�in�responding� to�cyber�security�related�incidents�and�has� facilitated�increased�collaboration�between� business�units�leveraging�their�respective� strengths�in�delivering�the�Group-wide� information�security�programme.�
Group-wide framework and risk management for operational risk The�risks�detailed�above�form�key�elements� of�the�Group’s�operational�risk�profile.�In� order�to�identify,�assess,�manage,�control� and�report�effectively�on�all�operational� risks�across�the�business,�a�Group-wide� operational�risk�framework�is�in�place.� The�key�components�of�the�framework�are:�
�— Regulatory�change�teams�in�place� to�assist�the�business�in�proactively� adapting�and�complying�with� regulatory�developments; �— On�financial�crime�risks,�screening� and�transaction�monitoring�systems� are�in�place�and�a�programme�of� compliance�control�monitoring�reviews� is�undertaken,�as�well�as�regular�risk� assessments; �— A�framework�is�in�place�for�emerging� risk�identification�and�analysis�in� order�to�capture,�monitor�and�allow� us�to�prepare�for�operational�risks� that�may�crystallise�beyond�the� short-term�horizon;�
These�activities�are�fundamental�in� maintaining�an�effective�system�of� internal�control,�and�as�such�outputs� from�these�also�inform�core�RCA,�incident� management�and�scenario�analysis� processes�and�reporting�on�operational� risk.�Furthermore,�they�also�ensure�that� operational�risk�considerations�are� embedded�in�key�business�decisionmaking, �including�material�business� approvals�and�in�setting�and�challenging� the�Group’s�strategy.
In�Asia,�Prudential�writes�significant� volumes�of�health�and�protection�business,� and�so�a�key�assumption�is�the�rate�of� medical�inflation,�which�is�often�in�excess� of�general�price�inflation.�There�is�a�risk�that� the�expenses�of�medical�treatment�increase� more�than�expected,�so�the�medical�claim� cost�passed�on�to�Prudential�is�higher�than� anticipated.�Medical�expense�inflation�risk� is�best�mitigated�by�retaining�the�right�to� reprice�our�products�each�year�and�by� having�suitable�overall�claim�limits�within� our�policies,�either�limits�per�type�of�claim� or�in�total�across�a�policy.�Prudential’s� morbidity�risk�is�mitigated�by�appropriate� underwriting�when�policies�are�issued�and�
The�focus�of�some�governments�toward� more�protectionist�or�restrictive�economic� and�trade�policies�could�impact�on�the� degree�and�nature�of�regulatory�changes� and�Prudential’s�competitive�position�in� some�geographic�markets.�This�could�take� effect,�for�example,�through�increased� friction�in�cross-border�trade,�capital� controls�or�measures�favouring�local� enterprises�such�as�changes�to�the� maximum�level�of�non-domestic�ownership� by�foreign�companies.�These�developments� continue�to�be�monitored�by�the�Group� at�a�national�and�global�level�and�these� considerations�form�part�of�the�Group’s� ongoing�engagement�with�government� policy�teams�and�regulators.
The�IAIS�is�developing�the�ICS�as�part�of� ComFrame.�The�implementation�of�ICS�will� be�conducted�in�two�phases�–�a�five-year� monitoring�phase�followed�by�an� implementation�phase.�ComFrame�will� more�generally�establish�a�set�of�common� principles�and�standards�designed�to�assist� supervisors�in�addressing�risks�that�arise� from�insurance�groups�with�operations� in�multiple�jurisdictions.�The�ComFrame� proposals,�including�ICS,�could�result�in� enhanced�capital�and�regulatory�measures� for�IAIGs,�for�which�Prudential�is�likely� to�satisfy�the�criteria.�The�Aggregation� Method�is�one�of�the�approaches�being� considered�as�part�of�the�ICS�and�the� related�proposals�are�being�led�by�the� National�Association�of�Insurance� Commissioners�(NAIC).�Alongside�the� current�ICS�developments,�the�NAIC�is�also� developing�its�Group�Capital�Calculation� (GCC)�for�the�supervision�of�insurance� groups�in�the�US.�The�GCC�is�intended�to� be�a�risk-based�capital�(RBC)�aggregation� methodology.�In�developing�the�GCC,� the�NAIC�will�also�consider�Group�capital� developments�by�the�US�Federal�Reserve� Board,�which�will�inform�the�US�regulatory� association�in�its�construction�of�a�US�group� capital�calculation.
In�certain�jurisdictions�in�which�Prudential� operates�there�are�also�a�number�of� ongoing�policy�initiatives�and�regulatory� developments�that�are�having,�and�will� continue�to�have,�an�impact�on�the�way� Prudential�is�supervised.�Decisions�taken� by�regulators,�including�those�related�to� solvency�requirements,�corporate�or� governance�structures,�capital�allocation,� financial�reporting�and�risk�management� may�have�an�impact�on�our�business.�
In�the�US,�various�initiatives�are�under� way�to�introduce�fiduciary�obligations�for� distributors�of�investment�products,�which� may�reshape�the�distribution�of�retirement� products.�Jackson�has�introduced� fee-based�variable�annuity�products�in� response�to�the�potential�introduction� of�such�rules,�and�we�anticipate�that�the� business’s�strong�relationships�with� distributors,�history�of�product�innovation� and�efficient�operations�should�further� mitigate�any�impacts.�
In�Asia,�regulatory�regimes�are� developing�at�different�speeds,�driven�by� a�combination�of�global�factors�and�local� considerations.�New�local�capital�rules� and�requirements�could�be�introduced�in� these�and�other�regulatory�regimes�that� challenge�legal�or�ownership�structures,� or�current�sales�practices,�or�could�be� applied�to�sales�made�prior�to�their� introduction�retrospectively,�which�could� have�a�negative�impact�on�Prudential’s� business�or�reported�results.
In�July�2014,�the�Financial�Stability�Board� (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.
Risk�management�and�mitigation�of� regulatory�risk�at�Prudential�includes� the�following: �— Risk�assessment�of�the�Business�Plan� which�includes�consideration�of�current� strategies; �— Close�monitoring�and�assessment� of�our�business�environment�and� strategic�risks; �— The�consideration�of�risk�themes� in�strategic�decisions;�and
A dditional inform ation prudentialplc.com� Prudential plc Annual�Report�2019 69 6.4 Environmental, social and governance risks The�business�environment�in�which� Prudential�operates�is�continually�changing� and�responding�effectively�to�those� material�risks�associated�with�ESG�themes� is�crucial�in�maintaining�Prudential’s�brand� and�reputation,�its�ability�to�attract�and� retain�customers�and�staff,�and�in�turn�its� financial�performance�and�its�long-term� strategy.�The�Group�maintains�active� engagement�with�its�key�stakeholders�as�it� responds�to�ESG-related�matters,�including� investors,�customers,�employees,� governments,�policymakers�and�regulators� in�its�key�markets,�as�well�as�with� international�institutions�–�all�of�whom�have� expectations�in�this�area�which�may�differ.
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,�particularly�in�joint�ventures�or� partnerships�where�Prudential�does� not�have�direct�overall�control.�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.�
The Group’s longer-term prospects Prudential�aims�to�meet�the�savings�and� investment�needs�of�its�customers,�which� by�their�very�nature�can�often�be�over�a� timeframe�of�many�years.�Aligned�with�this� objective,�in�the�markets�in�which�it� operates�it�seeks�to�provide�products�and� services�that�align�with�important�global� social�needs,�such�as�access�to�healthcare,� protection�against�poverty,�security�for� ageing�populations�and�investment�in� infrastructure�and�the�real�economy.� Prudential�is�focused�on�capturing�the� structural�growth�opportunity�arising�from� these�needs.�The�drivers�for�this�structural� growth,�such�as�the�low�penetration�rates� across�the�Asian�region,�are�discussed� on�pages�18�to�27�alongside�the�activities� we�undertook�to�expand�our�product�set� and�customer�reach�during�2019.�In� undertaking�these�activities�we�aim�to�both� meet�the�evolving�needs�of�our�customers� and�provide�sustainable�growth�for�our� shareholders,�which�will�ultimately�lead�to� the�viability�of�our�business�over�the�longer� term.�In�the�US,�the�Group�is�focused�on� delivering�products�that�will�help�mitigate� the�worry�many�retirees�have�of�running� out�of�money�during�retirement,�as� employer-based�plans�are�disappearing� and�many�individuals�have�insufficient� accumulation�of�assets�over�their�working� life.�Further�details�of�how�Jackson�is� meeting�this�need�are�set�out�on�pages� 28�to�33.
As�well�as�capturing�the�structural�growth� opportunities�outlined�above,�the�Group� seeks�to�continually�enhance�its�capabilities� with�a�view�to�remaining�relevant�in�an� ever-changing�world.�Recent�focus�has� been�on�digital�development�and�investing� in�new�and�existing�partnerships�to�ensure� our�products�reach�the�customers�we�seek� to�serve.�In�Asia,�we�developed�‘Pulse�by� Prudential’�Health�Ecosystem,�an�all-in-one� digital�app,�and�entered�into�a�new� strategic�partnership�with�OVO,�the�largest� digital�payment�platform�in�Indonesia.� In�the�US,�we�have�been�actively�engaged� with�FinTech�partners�to�help�illustrate� the�benefits�a�lifetime�income�solution�can� provide�within�a�comprehensive�wealth� management�plan.�This�is�intended�to�give� the�financial�adviser�the�necessary�tools�to� customise�according�to�the�unique�needs� and�goals�of�the�client.
The�Directors�performed�the�assessment� by�reference�to�the�three-year�plan�period� to�31�December�2022.�Three�years�is� considered�an�appropriate�period�as�it� represents�the�period�covered�by�the� detailed�business�plan�that�is�prepared� annually�on�a�rolling�three-year�basis.� In�approving�the�business�plan,�the� Directors�reviewed�the�Group’s�projected� performance�with�regards�to�profitability,� cash�generation�and�capital�position,� together�with�the�parent�company’s� liquidity�over�this�three-year�period.� This�projection�involves�setting�a�number� of�economic�and�other�assumptions�that� are�inherently�volatile�over�a�much�longer� reporting�period.�Such�assumptions� include�foreign�exchange�rates,�interest� rates,�economic�growth�rates,�the�impact� on�the�business�environment�arising�from� geopolitical�events�and�continued�level� of�changes�in�regulation�and�supervision.
