Annual�statement�from�the�Chairman�of�the�Remuneration�Committee 132 Our�Executive�Directors’�remuneration�at�a�glance 135 Summary�of�the�current�Directors’�remuneration�policy 137 Annual�report�on�remuneration 142 Supplementary�information 166 05 Financial statements 171 06 European Embedded Value (EEV) basis results 341 07 Additional information 377
Group Chief Risk Officer’s report of the risks facing our business and how these are managed 52
Overall, underlying free surplus generation increased by 14 per cent on a constant exchange rate basis (11 per cent on an actual exchange rate basis), reflecting good performance in each of our businesses with Asia up 14 per cent on a constant exchange rate basis (9 per cent on an actual exchange rate basis), the US up 11 per cent on a constant exchange rate basis (7 per cent on an actual exchange rate basis) and M&GPrudential up 21 per cent, including the positive impact of longevity assumption changes and an insurance recovery on annuity review costs.
Secondly, we want to create ‘best-in-class’ health capabilities and attained new business profit growth of 15 per cent from health and protection products in 2018. Our strategy is supported by distinctive value-added services, such as the exclusive multi-year partnership we signed with Babylon, a UK-based healthcare and technology services company. This partnership will provide personal health assessments and treatment information, powered by artificial intelligence, which will transform health provision for our customers. This will greatly enhance our customers’ access to healthcare, particularly for those in remote locations, whilst empowering them to proactively manage their health in a flexible and cost-efficient manner.
PRUworks is targeted specifically at SMEs, an under-served market in need of solutions catering to their size and budget. Wellness solutions, a core component of PRUworks, are offered as part of Prudential’s collaboration with healthtech companies and include fitness monitoring, specialist doctor recommendations and health screenings. Participating SMEs can also enjoy complimentary access to the Singapore government’s ‘SME Health+’ initiative, which includes programmes in chronic disease management, healthy eating, active living and mental wellbeing.
Investment for growth Building on our strong track record, we are building for future growth by investing in new opportunities and capabilities.
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 disappearing, and government plans are underfunded. 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.
These products also offer tax deferral, allowing interest and earnings to grow tax-free until withdrawals are made.
In September 2018, Jackson announced a technology integration collaboration with Envestnet® allowing Jackson to offer its complete product suite of advisory annuities on the Envestnet Insurance Exchange. The new collaboration brings together a leading provider of annuities in the US, with the leading provider of intelligent systems for wealth management and financial wellness. Jackson is working with Envestnet to make annuities easier to work with inside of a client’s portfolio. Advisers will be able to create more value for their clients by holistically considering longevity risk, sequence of returns risk, market risk and mortality risk within the Envestnet wealth management platform.
2 ©2019 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 2018. Jackson ranks #1 out of 25 companies in the Independent NASD channel, #1 out of 20 companies in the Bank channel, #1 out of 16 companies in the Wirehouse channel, and #4 out of 19 companies in the Regional Firms channel.
What all our customers have in common is the desire for professional help to build and protect their savings with confidence. Our approach is to offer a broad range of products and services, in a variety of formats, through multiple distribution channels – all backed by the same in-house investment expertise and capability.
During 2018, we continued to expand our range of mutual funds for retail investors. These included the innovative M&G Positive Impact Fund, which widens access to impact investing for retail customers who want to invest in companies that aim to have a positive impact on society, and the M&G Sustainable Allocation Fund, a multi-asset fund incorporating environmental, social and governance factors. We also launched an investment trust, M&G Credit Income Investment Trust, which for the first time allows UK retail investors to put their money into a combined portfolio of public and private debt.
Update on business transformation and demerger Our business modernisation programme is well advanced and already showing service benefits for customers. In January 2018, we announced a new partnership with Tata Consultancy Services to transfer, consolidate and upgrade the customer administration systems for our traditional insurance business. This involved the transfer of 2,500 people, including 650 Prudential colleagues.
UK and Europe total operating profit was 19 per cent higher at £1,634 million. Life insurance operating profit increased by 32 per cent to £1,138 million (2017: £861 million). Within this total, the contribution from our core3 with-profits and in-force annuity business was £519 million (2017: £597 million), including an increased transfer to shareholders from the with-profits funds of £320 million (2017: £288 million) and within this, a 30 per cent increase in the contribution from PruFund business of £55 million. Earnings from our core3 annuities business were lower, reflecting the reinsurance of £12 billion of annuity liabilities to Rothesay Life in March 2018. The balance of the life insurance result reflects the contribution from other elements which are not expected to recur at the same level. This includes the favourable impact of longevity assumption changes, contributing £441 million (2017: £204 million) relating to changes to annuitant mortality assumptions reflecting recent mortality trends, which have shown a slowdown in life expectancy improvements in recent periods, and the adoption of the Continuous Mortality Investigation (CMI) 2016 model (2017: adoption of 2015 model). The result also includes a £166 million insurance recovery, related to the costs of reviewing internally vesting annuities sold without advice after July 2008. Profits from management actions of £58 million were broadly offset by a provision of £55 million for the cost of equalising guaranteed minimum pension benefits on products sold by the UK insurance business, following a High Court ruling in October which applied across the UK life insurance industry.
Operating profit by business % vs 2017 £4,827m +6% (+3% AER)
IFRS basis non-operating items Non-operating items consist of short-term fluctuations in investment returns on shareholder-backed business of negative £558 million (2017: negative £1,514 million), the results attaching to disposal of businesses of negative £588 million (2017: positive £218 million), and the amortisation of acquisition accounting adjustments of negative £46 million (2017: negative £61 million) arising mainly from the REALIC business acquired by Jackson in 2012. The loss related to the disposal of businesses relates primarily to the £508 million pre-tax loss following the reinsurance of £12 billion4 UK annuities to Rothesay Life in March 2018.
IFRS basis short-term fluctuations in investment returns on shareholder-backed business Operating profit is based on longer-term investment return assumptions. The difference between actual investment returns recorded in the income statement and the assumed longer-term returns is reported within short-term fluctuations in investment returns.
In Asia, new business profit was 14 per cent higher at £2,604 million (10 per cent on an actual exchange rate basis), benefiting from pricing actions and our strategic focus on health and protection sales. This growth was also supported by increasing sales momentum, with APE growth of 8 per cent during the second half of 2018 compared with the second half of 2017.
Our focus on quality is undiminished, with regular premium contracts accounting for 94 per cent of APE sales as well as the mix of health and protection products increasing to 28 per cent of APE sales. Overall, new business profit from health and protection products was 15 per cent higher and contributed 70 per cent of the total in Asia. This favourable mix provides a high level of recurring income and an earnings profile that is significantly less correlated to investment markets.
Free surplus generation is the financial metric we use to measure the internal cash generation of our business operations and is based on the capital regimes that apply locally in the various jurisdictions in which our life businesses operate. For life insurance operations it represents amounts maturing from the in-force business during the year, net of amounts reinvested in writing new business. For asset management businesses, it equates to post-tax operating profit for the period.
Basic earnings per share based on post-tax operating profit 293.6 257.0 14 248.6 18 Basic earnings per share based on post-tax total profit 178.1 340.9 (48) 330.2 (46)
Asia life £4,387m, +23% (+18% AER) US life £2,115m, +2% (-1% AER) M&GPrudential life £1,374m, +35% Asset management and general insurance
20 The estimated solvency positions include management’s calculation of UK transitional measures reflecting operating and market conditions at each valuation date, which for both 2018 and 2017 reflects the approved regulatory position.
1. Introduction Group structure In August 2017 the Group announced its intention to combine M&G and its UK and Europe life business to form M&GPrudential, allowing the scale and capabilities in these businesses to be leveraged more effectively. In March 2018, the intention to demerge M&GPrudential from the rest of the Group was announced, with the aim of focusing on meeting customers’ rapidly evolving needs and to deliver enhanced long-term value to investors as two separate businesses.
In November the International Accounting Standards Board (IASB) tentatively delays the effective date of IFRS 17 by one year to periods beginning on or after 1 January 2022. The introduction of further amendments to this new standard will be considered.
The Group will continue to increase its risk management focus on Prudential Africa as the business there grows in materiality.
Culture is a strategic priority of the Board, who recognise its importance in the way that the Group does business. Risk culture is a subset of Prudential’s broader organisational culture, which shapes the organisation-wide values that we use to prioritise risk management behaviours and practices.
ii. The risk management cycle The risk management cycle comprises processes to identify, measure and assess, manage and control, and monitor and report on our risks.