Assessment of principal risks over the period The�Group’s�business�plan�implements�the� Group’s�strategic�objectives�through�the� business�model�and�activities�discussed� on�pages�12�to�15.�Matters�considered�as� part�of�that�planning�process�included�the� impact�of�pursuing�a�more�diversified� product�mix�in�the�US,�the�impact�of�the� recent�protests�in�Hong�Kong�on�sales� and�the�economic�outlook�for�Hong�Kong.� Assessment�of�the�risks�to�achieving�the� projected�performance�remains�an�integral� part�of�the�planning�process.�The�Group’s� approach�to�risk�management�and�a� summary�of�the�key�risks�facing�the�Group� are�set�out�on�pages�51�to�71.
The�impact�on�the�business�of�known�areas� of�regulatory�change�whose�financial� implications�can�be�reasonably�quantified� is�also�considered�as�part�of�the�plan.� As�well�as�known�areas�of�regulatory� change,�the�Group�is�exposed�to�the�risk� of�sudden�and�unexpected�changes�in� regulatory�requirements�at�the�Group�and� local�levels.�While�unexpected�changes� cannot�be�fully�anticipated�and�hence� modelled,�the�risk�of�regulatory�change� is�mitigated�by�capital�held�by�the�Group� and�its�subsidiaries�in�excess�of�Group�and� local�regulatory�requirements,�the�Group� and�its�subsidiaries’�ability�to�generate� significant�capital�annually�through� operational�delivery�and�the�availability� of�compensating�actions�designed�to� restore�key�capital�metrics.
Non-financial information statement We recognise that to help our customers de-risk their lives, we need to take a long-term view on a wide range of issues that affect our business and the communities in which we operate. To do this, we maintain a proactive dialogue with our stakeholders to ensure that we are managing these issues sustainably and delivering long-term value. Further information on our engagement with our stakeholders can be found in our Section 172 statement below.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 73 with our risk appetite, meet our customers’ needs and help build the communities in which we operate. Our ESG approach underpins the delivery of our strategy, generating sustainable earnings and resilient capital growth, enabling us to deliver on our promises to our customers. More detailed information on our ESG activities is available in our 2019 ESG report found at www.prudentialplc.com/ investors/reports/2019.
How we meet our Section 172 duty We ensure that our Board meets its duty under Section 172 of the UK Companies Act in a number of ways. A briefing note is circulated in advance of each Board meeting reminding Directors of their statutory duties under Section 172 and reiterating who the Group’s key stakeholders are. The annual Board evaluation process takes into account how the operation of the Board affects the consideration of stakeholder issues and seeks to identify improvements in this area. We ensure that our Section 172 obligations are taken into account in our Board succession planning and training, stakeholder engagement is addressed in the Board’s Terms of Reference, and there is guidance for individuals who prepare Board papers that references Section 172 duties and our key stakeholders. We ensure that we take account of any conflicts between different stakeholder concerns, and resolve such conflicts as smoothly as possible at the highest level necessary. The Board ensures that it listens to and acts on the views of a diverse range of shareholders, from large institutions to individuals, recognising that different types of investor have different investment mandates and varied stewardship approaches. Information on the independence of our Non-executive Directors can be found in the Governance report on page 115. Through our Group Code of Business Conduct, we ensure that we maintain the highest standards of behaviour throughout our business. Our Group Code of Business Conduct sets out the standards the Board expects in relation to employee behaviour and our business units run mandatory training programmes to highlight the personal obligations applicable to each individual. The Board reviews both the content of the Group Code of Business Conduct and business unit compliance each year. Meanwhile our Group-wide whistleblowing programme, Speak Out, enables all stakeholders to raise concerns, helping to maintain the highest standards of behaviour.
Alongside continuing to build our business and serve the needs of our customers, during 2019 our main activity was the demerger of M&G plc from the Group, which we completed successfully on 21 October 2019. The demerger had an impact for all our stakeholders, and we took steps to ensure that we engaged with all our stakeholder groups on the long-term consequences of this significant step in the history of our business. We are confident that this decision was the right one for the long-term interests of the Group.
Customers Helping to de-risk the lives of our customers and deal with their biggest financial concerns is at the centre of what we do, and listening to and understanding their concerns is key to the sustainability of our business. We engage directly with our customers through face-to-face advice, contact centres, dedicated account managers, sales support units, business processing and servicing, mobile phone apps and telephone technical support teams. The outcome of our engagements with customers is transmitted through the business and used to shape the design of our products and how and where we distribute those products, and ultimately to inform strategic decisions made at Board level. Decisions about which markets to access, what kind of products to offer and how to develop our agency force, our bank partnerships and our digital capabilities, are all driven by an understanding of what customers want, based on engagement with those customers.
Investors We engaged with our investors through our annual and half-year reports, ESG Report and other regular reporting, including press releases and regulatory announcements. We held regular meetings with investors, including our Annual General Meeting, analyst meetings and investor roadshows, and a General Meeting to propose the demerger for approval by shareholders. Our Chairman met key investors on governance matters to address any other concerns they may have had, and our Senior Independent Director and the Chairs of our Board Committees made themselves available to meet investors.
The main concerns of investors during this period were around the demerger, in particular its execution and timing, as well as the nature and strategy of the postdemerger Group and our post-demerger dividend policy. The demerger was subject to shareholders’ approval and was approved in line with the Board’s recommendation. The demerger dividend policy was approved by the Board. Investors were also consulted on the principal changes to the Directors’ Remuneration Policy. To strengthen the alignment between Executive Directors and the workforce, the policy includes pension benefits for new Executive Directors of 13 per cent of salary and a reduction in the pension benefits of incumbent Executive Directors. Climaterelated financial risk also emerged as an issue of increasing importance to investors during the year, and we have responded to that concern by proceeding with our intensive work towards meeting the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).
Regulators Prior to the demerger of M&G plc, the Group was subject to the consolidated supervision of the UK’s Prudential Regulation Authority. Following the demerger, the Hong Kong Insurance Authority (IA) became Prudential’s Group-wide supervisor. We have engaged with both regulators on a regular basis, sharing an agreed range of management information. The Board receives regular updates on our engagement with the Hong Kong IA regarding the shape of its legislative and regulatory framework. Hong Kong IA applies principles and standards to the Group through existing requirements to ensure that we are a fit and proper controller of regulated insurance companies. Hong Kong IA’s principles include financial integrity, effective corporate governance and sound risk management. We undertook gap analysis of the Group’s policies and processes against Hong Kong IA requirements.
Governments We regard governments and legislatures in the markets in which we operate as important stakeholders. We monitor governmental and legislative activity, and meet periodically with government ministers and officials, elected or permanent, and legislators, legislative committees and committee members, either bilaterally or as part of wider groups, to help us understand their objectives, priorities and concerns, and how they affect or shape our business. Across the many markets where we operate, the company engages governmental and political stakeholders (including ministers, officials and legislators) to inform and influence public policy debate in a range of areas, including regulatory development, financial inclusion, fairness and consumer protection, capital market development, sustainable finance, job creation and skills, tax policy, trade policy, demography and ageing, health and wellbeing, and the digital economy. During 2019 a number of key points emerged from these exchanges. One key area that arose and prompted action from us was life insurance penetration. Prudential was granted a life insurance licence from the Ministry of Planning and Finance of Myanmar, enabling us to start offering life insurance products and solutions in this market. Another was the gap in structural protection in Asia. After meeting with the former Deputy Prime Minister of Singapore, we committed to supporting the Global Asia Insurance Partnership for five years. A third area was digital innovation, and during the 2019 UK-Singapore Economic and Financial Dialogue, Prudential Singapore expanded its PruFintegrate initiative to London. Another key area was financial inclusion, and in Zambia we partnered with the Securities and Exchange Commission and Junior Achievement Zambia to roll out our global financial education and responsibility programme for children, Cha-Ching.
Suppliers Each of our critical suppliers has a nominated contact within Prudential, and we meet those suppliers on a regular basis to address concerns on both sides. Ahead of the demerger of M&G plc, we engaged with 217 suppliers in the UK to explain the impacts of the demerger and contracting changes. During 2019, we found that our suppliers were primarily concerned about revenue protection during the demerger. We introduced an e-procurement system in our London head office to improve the control and monitoring of our purchasing activities and to provide suppliers with greater visibility over their payments.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 75 which will be published on the Group website in May.
How we govern ESG Our ESG Executive Committee leads on how we identify, manage and report on material ESG risks and opportunities. The ESG Executive Committee is chaired by our ESG sponsor, our Group Director of Communications, supported by senior leaders from Group functions across financial reporting, risk, governance and human resources, with representation from our business units. The ESG Executive Committee meets quarterly and raises matters to the Nomination & Governance Committee as appropriate.
Environment Environment Policy outlines our approach to understand and manage the direct environmental impact of the Group. This covers our measurement, monitoring, review and reporting of issues associated with our environmental performance.
Owing to the distinct investment risks faced by our asset management and ownership businesses, with each investing in different markets and asset classes, each business manages ESG-related matters through the pursuit of business-specific responsible investment policies. This is overlain by our Group-wide Responsible Investment Framework, aligned to our Group Code of Business Conduct and underpinned by our Group Responsible Investment Standards.
Technology Privacy Policy governs the protection of data and complies with the General Data Protection Regulation.
Remuneration Policy outlines our effective approach to appropriately rewarding our employees in a way that aligns incentives to business objectives and enables the recruitment, retention and incentivisation of high-calibre employees in line with our risk appetite and Group Reward Principles.
Talent Policy demonstrates how we attract and select the best people for roles that will ensure high performance in the short term and improve the longer-term succession and talent pipeline. It sets out our fair and effective approach to pursuing this.
Communities Community Investment Policy covers how we are committed to working with the communities in which we operate as active and supportive members. This also outlines our strategy for investing in the community and how we make investments and report against them.
Our customer commitments Helping customers achieve their long-term financial needs through our products and services lies at the heart of our business strategy. Our Customer Commitments Policy applies to all members of the Prudential Group that deal directly or indirectly with customers. These commitments are: 1 Treat customers fairly, openly and honestly 2 Provide and promote a range of products and services that meet customer needs, are clearly explained and deliver real value 3 Maintain the confidentiality of our customer information 4 Provide and promote high standards of customer service 5 Act fairly to address customer complaints and any errors.