The risk profile is a key output from the risk identification and risk measurement processes, and is used as a basis for setting Group-wide limits, management information, assessment of solvency needs, and determining appropriate stress and scenario testing. The Group’s annual set of key risks are given enhanced management and reporting focus.
‘Macro’ risks Some of the risks that the Group is exposed to are necessarily broad given the external influences which may impact on the business. These risks include: Global economic conditions Changes in global economic conditions can impact Prudential directly; for example, by leading to poor investment returns and fund performance, and increasing the cost of promises (guarantees) that have been made to our customers. Changes in economic conditions can also have an indirect impact on the Group; for example, leading to a decrease in the propensity for people to save and buy Prudential’s products, as well as changing prevailing political attitudes towards regulation. This is a risk which is considered material at the level of the Group.
The pricing of Prudential’s products requires it to make a number of assumptions, and deviations from these may impact its reported profitability and capital position. Across its business units, some insurance risks are more material than others.
Business disruption risks may impact on Prudential’s ability to meet its key objectives and protect its brand and reputation. The Group’s business resilience is a core part of a wellembedded business continuity management programme.
Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued 6. Further risk information In reading the sections below, it is useful to understand that there are some risks that Prudential’s policyholders assume by virtue of the nature of their products, and some risks that the Company and its shareholders assume. Examples of the latter include those risks arising from assets held directly by and for the Company or the risk that policyholder funds are exhausted. This report is focused mainly on risks to the shareholder but will include those which arise indirectly through our policyholder exposures.
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 comfort with the level of interest rate and market risks incurred as a result. Derivatives are also used to provide some protection.
In cases where a surplus arises in an overseas operation which is to be used to support Group capital, or where a significant cash payment is due from an overseas subsidiary to the Group, this currency exposure may be hedged where it is believed to be favourable economically to do so. Further, the Group generally does not have appetite for significant direct shareholder exposure to foreign exchange risks in currencies outside the countries in which it operates, but it does have some appetite for this on fee income and on non-sterling investments within the with-profits fund. Where foreign exchange risk arises outside appetite, currency swaps and other derivatives are used to manage the exposure.
— The Group’s shareholder portfolio is well diversified: no individual sector makes up more than 15 per cent of the total portfolio (excluding the financial and sovereign sectors).
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 at 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; Shareholder exposure by sector2 3 Consumer, non-cyclical 11.79%
6.4 Risks from our business operations a. Strategic and transformation risks A number of significant change programmes are currently running in order to implement the Group’s strategy and the need to comply with emerging regulatory changes. These include, but are not limited to, the discontinuation of LIBOR and implementation of new international accounting standards – see section 6.1a. above for further information. This has resulted in a significant portfolio of change initiatives which increases the transformation risks for the Group, and is likely to further increase in the future. In particular the demerger of M&GPrudential from the rest of the Group has resulted in a substantial transformation programme which needs to be delivered alongside, and in conjunction with other material change programmes. The scale and the complexity of this portfolio of transformation programmes could impact business operations, weaken the control environment, impact customers, and has the potential for reputational damage if these programmes fail to deliver their objectives. Implementing further strategic initiatives may amplify these risks.
Information security risk and data privacy Information security risk remains an area of heightened focus after a number of recent high-profile attacks and data losses across industries. Criminal capability in this area is maturing and industrialising, with an increased level of understanding of complex financial transactions which increases the risks to the financial services industry. The threat landscape is continuously evolving, and the systemic risk of sophisticated but untargeted attacks is rising, particularly during times of heightened geopolitical tensions.
This Strategic report complies with the Non-Financial Reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006.
More detailed information on our corporate responsibility and ESG activities is available online at www.prudential.co.uk/ corporate-responsibility and in our 2018 ESG report, which will be published in May 2019.
Data protection and cyber security New technologies present new risks, from privacy to cyber security, and we are vigilant in working to identify these and to manage old and new risks in ways that are proportionate to and commensurate with the threats our business faces. At the same time, we are making significant investments in technology as we continue to upgrade our digital capabilities to provide a more seamless customer experience.
— Anti-Bribery and Corruption Policy covers our values for reputation, ethical behaviour and reliability. As an organisation we are focused on financial practices that align to those values and we prohibit corruption or bribery within our working practices.
Scope 2 – Market-based (supplier and residual mix) Occupied estate1 52,127 55,484 -6%
Carbon intensity* 2018 2017 % Change kg CO2e per m2 – Scope 1 and 2 only Group1 24 29 -17%
Nashville associates further financial education with Junior Achievement Career Exploration Centre Jackson and its employees donated more than US$150,000 to sponsor the Jackson Career Exploration Center at the brandnew Junior Achievement Finance Park in Middle Tennessee. The interactive personal finance facility will reach older students with a hands-on experiential budgeting simulation facility where students convene for 13 teacher-led lessons. The hands-on experience helps students build a foundation to make smart financial decisions related to income, expenses, savings and understanding credit.
Strategic report approval by the Board of Directors The Strategic report set out on pages 9 to 86 is approved by the Board of Directors.
�— The�health�ecosystem�and� partnerships�that�Prudential� Corporation�Asia�is�developing,� including�with�healthcare� technology�and�services�company,� Babylon�Health; �— Digitisation�and�customer�acquisition;� �— Expanding�the�Group’s�presence� in�China;�and
�— In�October�2018,�the�Group�ran�a� focused�cyber�security�update�for� members�of�the�Risk�and�Audit� Committees,�which�was��particularly� aimed�at�developing�the�knowledge� of�the�Non-executive�Directors; �— In�October�2018,�the�Board�also�received� an�update�about�developments� surrounding�Environmental,�Social�and� Governance�(ESG)�reporting,�including� climate�related�risk;�
Assumption setting The�measurement�of�insurance�liabilities�and�EEV�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�the�Group’s�EEV.� 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�assumptions�(including�mortality)�affecting�the�measurement�of�Jackson� guaranteed�liabilities�(see�note�C4.2(b)�of�the�IFRS�financial�statements�and�note�14�to�the�EEV� basis�results);�and
As�Chair�of�the�Committee,�I�have� responsibility�for�ensuring�the�Committee� operates�effectively.�In�order�to�enable� the�Committee�to�provide�constructive� challenge�to�management,�I�encourage� open�debate�and�contributions�from�all� Committee�members.�I�report�to�the�Board� in�full�after�each�meeting�on�the�main� matters�discussed.�An�annual�review�of�our� effectiveness�was�carried�out�as�part�of�the� Board�evaluation,�described�in�more�detail� on�page�100.�The�Committee�was�found�to� be�functioning�effectively.�
Financial reporting The�Directors�have�a�duty�to�report�to� shareholders�on�the�performance�and� financial�position�of�the�Group�and�are� responsible�for�preparing�the�financial� statements�on�pages�172�to�329�and�the� supplementary�information�on�pages�342� to�375.�It�is�the�responsibility�of�the�auditor� to�form�independent�opinions,�based�on�its� audit�of�the�financial�statements�and�its� audit�of�the�EEV�basis�supplementary� information,�and�to�report�its�opinions�to� the�Company’s�shareholders�and�to�the� Company.�Its�opinions�are�given�on�pages� 330�to�340�and�page�376.
Going concern In�accordance�with�the�guidance�issued� by�the�Financial�Reporting�Council�in� September�2014,��‘Guidance�on�Risk� Management,�Internal�Control�and�Related� Financial�and�Business�Reporting’,�after� making�sufficient�enquiries�the�Directors� have�a�reasonable�expectation�that�the� Company�and�the�Group�have�adequate� resources�to�continue�their�operations�for� a�period�of�at�least�12�months�from�the�date� that�the�financial�statements�are�approved.� In�support�of�this�expectation,�the� Company’s�business�activities,�together� with�the�factors�likely�to�affect�its�future� development,�successful�performance�and� position�in�the�current�economic�climate,� are�set�out�in�the�Strategic�report�on�pages� 10�to�86.�The�risks�facing�the�Group’s� capital�and�liquidity�positions�and�their� sensitivities�are�referred�to�in�the�Strategic� report�on�pages�52�to�69�and�note�II(c)� ‘Solvency�Capital�Position�at�31�December� 2018’�within�Additional�unaudited�financial� information.�In�addition�the�Directors� considered�the�operational�and�financial� risks�arising�from�the�UK’s�intended� departure�from�the�European�Union�in�a� number�of�possible�scenarios,�including� those�which�assume�no�withdrawal� agreement�is�enacted.�The�Group’s�IFRS� financial�statements�include�the�details�of� the�Group’s�borrowings�in�note�C6�on�page� 269,�the�market�risk�and�liquidity�analysis� associated�with�the�Group’s�assets�and� liabilities�can�be�found�in�note�C3.4(a)�on� pages�236�to�238,�policyholder�liability� maturity�profile�by�business�units�in�notes� C4.1(b),�(c)�and�(d)�on�pages�244,�246�and� 248�respectively,�cash�flow�details�in�the� consolidated�statement�of�cash�flows�and� provisions�and�contingencies�in�notes�C11� and�D2.�The�Directors�therefore�consider�it� appropriate�to�continue�to�adopt�the�going� concern�basis�of�accounting�in�preparing� the�financial�statements�for�the�year�ended� 31�December�2018.