Customer-first brand commitment in Asia In 2019 Prudential Corporation Asia launched its new brand commitment, ‘Listening. Understanding. Delivering.’ The commitment reinforces our focus on human connections, simplicity and innovation for our customers. The commitment is about: — Focusing on customers, anticipating their needs and enhancing their experience with easy access to information and services; — Delivering comprehensive solutions for protection, health and wellness, savings and retirements; and
— Renewing our strategic Asian bancassurance alliance with United Overseas Banks, increasing its geographical scope
Awards In Asia in 2019, we won awards for our services to customers in Hong Kong, Malaysia, Thailand and Vietnam, and in the US we won awards for the quality of our customer contact, our service and our digital initiatives.
Responsible investment landscape Across the Group’s footprint, the policy and regulatory landscape continues to evolve with respect to sustainable finance and ESG. For example, the Monetary Authority of Singapore (MAS) has signalled its commitment to promote sustainable practices by encouraging financial institutions to adopt ESG best practices and encourage the development of the green bond market. We are highly supportive of these efforts and are an active industry contributor, working closely with the regulator to advance this aim. Among policymakers, we continue to see increasing focus on the need to develop a view of the exposure of the insurance sector to climate-related financial risk. The Task Force on Climate-related Financial Disclosures (TCFD) recommendations were released in 2017 to provide a framework for companies to develop voluntary, climate-related financial risk disclosures. Following Board discussion, Prudential plc became a signatory to the recommendations in 2018 in order to meet the growing expectations of our investors and regulators, and to support the ambitions of our business units in the local markets in which we operate.
Strengthening our governance of responsible investment Following the successful completion of the demerger of M&G plc in late 2019, we took the opportunity to further integrate our responsible investment activities within the ESG Executive Committee by extending membership of the Committee to the chief investment officers of our asset owner businesses.
In 2019, both PPM America and Eastspring made progress in enhancing the integration of ESG factors into their respective investment processes. Since implementing its Responsible Investment Policy in 2018, PPM America has continued to integrate ESG information in its processes, wherever possible, so that its investment professionals can assess and evaluate potential ESG risks. During 2019, the fixed income team at Eastspring Singapore built on its ESG approach and launched its first investment strategy focusing on sustainable bonds. For Eastspring Singapore’s fixed income team, assessment and monitoring of ESG factors are an integral part of the bottom-up credit research process. ESG issues are incorporated in the fundamental analysis of individual companies to assess their impact on an issuer’s financial performance, its risk of default and the valuation of the bonds it issues. This process involves an assessment of the quality of corporate governance, as well as material environmental and social issues that could have an impact on a business’s day-to-day operation, financial performance, and subsequently the ability to pay back its obligations.
Climate We recognise that climate change presents long-term risks to the sustainability of our business, as well as a range of opportunities associated with the transition to a low-carbon economy. In 2018, following Board discussion, Prudential became a supporter of the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD). This reflects both the growing expectations of our external stakeholders and colleagues, and the ambition among our businesses to develop their capabilities to pursue products and services aligned to the global need to address the impacts of climate change.
Risks and opportunities We are committed to developing a more granular understanding of the diverse risks we face and to working collaboratively with governments, peers and business partners to identify opportunities at scale for our businesses. During 2019, we focused on enhancing access to ESG and climate risk data sources and the carbon footprinting of sample Asian investment portfolios. During 2020, our priorities are to determine the Group’s exposure to carbon-intensive sectors and companies, extend carbon footprinting across the Group’s investment book and to refine the initial stress testing of the investment book for climate-related scenarios.
Governance Our ESG Executive Committee, established in 2018, is focused on the holistic assessment of ESG matters material to the Group, raising matters to the Nomination & Governance Committee as appropriate. One of the ESG Executive Committee’s principal responsibilities is to oversee the Group’s progress towards fulfilling our commitment to report against the TCFD recommendations. This involves oversight of our Group-wide efforts to assess the climate-related risks and opportunities facing our businesses, and to subsequently identify and deliver the supporting implementation activities.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 79 responsible investment activities within the ESG Executive Committee by extending participation on the Committee to the chief investment officers of our asset owner businesses, reflecting the increasing importance of our investment activities within the development of our overall ESG strategies. Committee members include: the chief investment officers of our asset management businesses (PPM America and Eastspring), the Chief Investment Officer of Prudential Corporation Asia, Jackson’s General Counsel, Prudential Corporation Asia’s Chief Operating Officer, and representatives from Group functions.
We also recognise that climate-related opportunities can support the delivery of the Group’s strategy. For example, Eastspring is a member of the Sustainable Development Investment Partnership initiative, coordinated by the World Economic Forum with support from the OECD, working with others to scale the use of finance in sustainable infrastructure investments in emerging and developing countries. Since 2016, our US asset manager’s approach to ESG integration was a key factor in the sale of $55 million of utilities credits that generate electricity primarily by coal, and the purchase of $105 million of single-asset project bonds that generate 100 per cent of their electricity through renewables.
Risk management As a long-term investor, the Group’s most significant exposure to climate-related risk is through our role as an asset owner and manager, with $543.9 billion of assets under management. Our portfolio is exposed both to physical risk and transition risk as a result of climate change and we are using a range of methodologies to develop a more accurate understanding of the carbon intensity of our asset book and its exposure under a range of climate change scenarios. Through this process, we are seeking to develop metrics for actionable insights, which will help to inform the Group’s Responsible Investment Standards and to direct our investments in the low-carbon economy, and reduce our exposure to climate risk.
We have begun to assess the climate transition risk exposure of our portfolios using a third-party carbon footprinting data and software provider. Our Asian asset manager, Eastspring, has taken the lead across the Group in starting to measure and interpret the carbon footprint for listed equities in sample portfolios. This tool allows us to assess the carbon footprint of the portfolio constituents compared to historical constituents, the carbon efficiency of the portfolio, the exposure of a portfolio to fossil fuels, potential emissions from fossil fuels, the strength of carbon risk management relative to industry peers and a portfolio’s exposure to clean technology.
In order to assess our exposure to transition and physical risk, respectively, we have begun to explore the impact of temperature increase scenarios, over medium and long-term time horizons, on our investment portfolios. For this, we are using the guidance provided by the UK’s insurance regulator, the Prudential Regulation Authority, and informed by the IPCC, as part of the regulator’s August 2019 stress test exercise.
As a global business, we recognise the need for the Group to understand and mitigate the physical risks associated with climate change. The location of a significant number of our markets increases their vulnerability to climate change. Local environmental risks, including their potential short and medium-term impacts, are tracked and managed by our business units, with support from Group Risk and Security teams. This includes but is not limited to forecasts and reporting, business continuity advice and incident management planning. We manage the physical risk to our operations through comprehensive risk assessment during the selection of properties, including factors such as location, geography and weather events.
We continue to engage with policymakers and NGOs on this topic. We also work collaboratively with our peers through a range of networks, including the CRO Forum, the Asian Investor Group on Climate Change and ClimateWise. During 2019, we contributed to a ShareAction/AODP report entitled ‘Insuring a low-carbon future’, exploring leading practice and common barriers in managing climate-related risks and opportunities.
Metrics and targets We participate in external benchmarks that assess our management of climate change risks and opportunities. In 2019 we continued to participate in CDP (formerly the Carbon Disclosure Project) and maintained our score with a B grading (2018: B). We continue to participate in ClimateWise, which in 2019 changed significantly to align itself with the TCFD framework. The Group score, similar to other organisations, is down from our previous submission (2019: 51, 2018: 78), but we remain committed to enhancing our climate change disclosures, in line with TCFD. Our scoring in CDP and ClimateWise is based on the performance of the pre-demerger Group, including M&G plc. We seek to minimise the impact of our direct operations on the environment. More detail on our environmental performance is included in the Environment section on page 84 of this report.
Business integrity We are strongly aware of our purpose, which is to help people de-risk their lives and deal with their biggest financial concerns. In line with this purpose, responsible and ethical behaviour are embedded in our business. Our governance framework is clear about our standards of behaviour and those standards flow into every part of what we do, from our financial performance and tax practices to the way we fight financial crime and deal with our suppliers.
Responsible tax practices The responsible and sustainable management of our tax affairs helps us to maintain constructive relations with our stakeholders and play a positive role in the economy. Tax revenues are fundamental to sustainable development in those communities.
We understand the importance of paying the right amount of tax on time. We manage our tax affairs transparently and seek to build constructive relationships with tax authorities in all the countries in which we operate. Our Tax Risk Policy outlines our processes to identify, measure, control and report on risk across four categories: technical judgements, operations, regulations and reputation.
Our tax strategy is published annually and, as well as complying with the mandatory requirements under the UK 2016 Finance Act, includes additional disclosures, including a breakdown of the types and amounts of taxes we pay globally, which includes taxes borne and collected on employee income, for example social security. Furthermore, we disclose the revenues, profits, average employee numbers and taxes on a country-bycountry basis where more than $5 million of tax was paid.
We are due to publish our updated tax strategy, which will include more information on the tax we paid in 2019, how we manage our tax affairs and the governance and management of tax risk, by 31 May 2020.
Supply chain Our Group Code of Business Conduct outlines the values and standards that are required by each of our suppliers. Our Group Third-Party Supply policy is core to our supply chain governance and specifies our position on supply chain management, setting out our approach to due diligence, selection criteria, contractual requirements and ongoing monitoring of relationships. Business units conduct due diligence before engaging with and ultimately selecting a new supplier. We perform regular due diligence, review meetings and audits where required, and our policies and procedures are supported by regular employee training exercises. In July 2019, we introduced the Workday platform, an e-procurement and general ledger system, at our London head office to improve the control and monitoring of purchasing activities. This system also allows us to better understand the composition of our supply chain and to automate our payments to help make sure we pay businesses in a timely way.
People We provide an inclusive working environment in which we develop our talent, reward great performance, protect our people and value our differences, and we believe that such an environment is essential to enabling us to deliver for our customers, shareholders and communities.
Diversity and inclusion Having the benefit of diverse perspectives and experiences within our organisation is important to our success and fulfilling our purpose. Diversity and Inclusion (D&I) is an important priority for Prudential and the Group HR Director is the executive sponsor for D&I across the Group. Through the Group D&I Policy we ensure that we provide equal opportunities to our workforce, fostering a collaborative and supportive environment in which our employees are treated with dignity and respect.