The�Group�has�adopted�an�Inside� Information�Policy�which�includes� guidance�and�procedures�for�the� identification,�dissemination�and�escalation� of�inside�information�as�well�as�appropriate� controls�on�the�disclosure�of�such� information�in�line�with�regulatory� requirements.�All�staff�are�made�aware� of�the�policy�and�receive�communications� reminding�them�of�their�obligations�when� they�work�on�any�confidential�matters�in� the�business�or�are�notified�when�the� Company�enters�or�exits�a�closed�period.�
Information required to be disclosed in the Directors’ report may be found in the following sections: Information Section in Annual Report Page number(s)
Post-balance sheet events Note D3 of the notes on the Group financial statements 299
The vesting of 75 per cent of the 2019 PLTIP awards will be based on the achievement of relative TSR targets. Performance against our balanced scorecard targets will continue to determine the vesting of the remaining 25 per cent of the awards as set out in the Statement of implementation in 2019. The measures attached to long-term incentive awards to be made in 2020 and subsequent years will be developed in light of the evolving priorities of the business and we will consult with shareholders on these in due course.
Under�the�Group�TSR�measure�used�for�2016�PLTIP�awards,�25�per�cent�of�the�award�vests�for�TSR�at�the�median�of�the�peer�group� increasing�to�full�vesting�for�performance�within�the�upper�quartile.�TSR�is�measured�on�a�local�currency�basis�since�this�has�the�benefit� of�simplicity�and�directness�of�comparison.�The�peer�group�for�the�2016�awards�is: Aegon Aflac AIA AIG Allianz Aviva AXA Generali Legal�&�General Manulife MetLife Munich�Re Old�Mutual Prudential�Financial Standard�Life Sun�Life�Financial Swiss�Re Zurich�Insurance�Group
Anthony Nightingale, CMG SBS JP Paul Manduca Chair of the Remuneration Committee Chairman 12�March�2019� 12�March�2019
C2.1 Asia 218 C2.2 US 219 C2.3 UK and Europe 220
C8 Tax assets and liabilities C8.1 Deferred tax 283 C8.2 Current tax 284
Shareholders’�share�of�actuarial�gains� and�losses�on�defined�benefit� pension�schemes,�net�of�related�tax – – 73 – – 73 – 73
IFRS 9, ‘Financial Instruments’ and amendments to IFRS 4, ‘Insurance Contracts’ The�IASB�published�a�complete�version�of�IFRS�9�in�July�2014�with�the�exception�of�macro�hedge�accounting�and�the�standard�is� mandatorily�effective�for�annual�periods�beginning�on�or�after�1�January�2018.�
Other income and expenditure: Investment�return�and�other�income 52 11 11 373% 373% Interest�payable�on�core�structural�
Profit�(loss)�before�tax�(being tax attributable to shareholders’ and policyholders’ returns) note (viii) 1,717 1,739 754 4,210 (901) 3,309
C3.1 Group assets and liabilities – measurement continued (d) Fair value measurements for level 3 fair valued assets and liabilities�continued
Asia – non-linked shareholder-backed Internally�rated: Government�bonds 36 25 Corporate�bonds�–�rated�as�investment�grade�by�local�external�ratings�agencies 978 959
(d) US debt securities classified as available-for-sale in an unrealised loss position (i) Fair value of securities as a percentage of book value The�fair�value�of�the�debt�securities�in�a�gross�unrealised�loss�position�for�various�percentages�of�book�value: 31 Dec 2018� £m 31 Dec 2017� £m
(ii) Unrealised losses by maturity of security 31 Dec 2018� £m 31 Dec 2017� £m 1�year�to�5�years (72) (7) 5�years�to�10�years (436) (41) More�than�10�years (372) (39) Mortgage-backed�and�other�debt�securities (45) (19)
Shareholders'�transfers�post-tax (54) – (233) (287) Investment-related�items�and�other�movements 8,182 16,251 11,146 35,579 Foreign�exchange�translation�differences (3,948) (16,290) 113 (20,125)
Addition�for�closed�block�of�group�payout�annuities�in�the�US note (iv) – 4,143 – 4,143 Shareholders'�transfers�post-tax (65) – (259) (324) Investment-related�items�and�other�movements (2,784) (9,999) (5,481) (18,264) Foreign�exchange�translation�differences 3,357 10,945 (14) 14,288
Participating�products�often�offer�a� guaranteed�maturity�or�surrender� value.�Declared�regular�bonuses� are�guaranteed�once�vested.�Future� bonus�rates�and�cash�dividends�are� not�guaranteed.�Market�value� adjustments�and�surrender� penalties�are�used�for�certain� products�where�the�law�permits� such�adjustments.�Guarantees�are� predominantly�supported�by� segregated�life�funds�and�their� estates.