Group Executive Committee (GEC) Includes Executive Directors 7 6 1 – –
Full-time equivalent Includes the Chairman, all Directors, GEC members and Senior Managers 18,125 8,137 9,914 41 33
In 2019, we again participated in ShareAction’s Workforce Disclosure Initiative (WDI), which aims to create transparency for investors about how companies manage their workers, both in their direct operations and supply chains.
Talent development Developing our people is key to achieving our strategic objectives as a responsible business and to the long-term success of the company. Prior to the demerger of M&G plc from the Group, we created two full boards and senior management teams for two FTSE 100 companies, providing individuals with development opportunities and career progression. Our priority now is to ensure that we have the diverse short, medium and long-term talent we need in an inclusive environment to deliver on the strategic priorities of the newly shaped organisation. Group HR focuses on developing senior leadership through an annual process of talent review, and we use succession planning to continue developing leaders and critical specialists, segmenting our talent to identify short, medium and long-term successors. We develop our senior executive leaders through a bespoke exercise based on their aspirations and the skillsets they need to continue to be successful, including fostering innovation, leading transformation and driving digital capability and execution through collaboration. The Board receives an in-depth talent review, led by the Group HR Director, once a year.
The Board has considered options to ensure its decisions are informed by an appreciation of employees’ views and in line with expectations of the UK Corporate Governance Code.
Performance and reward We structure our reward arrangements to attract, motivate and retain high-calibre people. Our people contribute to the success of the Group and are rewarded accordingly. We recognise and reward high performance and are committed to a fair and transparent system of reward. Among our benefits, we offer employees competitive pension arrangements.
Executive remuneration The Group’s executive remuneration arrangements reward the achievement of Group, business, functional and personal targets, provided that performance is aligned to the Group’s risk framework and appetite and that our conduct expectations, as well as those of our regulators and other stakeholders, are met.
Increasing access to digital health tools in Asia Access to physicians remains a challenge for many communities across Asia. To aid the expansion of our role from providing protection to preventing and postponing adverse health events, we have launched Pulse by Prudential, an all-in-one digital app that forms the core component of our pioneering digital health proposition. Accessible to everyone, Pulse uses artificial intelligence-powered self-help tools and real-time information to offer holistic health management to customers in Asia. Pulse is an evolving platform and consists of a range of partnerships with health and technology companies. Our partnership with Babylon enables users to monitor their health status online. We are also working
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 83 with a range of local and regional partners to provide increasingly personalised health management services to consumers. For example, through our partnership with Tictrac, we are able to provide personalised wellness services to consumers by combining a user’s lifestyle signals from their apps and wearables with contextual information about their surroundings. This information helps guide users to achieve their health objectives, such as preventing diabetes or reducing stress levels, by establishing good nutritional and fitness habits or instilling behaviours that are beneficial to their health.
Using technology to enhance our capabilities In 2019, Jackson invested significant time and resources with fintech partners to help illustrate the benefits a lifetime income solution can provide within a comprehensive wealth management plan. The fintech platforms where Jackson is actively engaged include eMoney, MoneyGuidePro, and Envestnet. The technology solutions provided by eMoney reach more that 60,000 financial professionals, serving nearly four million households nationwide. During 2019, Prudential Singapore strengthened its partner network of fintech, insurtech, healthtech and medtech companies with the third edition of its flagship innovation initiative – the PRU Fintegrate Partnership. Our smart underwriting tool, which is now used in 64 per cent of all new sales, offers dynamic underwriting that streamlines the application process and communicates instant underwriting decisions to customers.
Promoting financial inclusion, protection and participation In June, we announced a strategic partnership with OVO, a digital payments, rewards and financial services platform in Indonesia. Available on over 115 million devices, OVO is the preferred digital payments platform for Indonesians, with over 500,000 merchants and a presence in 319 cities. The partnership significantly enhances our reach to digitally minded consumers in one of Asia’s fastest-growing insurance markets and is a key step in our broader commitment to make health and wealth services affordable and accessible to all Asians. Recognising the high cost of and unequal access to healthcare in the Philippines, Pru Life UK, our life insurance business in the Philippines, has the ambition to make health accessible and affordable to all through the use of mobile digital health. In 2019 PruLife UK published an independent study, which it commissioned to examine the readiness of the country’s regulatory and legal framework to support the development of mobile digital health.
In 2019 we launched several projects to enhance our approach to information security assurance using automation and analytics. In Asia we have introduced automated firewall rule analytics to provide deep-dive real-time reviews on the performance of our on-premise firewalls. Projects such as these are driving our approach to innovating our assurance processes to provide greater visibility in a faster and more efficient manner, while protecting the information entrusted to us.
Incident response and resilience While our aim at Prudential is always to prevent incidents wherever possible, we must ensure that we are prepared to respond to any incident in a timely and effective manner. Incident response plans are developed, maintained and tested regularly, and the Group Information Security & Privacy team maintains a close working relationship with business continuity and disaster recovery teams to ensure alignment of plans and support in the event of an incident. Regular scenario-
Managing our direct impact Our Group Governance Manual underpins all our activities, including minimising the direct impacts of our operations on the environment. Our Group Environmental Policy applies to our operational properties worldwide, guiding our approach to the management of the direct impacts of our business units, including compliance with environmental laws and regulations with respect to emissions, energy consumption, water use, waste disposal, environmental supply chain management and the adoption of risk management principles for all property-related matters. Business unit performance is monitored against the Group Environmental Policy and updates are provided to the Board. We participate in external benchmarks that assess our management of climate change risks and opportunities. More information is available in the Climate section on page 78 and information on our wider environmental impact can be found in the Responsible Investment section, on page 77.
Global environmental targets framework In 2016 we developed a global environmental targets framework to drive improvements in environmental operational performance. This framework was aligned to the operational footprint of the pre-demerger Prudential Group and, as such, a number of targets are no longer relevant to the demerged Group. The Group’s new operational footprint provides an opportunity to develop targets that are more closely aligned with that footprint and our ambition in this area. During 2020, we are reviewing our global environmental targets framework for the demerged Group and new targets will be established to start from 2021.
In Asia, we completed seven site assessments as part of our work towards achieving our target to conduct energy assessments of our 20 highest energyconsuming sites. In the US, Jackson continues to reduce energy usage and decrease our carbon footprint, and in 2019 completed a range of projects at our Corporate Way campus in Lansing, including installing high-efficiency rooftop CO2 sensors, high-efficiency water heaters, an energy recovery ventilation unit and a new dust-collector filtration system to reduce exhaust and recover energy in printing facilities.
As in 2018, we have disclosed our Scope 3 air travel booked from the UK. We will continue to work with our business units across all of our regions to extend our Scope 3 emissions reporting. In 2019 our reported air travel emissions were 6,092 tCO2e. During 2019 we chose to offset our air travel, covering both our reported and unreported emissions.
5 Sustainable procurement – partnering our supply chain to deliver sustainable solutions and source responsibly The continued support of our supply chain is key in becoming a sustainable business. Our procurement team ensures that environmental requirements are integrated into procurement frameworks and form part of the supplier selection criteria.
Our approach to community investment Our relationships with our charity partners are long-term, involving support through both funding and skills-based employee volunteering. Our business units are guided by the Group’s strategy and framework for investing in the community, as laid out in our Group-wide Community Investment Policy, but within that framework they have the autonomy to manage their own community investment programmes. Our Group-wide Community Investment Policy sets minimum standards, as well as prohibiting political funding and contributions to religious organisations that have a clear aim to propagate a set faith.
Monitoring and measuring our programmes We take a strategic, long-term approach to community investment, and we ensure that all our community investment activities meet our objectives. We use performance metrics aligned to the London Benchmarking Group (LBG) guidelines, which are used to monitor progress and guide the valuation of both cash and in-kind contributions, employee volunteering and management costs.
2019 highlights Volunteering across the globe Many of our employees play an active role in their communities through volunteering, charitable donations and fundraising. Chairman’s Challenge is our flagship international volunteering programme, bringing people together across the Group to help their communities. The programme continues to appeal to colleagues, with over 5,400 signing up to participate across 21 projects. Each volunteering project focuses on one or more of our community priorities and enables us to support both large, well established charities and innovative, smaller-scale activities with volunteers and financial support. As well as volunteering on behalf of the Chairman’s Challenge, employees around the Group volunteered on a huge range of other charitable projects, from providing disaster relief to mentoring schoolchildren supporting the elderly and skills-sharing.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 87
More detailed information on our ESG activities is available in our 2019 ESG report found at www.prudentialplc.com/investors/ reports/2019
Strategic report approval by the Board of Directors The strategic report set out on pages 10 to 87 is approved by the Board of Directors.
Set out below are some of the principal strategic and governance items the Board has considered over 2019.
As Prudential no longer has operations in the UK and Europe, the Hong Kong Insurance Authority (the Hong Kong IA) has assumed the role of Group-wide supervisor. However, our long-standing governance framework has remained in place.
We are developing plans for assessing and monitoring culture as we move forward, including regular reporting to the Board. Developing a shared culture and behaviours across multiple jurisdictions presents a number of challenges and so we are focusing efforts on developing a Group-wide culture framework, which includes a common purpose and shared mindsets, behaviours and capabilities but allows tailoring for local context.
Looking after our stakeholders and wider community initiatives At Prudential, we recognise that our stakeholders are key to our long-term success. We seek to engage proactively with them, to understand their views and to take these views into account when making decisions.
In response to the emphasis that the UK Corporate Governance Code places on wider stakeholders, the Board has designated two Non-executive Directors to represent the workforce at Board level and is taking action to improve oversight of workforce policies and practices in order to help ensure consistency with the Group’s culture and values, including a review of relevant policies to be completed in 2020. Further information about how the Board has taken into account the views of the Group’s key stakeholders, including employees, can be found on pages 73 to 76 and 81 to 84.
Our ESG Executive Committee has responsibility for identifying ESG themes and overseeing ESG reporting. This management Committee provides updates to the Nomination & Governance Committee. You can read more about our corporate social responsibility actions in the ESG summary and in our 2019 ESG report which will be published on our website.
Board composition The Nomination & Governance Committee has undertaken significant work during 2019 to ensure that the Board’s skills and experience remain appropriate to formulate and oversee delivery of the strategy for the Group following the demerger and that there is an orderly and planned succession strategy in place for key roles.
I would also like to note the expansion of the roles of Mark FitzPatrick and James Turner, as announced on 10 July 2019, in preparation for the demerger. Mark’s role is now Group Chief Financial Officer and Chief Operating Officer. This extension of his responsibilities encompasses oversight of key Group support functions including Legal, Government Relations and Communications. James assumed responsibility for Compliance and became Group Chief Risk and Compliance Officer.
I am pleased we have strengthened the Board’s composition further to ensure the Group is well-placed to develop and deliver on our strategic objectives post-demerger.
Board: October 2010 Chairman of the Board: July 2012 N&G : July 2012
Michael Wells Group Chief Executive Appointments Board: January 2011 Group Chief Executive: June 2015
Relevant skills and experience Paul will continue to draw on his extensive experience in leadership roles and his knowledge of the Group’s core businesses, international markets and industry sectors, and his technical knowledge, to provide effective leadership during a period of change for the Group.
Other previous appointments include the chairmanship of Aon UK Limited and JPM European Smaller Companies Investment Trust Plc. From September 2005 until March 2011, Paul was a non-executive director of Wm Morrison Supermarkets Plc, including as senior independent director, audit committee chairman and remuneration committee chairman. He was a non-executive director and audit committee chairman of KazMunaiGas Exploration & Production until the end of September 2012 and chairman of Henderson Diversified Income Limited until July 2017.
Mike has more than three decades’ experience in insurance and retirement services, having started his career at the US brokerage house Dean Witter, before going on to become a managing director at Smith Barney Shearson.
Mike joined the Prudential Group in 1995 and became Chief Operating Officer and Vice-Chairman of Jackson in 2003. In 2011, he was appointed President and Chief Executive Officer of Jackson, and joined the Board of Prudential.
Mike is Group Chief Executive, a position he has held since June 2015.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 93
Board changes Non-executive Directors As announced on 28 February 2019, Lord Turner stepped down from the Board with effect from the conclusion of the 2019 AGM held on 16 May 2019.
As announced on 10 May 2019, Amy Yip was appointed to the Board as a Non-executive Director and member of the Remuneration Committee with effect from 2 September 2019.
As announced on 30 January 2020, Shriti Vadera will join the Board as a Non-executive Director and member of the Nomination & Governance Committee with effect from 1 May 2020.
Mark previously worked at Deloitte for 26 years, building his industry focus on insurance and investment management globally. During this time, Mark was managing partner for Clients and Markets, a member of the executive committee and a member of the board of Deloitte UK. He was a vice chairman of Deloitte for four years, leading the CFO Programme and developing the CFO Transition labs.
Mark previously led the Insurance & Investment Management audit practice and the insurance industry practice.
Mark is Group Chief Financial Officer and Chief Operating Officer, a position he has held since July 2019. He joined the Board as Chief Financial Officer in July 2017.
James joined Prudential in November 2010 as the Director of Group-wide Internal Audit and was appointed Director of Group Finance in September 2015, with responsibility for delivery of the Group’s internal and external financial reporting, business planning, performance monitoring and capital and liquidity planning. He also led the development of the Group’s Solvency II internal model.
James Turner FCA FCSI FRM Group Chief Risk and Compliance Officer Appointment
Jeremy joined the Board in January 2020 as a Non-executive Director and member of the Audit and Risk Committees.
Relevant skills and experience Howard has a wealth of experience in the financial services industry, across the Civil Service, consultancy, asset management, regulatory and academia. He also contributes his detailed knowledge of the Group’s key international markets including the UK, Europe, North America and Asia as well as international regulatory experience.
Howard was previously chairman of the Phoenix Group and an independent director of Morgan Stanley Inc.
Relevant skills and experience Philip contributes experience across a number of sectors and in particular listed company experience and the financial services industry, including asset management, in the UK and Europe.
Philip was a senior adviser at Credit Suisse and a vice chairman of Credit Suisse First Boston (CSFB) Europe and head of the UK Investment Banking Department. He was twice seconded to the role of director general of the Takeover Panel. Philip also served on the board of Northern Rock plc and as chairman of the Shareholder Executive. Until July 2018, he also served on the board of UK Financial Investments Limited.
Philip joined the Board in January 2013 as a Non-executive Director, as Senior Independent Director and as a member of each of the Audit Committee, the Remuneration Committee and the Nomination & Governance Committee. He also chaired the M&G Group Limited board from April 2016 until October 2018.
Board: October 2010 Audit : November 2010 N&G : July 2012 Risk : October 2010
Board: January 2020 Audit : January 2020 Risk : January 2020
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Relevant skills and experience David has experience across the Group’s key international markets including North America and Asia, and across a number of industry sectors. He contributes extensive technical knowledge of audit, accounting and financial reporting essential to his role as Chair of the Audit Committee.
David joined the Board in September 2015 as a Non-executive Director and member of the Audit Committee. David was appointed Chair of the Audit Committee and a member of the Risk Committee and of the Nomination & Governance Committee in May 2017.
Other appointment — University of Edinburgh (Member of the court and policy and resources committee)
Kai joined the Board in January 2012 as a Non-executive Director and member of the Remuneration and Risk Committees. Kai acts as a designated Non-executive Director for employee engagement matters as set out in the UK Code, for the Group’s workforce in Asia and Africa.
Anthony spent his career in Asia, where he joined the Jardine Matheson Group in 1969, holding a number of senior positions before joining the board of Jardine Matheson Holdings in 1994. He was managing director of the Jardine Matheson Group from 2006 to 2012. He was a member of the Hong Kong-APEC trade policy study group until 2018 and a member of the UK-ASEAN Business Council until 2019.
— Shui On Land Limited — Vitasoy International Holdings Limited — The Innovation and Strategic Development
Board: September 2015 Audit : May 2017 Risk : May 2017 N&G : May 2017
Board: June 2013 N&G : May 2015 Rem : May 2015
Relevant skills and experience Fields has extensive international boardroom experience, combining knowledge of the Group’s key geographic markets with experience across the global financial services industry.
Fields started her career at Philadelphia National Bank in 1982 before joining Strategic Planning Associates (now Oliver Wyman) as a senior partner in 1989. She became chief financial officer and director of strategy at the London Stock Exchange in 1994, leader of the global markets practice of AT Kearney in 1998 and managing director of Vesta Capital Advisors in 2000. She was appointed to Nasdaq’s Technology Advisory Council in 2000 and was a member of the panel of experts advising the European Parliament on financial markets harmonisation for four years from 2002. She became a non-executive director and chair of the audit committee of Savills plc in 2002 and a non-executive director and chair of the investment committee of the Royal London Group in 2003. Fields was also a non-executive board member at the Department for Digital, Culture, Media & Sport from January 2016 until January 2020.
Fields joined the Board in September 2018 as a Non-executive Director and member of the Remuneration Committee.
Relevant skills and experience Tom has experience across the insurance, asset management and financial services industries as well as experience with listed companies in the UK and the US.
He was a key member of the team associated with Provident’s merger with Unum in 1999 and was appointed president and chief executive officer of the renamed Unum Group in 2003, a role he held until May 2017. Tom also served on the board of Sun Trust Banks from 2010 until April 2019. In 2019, Tom joined the boards of LocatorX, Inc and in 2020 he joined the board of Arch Capital Group Limited.
Board: July 2017 Rem : July 2017 Risk : November 2018
Alice began her career as a qualified accountant at Ernst & Young. She joined the Financial Accounting Standards Board as a manager in 1991, overseeing the issuance of several significant insurance accounting standards.
Alice joined the Board in June 2013 as a Non-executive Director and member of the Audit Committee. She became a member of the Risk Committee in March 2018.
Board: June 2013 Audit : June 2013 Risk : March 2018
Relevant skills and experience Amy has extensive experience of China and South-east Asia following a 40-year career in banking, insurance, asset management and government.
Jolene Chen Group Human Resources Director Appointment to the GEC: June 2019 Age: 60
Relevant skills and experience Jolene is the Group Human Resources Director and Chief Human Resources Officer for Prudential Corporation Asia. She is also a member of the Prudential Corporation Asia Executive Board and a Councillor of Prudence Foundation, the community investment arm of Prudential in Asia.
Jolene has more than 30 years’ experience, including eight as Chief Human Resources Officer for Prudential Corporation Asia. Prior to joining us she spent over 21 years with multinational companies in a variety of resourcing, organisational design, talent management, learning and development and human resources roles.
Nic started his career at PricewaterhouseCoopers (PwC). Before joining Prudential as an Executive Director and Chief Financial Officer in 2009, he worked at Aviva, where he held a number of senior finance roles, including as Norwich Union Life’s finance director and board member, Aviva group financial control director, Aviva group financial management and reporting director and CGNU group financial reporting director.
Relevant skills and experience Al-Noor, who joined Prudential in 2016 in the newly-created role of Group Chief Digital Officer, is responsible for developing and executing an integrated, long-term digital strategy for the Group.
Before joining Prudential, he worked at Northgate Capital, a venture capital firm in Silicon Valley, where he ran the technologyfocused funds. Prior to that, Al-Noor was at Misys, the financial services software group, and he has previously held leading technology and innovation roles at BT Group, Qwest Communications, Dresdner Kleinwort Benson and Swiss Bank Corporation.
Group governance Corporate governance codes – statement of compliance The Company has dual primary listings in London (premium listing) and Hong Kong and has therefore adopted a governance structure based on the UK and Hong Kong Corporate Governance Codes (the UK and HK Codes). This report explains how the principles set out in the UK and HK Codes have been applied.
The Company has also complied with the provisions of the HK Code other than as follows: Provision B.1.2(d) of the HK Code requires companies, on a comply or explain basis, to have a remuneration committee which makes recommendations to a main board on the remuneration of non-executive directors. This provision is not compatible with provision 34 of the UK Code which recommends that the board determines the remuneration of non-executive directors. Prudential has chosen to adopt a practice in line with the recommendations of the UK Code.
The governance framework includes the key mechanisms through which the Group sets strategy, plans its objectives, monitors performance, considers risk management, holds business units to account for delivering on business plans and arranges governance.
Risk Committee Chair and Group Audit Committee Chair report to the Board or relevant Group Committee on the outcome of those dialogues, with any urgent issues being escalated between meetings as required.