For�India�and�Taiwan,�US�GAAP�is� applied�for�measuring�insurance� liabilities.�For�these�businesses,�the� future�policyholder�benefit�provisions� for�non-linked�business�are�determined� using�the�net�level�premium�method,� with�an�allowance�for�surrenders,� maintenance�and�claims�expenses.� Rates�of�interest�used�in�establishing� the�policyholder�benefit�provisions� vary�by�operation�depending�on�the� circumstances�attaching�to�each�block� of�business.
Institutional�products�are:� guaranteed�investment�contracts� (GICs),�funding�agreements� (including�agreements�issued�in� conjunction�with�Jackson’s� participation�in�the�US�Federal� Home�Loan�Bank�programme)�and� Medium�Term�Note�funding� agreements.�At�31�December�2018,� institutional�products�accounted�for� 1�per�cent�of�contract�liabilities� (31�December�2017:�1�per�cent).
(b)� The DAC amount in respect of US insurance operations comprises amounts in respect of: 2018� £m 2017� £m
(iii) Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders 2018� £m 2017� £m
Lapse risk, but the effects of extreme events may be mitigated by the application of market value adjustments
— The required level of provision for claims for guaranteed minimum death, ‘for life’ withdrawal, and income benefits.
Employees’�contributions 1 (1) – – – – – Actuarial�gains�and�losses note (d) 119 – 119 87 206 (6) 200 Transfer�into�investment�in�Prudential�
Actuarial�gains�and�losses Return�on�the�scheme�assets�less�amount�included�in�interest�income� (221) 119 Gains�(losses)�on�changes�in�demographic�assumptions 168 (10) Gains�(losses)�on�changes�in�financial�assumptions 330 (101) Experience�gains�on�scheme�liabilities 26 111
D1.1 Gains/(losses) on disposal of businesses and corporate transactions ‘(Loss)�gain�on�disposal�of�businesses�and�corporate�transactions’�comprises�the�following: 2018� £m 2017� £m
Key to classes of shares held LBG� Limited�by�Guarantee LPI� Limited�Partnership�Interest MI� Membership�Interest�� NSB� Non-stock�basis OS� Ordinary�Shares PI� Partnership�Interest PS� Preference�Shares U� Units
(iv) In October 2018, the High Court ruled that pension schemes are required to equalise benefits for the effect of guaranteed minimum pensions (GMPs). GMPs are a minimum benefit that schemes that were contracted-out on a salary-related basis between 1978 and 1997 are required to provide.