The Nomination & Governance Committee is responsible for oversight of governance arrangements for the material subsidiaries. This and other activities of the Nomination & Governance Committee during 2019 are described on pages 110 to 117.
Regulatory environment Prior to the demerger of M&G plc on 21 October 2019, the Group was subject to the consolidated supervision of the UK’s Prudential Regulation Authority (PRA) under Solvency II. Following completion of the demerger, the Group-wide supervisor is now Hong Kong’s Insurance Authority (Hong Kong IA).
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 99 engagement and discussion on stakeholder views as part of the Board decision-making process can be found on pages 73 to 76. Additional information can be found on our website at www.prudentialplc.com/ about-us/esg/our-approach
Employee voice Having considered the suggested methods for strengthening workforce engagement as described in the UK Code, the Board concluded that the most appropriate method for achieving effective engagement, taking into account the international nature of the business and the geographic spread of the workforce, would be to designate a Non-executive Director based in Asia and a Non-executive Director based in the US to represent the workforce in those regions. During the year, the Board designated responsibility to Kai Nargolwala for engagement with the workforce in Asia, as well as in Africa, and to Tom Watjen for engagement with the workforce in the US, as well as staff in London.
An initial framework of activities was established, combining both formal and informal interactions with employees as well as access to relevant material. In particular, during the course of the year Kai Nargolwala attended townhall sessions with staff in Singapore and Hong Kong, and Tom Watjen visited staff in Nashville in 2019 and in London in January 2020. The key focus of those discussions was the impact on staff of organisational changes following the demerger. In addition, Tom Watjen and Kai Nargolwala received briefings from the Group HR Director on workforce-related matters.
Shareholders The Board recognises the importance of maintaining an appropriate level of two-way communication with shareholders.
The Group Chief Executive, Group Chief Financial Officer and Chief Operating Officer and Investor Relations team also attend major financial services conferences to present to, and meet with, the Company’s shareholders.
The Board consists of 14 Directors, of which a majority, excluding the Chairman, are independent Non-executive Directors. Biographical details of each of the Directors can be found on pages 92 to 97 and further details of the roles of the Chairman, Group Chief Executive, Senior Independent Director, Committee Chairs and the Non-executive Directors can be found on pages 104 to 106.
— Assessing and monitoring culture, including alignment with policy, practices, behaviours and risk appetite.
— Ensuring effective engagement with, and encouraging participation from, key stakeholder groups.
Group Chief Financial Officer’s performance report l l l l l l l
Cash, capital and operations reports l l l l l l
Relationship with Regulators and Regulatory and compliance updates l l l l l l l l
Investor updates including feedback on investor meetings l l l l l
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Between meetings, the Board is provided with monthly update reports from management.
3 Michael Falcon, John Foley and Nic Nicandrou stepped down from the Board with effect from the conclusion of the AGM held on 16 May 2019. Michael Falcon and Nic Nicandrou each continue in their role as chief executive of their respective business units as well as their membership of the Group Executive Committee. John Foley maintained his position as chief executive of M&G plc and continued as a member of the Group Executive Committee until demerger on 21 October 2019.
4 Lord Turner stepped down from the Board with effect from the conclusion of the AGM held on 16 May 2019. 5 Amy Yip was appointed a member of the Board and of the Remuneration Committee with effect from 2 September 2019.
Board effectiveness Actions during 2019 arising from the 2018 review The performance evaluation of the Board and its principal Committees for 2018 was conducted internally at the end of 2018 through a questionnaire. The findings were presented to the Board in February 2019 and an action plan agreed to address areas of focus identified by the evaluation.
Set out below are the themes, summary of actions and progress updates: Theme Summary of actions Progress
— Cyber risk focus for Board agenda for 2019. — Board training on the Hong Kong IA regulatory regime.
— Board members were briefed on the new regulatory regime in December 2019.
— Workforce engagement mechanisms were approved by the Board during the year and a report on engagement activities was reviewed at the Board meeting in December 2019. This will be an area of continued focus in 2020 as the framework of Non-executive Director engagement is developed and their reporting to the Board embedded.
— Ensure overseas and ‘home’ Boards give scope for Non-executives to meet colleagues below Group Executive Committee level.
— Both the Board visit to Hong Kong in March and the Board strategy session in Lansing in June provided opportunities for Non-executive Directors to meet with management below the Group Executive Committee level as part of presentations by Prudential Corporation Asia and Jackson management and in informal settings.
— Non-executive Directors continue to engage directly with management as part of their meeting preparations, particularly for Committee meetings.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 103 2019 review and actions for 2020 The performance evaluation of the Board and its principal Committees for 2019 was conducted internally at the end of 2019 through a questionnaire. The findings were presented to the Board in February 2020 and an action plan agreed to address areas of focus identified by the evaluation.
In accordance with the UK Code, the 2020 Board evaluation will be externally facilitated. The process for identifying and appointing the external evaluator will be overseen by the Nomination & Governance Committee.
The effectiveness of each Committee is monitored via the annual Board effectiveness programme. Each Committee was found to be operating effectively. More details are set out in each of the Committee reports.
Managing Board business — Responsible for setting the Board agenda, ensuring the right issues are brought to the Board’s attention through collaboration with the Group Chief Executive and the Company Secretary
— Ensuring information brought to the Board is accurate, clear, timely and contains sufficient analysis appropriate to the scale and nature of the decisions to be made
Membership and composition of the Board — Leading the Nomination & Governance Committee in succession planning and the identification of potential candidates, having regard to the skills and experience the Board needs to fulfil its strategy, and making recommendations to the Board
— Considering the development needs of the Directors so that Directors continually update their skills and knowledge required to fulfil their duties, including the provision of a comprehensive induction for new Directors
— Working with the Company Secretary to ensure continued good governance
— Meeting with the independent chairs of the Group’s Material Subsidiaries1 on a regular basis and reporting to the Board on the outcome of those meetings
— Balancing the interests of different categories of stakeholders, preserving an independent view and ensuring effective communication
External positions — Approving Directors’ external appointments prior to them being accepted, taking into account the required time commitment and escalating consideration of conflicts of interests to the Nomination & Governance Committee as needed
Group Chief Executive – Mike Wells Senior Independent Director – Philip Remnant
— Works with the Company Secretary to ensure the continued good governance of each Committee during the year
In addition to Committee duties, the Chairs of the Audit and Risk Committees act as key contact points for the independent chairs of the audit and risk committees of the Material Subsidiaries1
— Engaging with Executive Directors and other senior management at Board and Committee meetings as well as at training sessions and on an informal basis
— Taking part in one-to-one meetings with the Group Strategy team and participation in the annual strategy session
The Board has established four principal Committees. These Committees form a key element of the Group governance framework, providing effective independent oversight of the Group’s activities by the Non-executive Directors. Each Committee Chair provides an update to the Board on the matters covered at each Committee meeting, supported by a short written summary. The terms of reference for each Committee are reviewed at least annually. The functions of the principal Committees are summarised below.
— Develops succession planning for the Board and senior executives based on merit against objective criteria promoting diversity in all areas
See Nomination & Governance Committee Report on pages 110 to 117
— Ensures there is a formal and transparent process for establishing the Directors’ Remuneration Policy
— Reviews the design and development of share plans and approves and assesses performance targets where applicable and ensures alignment with the Group’s culture
— Explanation of Prudential’s corporate structure, Board and Executive Committee structure
— Explanation of the Group’s strategy and business plan — Tailored briefings with each business unit to gain a comprehensive understanding of each of their business models, product suites, pricing arrangements and governance structures
— Orientation to the work and role of the Remuneration Committee
— Meeting with the Chair of the Remuneration Committee to discuss the annual cycle of Committee work, its current focus and focus for 2020 and beyond
Jeremy Anderson was appointed to the Board as a Non-executive Director with effect from 1 January 2020. His induction commenced in early 2020 and included a particular focus on risk matters to support his role as a member of the Risk Committee.
— The Remuneration Committee receives updates on regulatory and governance developments affecting the Group’s remuneration arrangements. In 2019, these included updates on discussions with the Hong Kong IA on the new regulatory regime, compliance with the UK Corporate Governance Code 2018 and guidelines from investment institutions.
All Directors have the opportunity to discuss their individual development needs as part of the annual Board effectiveness review and are encouraged to request specific updates during the year. At the start of the year, suggested topics are shared with the Board for feedback. Directors are asked to provide a record of training received externally on an annual basis. All Directors have the right to obtain professional advice at Prudential’s expense. Board training materials are also made available, as relevant, to Group Executive Committee members, who have an opportunity to request any additional training as needed.
The Board has delegated authority to the Audit Committee to review the framework and effectiveness of the Group’s systems of internal control. The Audit Committee is supported in this responsibility by the assurance work carried out by Group-wide Internal Audit and the work of the business unit audit committees, which oversee the effectiveness of controls in each respective business unit. Details of how the Audit Committee oversees the framework of controls and their effectiveness on an ongoing basis, is set out more fully in the report on pages 118 to 126.
The Board determines the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The Board has delegated authority to the Risk Committee to assist it in providing leadership, direction and oversight of the Group’s overall risk appetite, risk tolerance and strategy, overseeing and advising on the current and potential future risk exposures of the Group, reviewing and approving the Group’s risk management framework, including changes to risk limits within the overall Board-approved risk appetite, monitoring the effectiveness of the risk management framework and adherence to the various risk policies.
Regular activities are detailed in the report on pages 127 to 132.
Formal review of controls A formal evaluation of the systems of risk management and internal control is carried out at least annually. Prior to the Board reaching a conclusion on the effectiveness of the systems in place, the report is considered by the Disclosure Committee and Audit Committee, with risk specific disclosures within the report also reviewed by the Risk Committee. This evaluation takes place prior to the publication of the Annual Report.
As part of the evaluation, the Chief Executive and Chief Financial Officer of each business unit, including Group Head Office, certify compliance with the Group’s governance policies and the risk management and internal control requirements. The Group Risk function facilitates a review of the matters raised in this certification process. This includes the assessment of any risk and control issues reported during the year, risk and control matters identified and reported by the other Group oversight functions and the findings from the reviews undertaken by Group-wide Internal Audit, which carries out risk-based audit plans across the Group. Issues arising from any external regulatory engagement are also taken into account.