b Information on transactions of the directors with the Group is given in note D4 of the Group financial statements. c The Company employs no staff. d Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2017: £0.1 million)
Our�responsibility�is�to�conclude�on� the�appropriateness�of�the�Directors’� conclusions�and,�had�there�been�a�material� uncertainty�related�to�going�concern,�to� make�reference�to�that�in�this�audit�report.� However,�as�we�cannot�predict�all�future� events�or�conditions�and�as�subsequent� events�may�result�in�outcomes�that�are� inconsistent�with�judgements�that�were� reasonable�at�the�time�they�were�made,� the�absence�of�reference�to�a�material� uncertainty�in�this�auditor’s�report�is�not� a�guarantee�that�the�Group�and�the� Company�will�continue�in�operation.�
Net increase in shareholders’ equity 3,533 1,198 (43) 396 5,084 Shareholders’�equity�at�beginning�of�year 21,348 13,492 13,627 (3,769) 44,698
Notes on the EEV basis results continued 9 Analysis of movement in net worth and value of in-force for long-term business 2018� £m
(i) Sensitivity analysis – economic assumptions The�tables�below�show�the�sensitivity�of�the�embedded�value�as�at�31�December�2018�and�31�December�2017�and�the�new�business� contribution�after�the�effect�of�required�capital�for�2018�and�2017�for�long-term�business�operations�to: �— 1�per�cent�increase�in�the�discount�rates; �— 1�per�cent�increase�in�interest�rates�and�risk�discount�rates,�including�consequential�changes�(assumed�investment�returns�for�all�asset� classes,�market�values�of�fixed�interest�assets);�
I(c) Analysis of asset management operating profit based on longer-term investment returns continued
� EEV post-tax operating profit of UK long-term business 2018� £m 2017� £m
Operating expense used in cost/income ratio 232 238 Share�of�joint�venture�expense (100) (92)
Prudential conducts its businesses subject to regulation and associated regulatory risks, including the effects of changes in the laws, regulations, policies and interpretations and any accounting standards in the markets in which it operates Changes�in�government�policy�and� legislation�(including�in�relation�to�tax),� capital�control�measures�on�companies� and�individuals,�regulation�or�regulatory� interpretation�applying�to�companies�in�the� financial�services�and�insurance�industries� in�any�of�the�markets�in�which�Prudential� operates�(including�those�related�to�the� conduct�of�business�by�Prudential�or�its� third�party�distributors),�or�decisions�taken� by�regulators�in�connection�with�their� supervision�of�members�of�the�Group,� which�in�some�circumstances�may�be� applied�retrospectively,�may�adversely� affect�Prudential.�The�proposed�demerger� of�M&GPrudential�from�Prudential�plc�will� result�in�a�change�to�Prudential’s�groupwide �supervisor�to�the�Hong�Kong� Insurance�Authority,�and�as�a�consequence� will�change�the�group-wide�supervisory� framework�to�which�Prudential�is�subject,� the�final�form�of�which�remains�uncertain.� The�impact�from�any�regulatory�changes� may�affect�Prudential’s�product�range,� distribution�channels,�competitiveness,� profitability,�capital�requirements,�risk� management�approaches,�corporate�or� governance�structure�and,�consequently,� reported�results�and�financing� requirements.�Also,�regulators�in� jurisdictions�in�which�Prudential�operates� may�impose�requirements�affecting�the� allocation�of�capital�and�liquidity�between� different�business�units�in�the�Group,� whether�on�a�geographic,�legal�entity,� product�line�or�other�basis.�Regulators� may�change�the�level�of�capital�required�to� be�held�by�individual�businesses,�the� regulation�of�selling�practices,�solvency� requirements�and�could�introduce� changes�that�impact�the�products�sold.� Furthermore,�as�a�result�of�interventions�by� governments�in�light�of�financial�and�global� economic�conditions,�there�may�continue� to�be�changes�in�government�regulation� and�supervision�of�the�financial�services� industry,�including�the�possibility�of�higher� capital�requirements,�restrictions�on� certain�types�of�transactions�and�enhanced� supervisory�powers.�
Prudential’s�designation�as�a�G-SII�was�last� reaffirmed�on�21�November�2016.�The� FSB,�in�conjunction�with�the�IAIS,�did�not� publish�a�new�list�of�G-SIIs�in�2017�and�did� not�engage�in�G-SII�identification�for�2018� following�IAIS’�launch�of�the�consultation� on�the�Holistic�Framework�(HF)�on� 14�November�2018,�which�aims�to�assess� and�mitigate�systemic�risk�in�the�insurance� sector�and�is�intended�to�replace�the� current�G-SII�measures.�The�IAIS�intends� to�implement�the�HF�in�2020�and�it�is� proposed�that�G-SII�identification�be� suspended�from�that�year.�In�the�interim,� the�relevant�group-wide�supervisors�have� committed�to�continue�applying�existing� enhanced�G-SII�supervisory�policy� measures�with�some�supervisory� discretion,�which�includes�a�requirement� to�submit�enhanced�risk�management� plans.�In�November�2022,�the�FSB�will� review�the�need�to�either�discontinue�or� re-establish�an�annual�identification�of� G-SIIs�in�consultation�with�the�IAIS�and� national�authorities.�The�Higher�Loss� Absorbency�(HLA)�standard�(a�proposed� additional�capital�measure�for�G-SII� designated�firms,�planned�to�apply�from�
As a holding company, Prudential is dependent upon its subsidiaries to cover operating expenses and dividend payments The�Group’s�insurance�and�investment� management�operations�are�generally� conducted�through�direct�and�indirect� subsidiaries,�which�are�subject�to�the� risks�discussed�elsewhere�in�this� ‘Risk�factors’�section.