First line of defence (risk taking and management) — Takes and manages risk exposures in accordance with the risk appetite, mandate and limits set by the Board; — Identifies and reports the risks that the Group is exposed to, and those that are emerging; — Promptly escalates any limit breaches or any violations of risk management policies, mandates or instructions; — Identifies and promptly escalates significant emerging risk issues; and
— Manages the business to ensure full compliance with the Group risk management framework as set out in the Manual, which among other requirements, includes the Group Risk Framework and associated policies as well as approval requirements.
Second line of defence (risk control and oversight) — Assists the Board to formulate the risk appetite and limit framework, risk management plans, risk policies, risk reporting and risk identification processes; and
Each business unit is required to implement a governance structure based on the three lines of defence model, proportionate to its size, nature and complexity, and to the risks that it manages.
Effectiveness of controls In accordance with provision 29 of the UK Code and provisions C.2.1, C.2.2 and C.2.3 of the HK Code, the Board reviewed the effectiveness and performance of the systems of risk management and internal control during 2019. This review covered all material controls, including financial, operational and compliance controls, risk management systems, budgets and the adequacy of resources, qualifications and experience of staff of the Group’s accounting, internal audit and financial reporting functions. The review identified a number of areas for improvement, and the necessary actions have been or are being taken. The Audit Committees at Group and subsidiary level collectively monitor outstanding actions regularly and ensure sufficient resource and focus is in place to resolve them within a reasonable time frame. This included oversight of M&G plc whilst it was a subsidiary of the Group.
Board-level committees Executive personnel Exec/Management committees Head office functions Direct reporting line Regular communication and escalation
Committee members — Paul Manduca (Chair) — Howard Davies — David Law — Anthony Nightingale — Philip Remnant
Regular attendees — Group Chief Executive — Group Human Resources Director — Company Secretary
Number of meetings in 2019: Three. (Two regular meetings and an additional meeting to consider Chair succession, held in September.)
Dear shareholder This report highlights some of the key areas of focus considered by the Committee during 2019.
The Committee’s role has expanded recently to include taking a wider role in overseeing diversity initiatives, the wider talent pipeline, and receiving updates on ESG matters. Accordingly, the number of regular Committee meetings in 2020 will increase to three.
Ongoing succession planning One of the Committee’s main roles is to ensure the Board retains an appropriate balance of skills to support the strategic objectives of the Group. As part of this, the Committee helps maintain a rigorous and transparent approach to the identification of candidates for appointment as Directors.
In accordance with the UK Code, Howard Davies, who has been a member of the Board and Chair of the Risk Committee since its inception in 2010, will not be standing for re-election at the 2020 Annual General Meeting. The Committee has therefore been focused on identifying a suitable successor and recommended the appointment of Jeremy Anderson, who contributes substantial leadership and international experience in financial services, particularly in audit and risk. Having appointed Jeremy as a Non-executive Director with effect from January 2020, we subsequently announced that he would assume the role of Risk Committee Chair from the conclusion of the 2020 Annual General Meeting.
During the year, the Committee also recommended the appointment of Amy Yip to the Board as a Non-executive Director. Amy brings 40 years of experience in insurance, asset management and government gained across China and South-east Asia.
The Committee has responsibility for reviewing and monitoring diversity initiatives across the Group as a whole. I am pleased that the Group remains on target by the end of 2021 to achieve 30 per cent representation of women in senior leadership roles in accordance with our commitment to the HM Treasury Women in Finance Charter.
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ESG considerations The Committee received updates on primary ESG-related reporting developments and the proposed approach to ESG reporting, and reports from the newly created ESG Executive Committee. The Committee also received updates on progress against implementing the Task Force on Climate-related Financial Disclosures, including how to quantify risks and their potential financial impact on the Group.
Governance Further changes have been made to the Committee’s Terms of Reference to reflect the Committee’s oversight of the process surrounding the annual evaluation of the effectiveness of the Board and its Committees. Committee members have taken a more active role in planning the Board evaluation in respect of 2019 and reviewed the actions arising from that evaluation. In 2020, the Committee will oversee the process for the appointment of an external specialist to conduct the next Board evaluation.
The effectiveness of the Committee was reviewed as part of the annual Board evaluation, which confirmed that the Committee continued to operate effectively during the year and no major areas requiring improvement or action points were highlighted. Committee members noted that the focus in 2020 should include continuing enhancements on Diversity and Inclusion reporting in respect of the executive pipeline and developing the Committee’s role in monitoring ESG strategy and reporting.
Succession planning Board composition The Committee plays an important role in ensuring that the Board retains an appropriate balance of skills to support the strategic objectives of the Group and in ensuring that an effective framework of succession planning is maintained.
The Committee keeps succession plans for Executive and Non-executive Directors under review throughout the year and also considers the ongoing appointment of all Board members.
Succession plans are supported and informed by the results of the annual Board evaluation and individual Director evaluations.
The Committee takes account of the size, structure and composition of the Board and its Committees, including existing knowledge, experience and diversity. In doing so, the Committee considers the Group’s strategic goals and anticipates future requirements, skills and experience.
Succession planning for the Non-executive Directors and principal Committees Succession planning for Non-executive Directors and the Board’s principal Committees ensures the Board is regularly refreshed and maintains appropriate levels of independent challenge to management.
The balance of Non-executive and Executive Directors required on the Board is considered on a regular basis, including the overall number, skills and experience.
The Committee made use of a skills map which identifies skills, experience by sector, geography and technical skills, which are desirable for the Board as a whole, taking account of the Group’s strategic objectives.
Succession planning for Non-executive Directors is supported by Egon Zehnder and Ridgeway Partners.
The Committee regularly reviews the membership of all principal Board Committees and makes recommendations to the Board as appropriate.
This year, the Committee considered the requirements for the role of Risk Committee Chair as Howard Davies will not stand for re-election at the 2020 Annual General Meeting as his nine-year tenure will have ended.
Shriti Vadera will join the Committee on her appointment in May 2020 to facilitate her transition to Chair of the Board and of the Committee, effective from 1 January 2021.
The Committee received feedback on the performance of each Executive Director from the Group Chief Executive and confirmed the Executive Director succession plans.
The Committee also directed development and renewal of these plans through the Group HR Director, supported by Egon Zehnder in the case of the Group Chief Executive and by Talent Intelligence in the case of the other Executive Directors and Group Executive Committee roles.
Senior leadership below Group Executive Committee The Committee has oversight of a diverse pipeline of leadership talent extending below the level of the Group Executive Committee and seeks to attract, retain and develop the next generation of emerging leadership.
The Committee is responsible for overseeing a diverse pipeline for the Board and other senior executives.
The Board considers that its diversity of experience and skills set has increased as a result of Board level succession in 2019.
The diversity of the Board, including skills and experience, of each Director is set out in the individual biographies of Directors on pages 92 to 97.
Further details of the gender make-up of the Board, the Group Executive Committee, management and employees can be found on page 81.
Process for appointing new Directors The Committee assists the Board in ensuring that there is a formal, rigorous and transparent approach to the appointment of new Directors.
The Committee is involved from the start when a vacancy or a gap in the Board’s skills is identified. Led by the Chairman, and working with the Group Chief Executive and the Group Human Resources Director, a role specification is prepared, reflecting the desired skills and experience and the Group’s Diversity and Inclusion policy. This specification takes into account feedback from the Committee. Once agreed, specialist talent agencies are typically engaged to create a shortlist of candidates which is reviewed by the Committee and other stakeholders. Interviews with individuals then take place with selected Committee members and feedback is provided to all members. In this manner, a preferred candidate is selected and the Committee then recommends the individual to the Board for appointment. For the appointment of Executive Directors, the process is led by the Group Chief Executive working closely with the Chairman. The Senior Independent Director leads the Committee in the process of appointing a new Chairman.
Contemporaneously with this process, due diligence checks are undertaken on the candidate and Prudential liaises with the relevant regulatory authorities. The Committee is kept updated on this process as necessary.
Note In addition to acting as search consultant in respect of the appointment of the Chair, the Chair of the Risk Committee and certain executive hires, Egon Zehnder also provides support for senior development assessments. Talent Intelligence also provides additional succession planning support to the Group below Group Executive Committee level. Ridgeway Partners also provided support for succession planning in respect of certain subsidiary company board committees.
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Group-wide oversight Following an update to its terms of reference in December 2018, the Committee’s remit includes reviewing the Group’s diversity initiatives to see that these are in line with strategic objectives.
The Group’s Diversity and Inclusion policy aims to provide equal opportunities for all who apply and who perform work for our organisation, irrespective of sex, race, age, ethnic origin, educational, social and cultural background, marital status, pregnancy and maternity, civil partnership status, any gender reassignment, religion or belief, sexual orientation, disability, or part time/fixed term work.
In line with the Committee’s expanded remit, consideration was given to updating and developing the approach to overseeing talent development and Diversity and Inclusion initiatives across the Group. A review of the approach was subsequently provided to the Committee in February 2020, including an update on activities across the Group’s business units and details of the 2020 Diversity & Inclusion and Talent strategy.
As at 31 December 2019 the percentage of women in senior management was 28 per cent and the Group remains on track to meet the 30 per cent target by the end of 2021.
Independence helps ensure effective scrutiny of management and individual Executive Directors against agreed objectives.
Each Non-executive Director provides an annual confirmation of his or her independence as required under the HK Listing Rules.
All Non-executive Directors were considered to be independent, taking into account UK and HK requirements.
Although Howard Davies has exceeded the nine-year tenure suggested by the UK Code and Kai Nargolwala will exceed from January 2021 (subject to re-election of Kai by shareholders in May 2020), both continue to demonstrate independence of judgement.
Prior to his appointment as a Non-executive Director, the Committee carefully considered the independence of Jeremy Anderson. In particular, the Committee reviewed the potential impact of his former position as a partner at KPMG (including any financial interest) which ended with effect from 31 December 2017 and noted that he had not been involved in any way in the audit of Prudential plc or its subsidiaries.
Amy Yip and Shriti Vadera were deemed to be independent on appointment.
The members of the Audit Committee were considered to be independent within the meaning of the Sarbanes-Oxley legislation.
The Committee concluded that the expected time commitment of 32.5 days per annum remained appropriate.
The external commitments of Directors were considered as part of the Committee’s recommendation of Directors’ election at the next Annual General Meeting. Prudential recognises the need for Non-executive Directors to dedicate sufficient time to their role while also developing a wide range of experience and skills through seeking external appointments.