— That are contractually based on asset, fund, company or other entity performance.
Total shareholder return (TSR) TSR represents the growth in the value of a share plus the value of dividends paid, assuming that the dividends are reinvested in the Company’s shares on the exdividend date.
As at 12 March 2019, no notifications have been received since the year end.
Authority to purchase own shares The Directors also require authority from shareholders in relation to the purchase of the Company’s own shares. Prudential seeks authority by special resolution on an annual basis for the buyback of its own shares in accordance with the relevant provisions of the Companies Act 2006 and other related guidance. This authority has not been used since it was last granted at the AGM in 2018. This existing authority is due to expire at the end of this year’s AGM and a special resolution to renew the authority will be put to shareholders at the AGM on 16 May 2019.
Tel +1 800 990 1135, or from outside the US +1 651 453 2128 or log on to www.adr.com
Share dealing services The Company’s registrars, Equiniti, offer a postal dealing facility for buying and selling Prudential plc ordinary shares; please see the Equiniti address or telephone 0371 384 2248. They also offer a telephone and internet dealing service, Shareview, which provides a simple and convenient way of selling Prudential shares. For telephone sales, call 0345 603 7037 between 8.00am and 4.30pm, Monday to Friday, and for internet sales log on to www.shareview.co.uk/dealing
This Prudential Annual Report may contain ‘forward-looking statements’ with respect to certain of Prudential’s plans and its goals and expectations relating to its future financial condition, performance, results, strategy and objectives. Statements that are not historical facts, including statements about Prudential’s beliefs and expectations and including, without limitation, statements containing the words ‘may’, ‘will’, ‘should’, ‘continue’, ‘aims’, ‘estimates’, ‘projects’, ‘believes’, ‘intends’, ‘expects’, ‘plans’, ‘seeks’ and ‘anticipates’, and words of similar meaning, are forward-looking statements. These statements are based on plans, estimates and projections as at the time they are made, and therefore undue reliance should not be placed on them. By their nature, all forward-looking statements involve risk and uncertainty. A number of important factors could cause Prudential’s actual future financial condition or performance or other indicated results to differ materially from those indicated in any forward-looking statement. Such factors include, but are not limited to, the timing, costs and successful implementation of the demerger of the M&GPrudential business; the future trading value of the shares of Prudential plc and the trading value and liquidity of the shares of the to-be-listed M&GPrudential business following such demerger; future market conditions, including fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, and the performance of financial markets generally; the policies and actions of regulatory authorities, including, for example, new government initiatives; the political, legal and economic effects of the UK’s decision to leave the European Union; the impact of continuing designation as a Global Systemically Important Insurer or ‘G-SII’; the impact of competition, economic uncertainty, inflation and deflation; the effect on Prudential’s business and results from, in particular, mortality and morbidity trends, lapse rates and policy renewal rates; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; the impact of internal projects and other strategic actions failing to meet their objectives; disruption to the availability, confidentiality or integrity of Prudential’s IT systems (or those of its suppliers); the impact of changes in capital, solvency standards, accounting standards or relevant regulatory frameworks, and tax and other legislation and regulations in the jurisdictions in which Prudential and its affiliates operate; and the impact of legal and regulatory actions, investigations and disputes. These and other important factors may, for example, result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits. Further discussion of these and other important factors that could cause Prudential’s actual future financial condition or performance or other indicated results to differ, possibly materially, from those anticipated in Prudential’s forward-looking statements can be found under the ‘Risk factors’ section in this document.