All Non-executive Directors are required to discuss any additional commitments which might impact the time which he or she is able to devote to their role with the Chairman prior to accepting and the Chairman escalates to the Committee as appropriate.
The Committee considered and approved the appointment of Tom Watjen as a non-executive director of Arch Capital Group Ltd., a specialist financial services group with shares listed in Bermuda. The Committee considered the expected time commitment of the role and, taking into account any other commitments, concluded that he continued to have sufficient time to commit to his duties as a Non-executive Director. No conflicts of interest were identified in connection with the proposed appointment.
The tenure of each Non-executive Director is shown in the Directors’ remuneration report.
These processes help to ensure decisions are made in the best interests of the Company.
The Board has delegated authority to the Committee to identify and, where necessary, authorise any actual or potential conflicts of interest.
The Chairman considers potential conflicts of interest in connection with proposed external appointments and escalates to the Committee for authorisation where a conflict or potential conflict could arise.
The Committee considered the external positions of Amy Yip, Jeremy Anderson and Shriti Vadera prior to recommending their appointment to the Board.
Subsidiary governance The Committee has an important role in reviewing the Group’s governance arrangements.
The Committee had oversight of the search for and appointment of candidates to the M&G plc board in preparation for the demerger.
— Reviewing governance arrangements for the Group’s subsidiaries with a particular focus on changes to the risk and audit committee arrangements for Prudential Corporation Asia in the context of the demerger, reflecting that the composition of the Prudential Corporation Asia Limited board now mirrors the Prudential Board and Board meetings are held concurrently.
The Committee was provided an update on the governance arrangements for Jackson National Life and Prudential Corporation Asia in October 2019.
Committee members — David Law (Chair) — Jeremy Anderson (from January 2020) — Howard Davies — Philip Remnant — Alice Schroeder
— Director of Group Finance — Director of Group Financial Accounting and Reporting
Dear shareholder As Chair of the Audit Committee, I am pleased to present this report on the Committee’s activities during 2019. The Committee provides the Board with assurance as to the integrity of the Group’s financial reporting and, together with the Risk Committee, monitors the effectiveness of the second and third lines of defence, which are an integral part of our internal control environment.
With regard to the Group’s financial reporting, the Committee’s work is focused on ensuring appropriate financial accounting policies are adopted and implemented, and on assessing key judgements and disclosures. We also have throughout the year received updates on the programme to implement IFRS 17 given the significant system and accounting changes it entails.
The Committee held additional meetings during the year to focus on matters relating to the demerger of M&G plc. The Committee supported the Board’s review of the shareholder Circular and reviewed the various supporting processes and assurances received. When considering matters relating to the demerger, the Committee was conscious of the need to balance potential conflicts of interests between Prudential and M&G. The Committee also discussed the appropriate governance arrangements for the Group’s subsidiary audit committees post-demerger, together with associated transitional arrangements. I worked closely with the chair of the M&G plc audit committee to ensure a smooth transition of the oversight of the M&G business between the two committees.
External auditor An important part of the Committee’s work consists of overseeing the Group’s relationship with KPMG LLP (KPMG), including safeguarding independence, approving non-audit fees and satisfying ourselves that it is in the best interests of shareholders to recommend the re-appointment of KPMG. During the year, we enhanced the review of their effectiveness by adding an interview process conducted by a senior KPMG partner, independent of the audit team, with senior management across the Group and with Committee members. The results were discussed directly with the Committee. Overall feedback was positive and the KPMG audit team is following up on areas where potential enhancements were highlighted.
The Committee also requested earlier an enhanced review of the M&G half year key judgements, particularly longevity, in advance of the half year results announcement.
Internal audit Throughout 2019, the Committee continued to receive regular briefings from the Group Chief Internal Auditor. During the year, Group-wide Internal Audit (GwIA) undertook a programme of risk-based audits covering matters across the business units in addition to assurance work on the demerger and significant change programmes. The work undertaken by GwIA during the year was important in supporting the demerger, the Group maintaining a stable control environment through a period of significant change and the creation of two appropriately-sized, resourced and experienced independent internal audit functions.
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Committee governance The Committee works closely with the Risk Committee to make sure both Committees are updated and aligned on matters of common interest. Where responsibilities are perceived to overlap between the two Committees, Howard Davies and I agree the most appropriate Committee to consider the matter. During 2019, there was one joint session which, similar to the prior year, focused on cyber and information security, more details of which are set out in the Risk Committee report on page 127.
In April we held a private session as a Committee to discuss our evaluation and key objectives for the year. We assessed our performance against these objectives and I am pleased with the feedback received. The demerger, IFRS 17 and key accounting judgements were particular areas of focus. One area we will monitor for the future is how we are kept abreast of Asian market developments. One of my key focuses over the past two years has been the Group’s whistleblowing procedures. I regularly meet privately with the Group Resilience Director to discuss whistleblowing cases and their resolution. These are also discussed in private sessions with the Committee or the relevant local audit committee. The Committee also meets privately with GwIA and KPMG.
— Associated audit reports l l l l l l l l l l
Audit planning, fees, independence, effectiveness and reappointment l l l l l l
Business unit audit committee effectiveness and terms of reference l l
Financial reporting Overview One of the Committee’s key responsibilities is to monitor the integrity of the financial statements and any other periodic financial reporting. This has primarily focused on the Annual Report and Accounts but also covers the Group’s environmental, social and governance report and Tax Strategy Report. The Committee also reviewed the 2018 Solvency and Financial Condition Report and associated Pillar 3 returns submitted to the Prudential Regulation Authority as required under the Solvency II regime. Post-demerger, this regime is no longer applicable.
The following sections set out the key assumptions, judgements and other matters considered as part of their review of the 2019 Annual Report and Accounts.
Assumption setting The measurement of insurance liabilities are based on estimates of future cash flows, including those to and from policyholders, over a long period of time. These estimates can, depending on the type of business, be highly judgemental. The Committee considered changes to assumptions and other estimates used to derive IFRS insurance liabilities and EEV reporting. Peer benchmarking was considered where available. The key assumptions reviewed were: — Persistency, mortality, morbidity (including in relation to medical inflation) and expense assumptions within the Asia life businesses; — Policyholder behaviour (eg guaranteed benefit utilisation and persistency) and mortality assumptions affecting the measurement of Jackson guaranteed liabilities (see note C4.2(b) of the IFRS financial statements); — Economic assumptions, including investment return and associated discount rates; and — Changes to the allowance within EEV for future hedge costs in connection to the Jackson variable annuity business. This is discussed further in note 7 of the EEV basis results.
Intangible assets including deferred acquisition costs (DAC) The Committee received information to enable it to review the more material intangible asset balances. This included the assumptions that supported the amortisation profile of the DAC balance in the US, as described in note A4.1 ‘Other items requiring application of critical estimates or judgements’ and whether there had been any indication of impairment of the Group’s distribution rights assets. The Committee was satisfied that there was no impairment of the Group’s intangibles at 31 December 2019. Further information is contained in note C5 of the IFRS financial statements.
Fair, balanced and understandable requirement The Committee carried out a formal review of whether the Annual Report and Accounts were ‘fair, balanced and understandable’ as required by the UK Corporate Governance Code. In particular, they considered whether the report gave a full picture of the Group’s performance in the year with important messages appropriately highlighted, the level of consistency between financial statements and narrative sections and whether performance measures were clearly explained. They also considered the prominence of alternative performance measures.
Parent company financial statements The Committee reviewed the parent company profit and loss account and balance sheet, which included the recoverability of the parent company’s investment in subsidiaries by assessing whether the net assets of the relevant subsidiaries, being an approximation of their minimum recoverable amount, were in excess of their carrying value at the balance sheet date and whether those subsidiaries have historically been profit making.
Internal evaluation of KPMG was conducted using a questionnaire that was circulated to the Committee members, Material Subsidiary audit committee members, the Group Chief Financial Officer and the Group’s senior financial leadership for completion. A key component of the evaluation is the degree of challenge and robustness of approach to the audit. The survey asked 27 questions over four categories (audit quality and execution, team performance, process and communication) in relation to the 2018 audit.
As noted above the Committee enhanced the 2019 effectiveness review by arranging for a series of interviews to be conducted by a senior partner independent from the engagement team.
During the year, the Committee considered the proposals put forward by the Financial Reporting Council in December 2019 in a revision to its Ethical Standard and Auditing Standards on the Policy. The Committee agreed to implement their proposals for the 2020 year end. The key change is to establish a specific ‘white-list’ of non-audit services that the external auditor will be permitted to perform. The Committee will continue to monitor developments to ensure the Group’s policies and processes around audit effectiveness and independence evolve in line with market practice.
The Company has complied throughout the 2019 financial year with the provisions of the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 issued by the Competition and Markets Authority.
In line with the Financial Reporting Council’s Ethical Standard, the rules and regulations of the SEC and the standards of the PCAOB, a new Group Lead Partner, Philip Smart, was appointed in respect of the 2017 financial year. Mr Smart is expected to be in place for a five-year term until the completion of the 2021 reporting cycle. A new Group Lead Partner will be required for the 2022 audit and an appropriate transition plan developed.
From 1 January 2020, the Risk Committee assumed responsibility for Compliance oversight from the Committee in order to align governance with changes to management’s reporting responsibilities.
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The Committee is responsible for oversight of the effectiveness of the Group’s whistleblowing arrangements. The Committee received regular reports on the most serious cases and other significant matters raised through the programme and the actions taken to address them. The Committee was also briefed on emerging Speak Out trends and themes. The Committee may, and has, requested further reviews of particular areas of interest.
A review of the Speak Out programme and its oversight is being undertaken in 2020.
Third line oversight Internal audit Regular reporting The Committee received regular updates from GwIA on audits conducted and management’s progress in addressing audit findings within agreed timelines. Any delays in implementing remediation actions were escalated to the Committee and given particular scrutiny.
The Group Chief Internal Auditor reports functionally to the Committee Chair and for management purposes to the Group Chief Executive, and also has direct access to the Chair of the Board. In addition to formal Committee meetings, the Committee meets with the Group Chief Internal Auditor in private to discuss matters relating to, for example, the effectiveness of the internal audit function, significant audit findings and the risk and control culture of the organisation.
The Committee Chair also meets with GwIA’s Quality Assurance Director to discuss the outcome of the quality reviews of GwIA’s work and actions arising.